PI Aquino - Independent Investor Relations and Finance Consultant Sam K. Reed - Chairman, President & Chief Executive Officer Dennis F. Riordan - Chief Financial Officer & Executive Vice President.

David Cristopher Driscoll - Citigroup Global Markets, Inc. (Broker) Farha Aslam - Stephens, Inc. Kenneth B. Goldman - JPMorgan Securities LLC Robert B. Moskow - Credit Suisse Securities (USA) LLC (Broker) Evan Morris - Bank of America Merrill Lynch Christopher R. Growe - Stifel, Nicolaus & Co., Inc.

Amit Sharma - BMO Capital Markets (United States) Jonathan P. Feeney - Athlos Research Brett Michael Hundley - BB&T Capital Markets Akshay S. Jagdale - KeyBanc Capital Markets, Inc. John J. Baumgartner - Wells Fargo Securities LLC Jon R. Andersen - William Blair & Co. LLC.

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, 2014, 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 would like to turn the call over to the Chairman, President and Chief Executive Officer of TreeHouse, Mr. Sam K. Reed..

no brand conflict; no technology lockout or work-around; no equal in category management; and no compromise in value, quality or service. Simply put, we are unmatched as custodians of customer brands. As such, the beverage brands for our TreeHouse maybe bent but not broken.

In our snacks category, timing delays on new product placement and produce merchandising programs have slowed our acceleration after a weak holiday season. This temporary lull be short-lived.

In the interim, at Flagstone, we have installed a new President, developed new products, secured holiday bookings, invested in automation and diligenced acquisition candidates. While much have changed since its acquisition, Flagstone Foods remains the cornerstone of a multi-billion dollar better-for-you snacks platform in the making.

To sum things up, we are tackling two immediate tactical issues but we are by no means disheartened by our future strategic prospects. Dennis will now address our quarterly performance and annual outlook. I'll return later with thoughts on the longer-term prospects of our ever-growing portfolio.

It's transitioned from industrial might to consumer to insight and its future in customer brands and custom products.

Dennis?.

We had a very good quarter of cash flow and were able to reduce our net debt by just over $63 million. Combined with our EBITDA growth, our leverage is now down to 3.3 times debt-to-EBITDA, and we have approximately $400 million in dry powder along with additional access to capital markets to further grow TreeHouse through strategic acquisitions.

Now, in regard to the outlook for the year, we believe that the next two quarters of 2015 will be challenging. We see it as a period of reinvestment in preparation for what we believe will be a very good finish to the year, and more importantly, the foundation for a very solid organic growth here in 2016.

While this may sound overly optimistic to some, we have the advantage of knowing about new business that is committed and is expected to begin shipping later in Q4. This includes new customers and products for our snack business and importantly returning business in our single-serve coffee program.

This is great news but our sales and earnings will be under pressure in our second and third quarters. Let me address the situation with snack nuts first. Last year, the business had a series of successful promotions that drove very nice volumes in the seasonally low period of the first quarter.

We'd anticipated some delays in these programs in the first quarter of this year in light of lower consumption level of nuts during last year's fourth quarter. However, rather than being delayed from the first quarter of this year to early in our second quarter, we are now seeing two major programs being delayed to well into the second quarter.

Additionally, we are in the process of executing a national rollout of new display racks of snack nuts and dried fruits within the produce section for a major customer. As you can imagine, we've been working with our customer to get these racks just right.

We believe this will be a great program, but it has delayed shipments well beyond what we expected just three months ago. In addition, we are getting great traction with our new products, like heat-and-eat nuts and our new snack bars, and we'll see those benefits during the fourth quarter when we normally see seasonally high shipments.

Turning to coffee, this continues to be a particularly challenging and dynamic situation. While we've had further volume loss in non-retail customers and that does present challenges, we are much more disappointed with the ongoing pricing pressure in the category.

As one research analyst pointed out, measured channel data shows that unit pricing of private label is flat while branded pricing is up. And more important, the price gaps between private label and branded products is increasing. We believe this is the result of the brand leaders' aggressive move to capture private label business.

The positive result is that private label is growing much faster than branded sales in this category. Measured channel data for the 13 weeks ended April 26 shows private label unit sales are growing at nearly 40% over last year, while branded sales are up only 14%. While this is great for consumers, it is tough on our margins.

The downward movement in pricing occurred despite the increase in year-over-year coffee cost as a result of the timing of forward contracts and higher costs associated with the new 2.0 compatible technology. However, we do have positive news. Our lost customers are beginning to come back.

In the past few weeks, we have been awarded business from a key customer that converted to the brand leader last year, and we believe others will be following. Although these shipments will not start until Q4, they demonstrate that retail customers want to do business with TreeHouse.

They recognize that we are dedicated when it comes to their private label programs, and we are not out of the game as a supplier of choice in the single-serve market, whether it's coffee, tea, hot chocolate, cappuccinos, or more recently, soups and specialty dessert offerings, we have both the capability and the technical wherewithal to lead private label in this category.

Let me give you some more data points that support the notion that private label programs work better with a dedicated private label supplier. When looking at measured channel data for our customers, we see unit sales increases at our retained accounts of nearly 60% for the retail private label category, which was up only 40%.

We think this demonstrates how we help our customers maximize their private label offerings in single-serve coffee leading to higher customer satisfaction and higher profits. We believe this is because our products are designed to be as good or better than branded products.

We have no conflicts that require the products to be inferior by design in order to justify price points and product positionings. And we strongly believe we will see more customers coming back to us. Unfortunately, those benefits will not be realized until 2016.

So with these coffee challenges facing us this year and the timing of new business in our snack nuts category, we are taking down our full-year forecast for both sales and gross profit to reflect those issues in 2015.

We now expect full-year revenues to approximate $3.4 billion to $3.5 billion and gross margins to finish in the range of 20.5% to 21.0%. The lower sales will be partially offset by lower spending, including incentive compensation costs, but not sufficiently to maintain our original projections for the year.

As a result, we now expect full-year adjusted earnings per share to be in a range of $3.40 to $3.55. We feel most of the negative impact of the earnings will occur in our second quarter. As such, we believe our adjusted fully diluted earnings in the second quarter will be in a range of $0.60 to $0.65 per share.

Sam?.

snacks, soup, sauces, and jams and spreads. In the soup, gravy and broth category, a market-wide consumer shift in favor of paper cartons, up 9%, versus steel cans, down 3%, over the past year. In cold beverages, a test market in organic smoothies under a proprietary control label.

In single-serve beverages, now a category of more than 200 brands and over 1,900 SKUs, an opportunity to increase retailer margins and private label penetration for those customers no longer willing to subject their private labels to national brand control.

In better-for-your snacks, expansion of permanent displays in produce departments to another 400 grocery stores. In simplification, improved margins in eight legacy product categories, led by salad dressing, salsa and soup.

In infrastructure, capital funds to extend our SAP system to Protenergy and Flagstone, automate production in hot cereal, snack nuts and aseptic broth, and lastly to support newly-won business in aseptic sauces and pickles.

In M&A, a heated deal market and sufficient funds to acquire a mid-sized private label business in better-for-you snacks, aseptic cartons or another perimeter-based growth-oriented adjacency.

Taken in their entirety, these strategic opportunities demonstrate the vitality of our product innovation and customer engagement initiatives across a portfolio of 15 grocery categories.

Our decade-long progression, not without its difficulties, has been one of ceaseless pursuit of the continuously evolving marketplace for customer brands and custom products.

It is this relentless quest to grow whether through acquisition, innovation, or simplification, that makes our TreeHouse the home of the very best in private label products, service and people. We are TreeHouse, growing strong, standing tall. Cody, you may now open the phone lines for Q&A..

Absolutely. And we'll take our first question from David Driscoll with Citi..

Great. Thank you and good morning..

Morning..

Dennis, I had two kind of detailed questions for you. And then Sam, I have a significant question for you.

Dennis, on the single-serve coffee volumes, do I understand it correct that absolute volumes were down year-over-year? So, it's not just a deceleration of the rate of growth, the volumes are actually down, and can you quantify that?.

I can't quantify it, but I will say that the volumes were down..

All right. And then you said that you have a negative headwind on green coffee cost and you have the price reductions on the single-serve coffee product itself.

Can you quantify then the margin impact on the year because of these effects?.

I didn't provide – we don't have that. We try not to give margins out. You know that, David. But I'd refer back to the fourth quarter when we indicated that our unit sales were up 50% in that category, but our revenues were up 30% with that all being pricing and hitting the bottom line.

So I think it gives you the magnitude of the change in the margin structure of this category..

Okay. And then, Sam, so kind of – just love to hear you discuss the actions of – you mentioned that the brand leader was driving these price – this price competition within single-serve. I'd love to hear your perspective on strategy.

What sense in the world does it make for Green Mountain to drive prices lower in private label? I mean, we're watching the volumes shift massively into private label from the brands.

Doesn't this kind of fundamentally destroy the profitability of the entire category if it persists for any length of time? And then, if you could conclude your comments on this by just, once again, give us your sense of why are you confident that this gets better? Because I think this is the key issue here for everyone, all the investors in your stock..

Well, David, thank you. My view is that – let me take the long-run view first and then come back to the immediate. Now, if we look at grocery product categories, where they perform best, it really requires kind of three conditions.

The first is that there has to be national brand leadership and innovation and then communication and then developing consumer benefit. And that is the fundamental issue that will drive category expansion and bring consumers into that.

The second matter than one needs is that for the, in our – the retailers, they have to articulate and then follow a particular strategy for both the branded merchandising as well as their own customer brands.

And then, the third and last is that this categories seem to work best when there is a concentration of kind of private label that always has the smaller piece of the business, but in fact, provides an analog to the national brand and then relies upon being able to differentiate itself through value, service and superb execution.

And if one looks at those three conditions today, there seems to – nothing seems to be completely in equilibrium, but I believe that we're headed back to a new equilibrium here.

And that, I can't comment about the national brand per se; but I do know what our strategy has to be, and it gets back to our fundamental competitive advantage is that we have no conflict. We are dedicated only to our customers' brands, and we are all-in in that prospect.

And there was a period of time when there was, as I've indicated in my remarks, a great deal of tumult about technological lockout and whether there would be new consumer benefit.

And what we've seen is that the marketplace has voted, as it always does, and how we will find I think over the immediate future that we'll be headed towards an equilibrium where those grocers, retailers who regard their customer brands as a strategic tools or capabilities, they'll follow their own instincts and go back to their best interest and that will create opportunity that – again for us.

And I would expect that you'll see over some period of time that the – that private label will reach that new equilibrium.

The last matter with regard to this is we've got – in addition to ourselves and the national brand, we've got a series of small companies that are marginal with regard to the entirety of single-served beverages and the marketplace will work its way and we will see that number of others in this industry in a decline as their marginal economics force them to the sideline..

Thanks for the comments, guys. I'll pass it along..

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

Good morning..

Morning..

Can we just focus on Flagstone for a moment? You were planning to raise pricing.

Has that pricing been implemented, and what's been the customer and consumer reaction to that pricing?.

Yeah, Farah, we implemented the pricing last year in December. Most of it was effective by January. And the – I think the reaction was pretty straightforward. It was primarily due to the higher prices in almonds and a little bit in pecans, but mainly, almonds. And since that time, we've been working on formulation changes with our customers.

And frankly, I think we're making very good progress on that front. And as we said, we are confident with where our programs are going. What was disappointing was the timing of the programs. And that's the dynamic facing us right now. The sell-in has been quite strong.

At this point, the only other product that seems to continue to be potentially at risk is almonds and we're pretty well set for most of this year.

And we'll have to evaluate into Q4 if almond prices continue to go up, whether we need to do pricing at that time; but that's kind of a TBD based on the how the rest of the harvest goes with almonds in California..

And so, what growth or sales expectation should we expect from that Flagstone business this year? And kind of as you look out into next year, what type of growth should we expect there?.

Well, we're not deviating off our double-digit growth opportunity. We think we'll be very close to that this year from last year. We thought that was going to be an easier goal originally, but now, it's going to take a good effort to get there. But still, I think it gives you a sense of the strength, and it isn't just selling snack nuts.

As I said, it's the combination of new products and programs we have that will drive that. So, we think we'll get some share back along with the new product introductions to get to that top-line growth.

And if the selling that we're seeing right now for fourth quarter's an indication, I'm not sure why we wouldn't see double-digit growth again next year. But it's pretty early to make that prediction..

Yeah, Farha, this is Sam. To comment a little bit further. As I've indicated, we've taken all of the steps necessary to reestablish Flagstone internally. We've appointed a new president. He's a long-term veteran of our business and has run our Canadian operations. He's running a big business unit and also our North American Retail Grocery.

We put the team in place. We've committed to large scale automation projects in two of their most important snack nuts categories and those lines will be coming on.

Importantly, we will extend the SAP system to that team as well; and then as Dennis had indicated, we've developed this line of microwavable nuts that along with other product – new product development will move us quite forward.

And then the single thing that I am the most pleased about is this display program, although it was delayed, has been greatly improved. And the number of stores that we will reach now and the numbers of SKUs on those display units, both of those are beyond the original projections that we had when we were first looking at acquiring the business.

It will be from a lower base, but you'll see great growth out of here..

And any read on how many stores you plan to target, over what timeframe that can grow?.

Well, in this one program, we will be in 400 new stores when the program is fully rolled out in the second half of this year..

Thank you very much..

We'll now move on to Ken Goldman with JPMorgan..

Good morning everyone. Sam, how do we get out of the cycle where you win a bid in coffee, you lose a bid, win a bid.

I think it's great you gained some customers back, and I understand why, but isn't the nature of private label that someone will always undercut someone else on price? Again, I hear you on providing customers with unique solutions, but grocers don't always act rationally.

And my experience has been that more often than we'd like, they'll just choose the product or an offering based on what's cheaper..

There will always be a segment of that, Ken. Those are the stores where the demographics of the consumer are such that you got to have the open price point product. But let me go back to one of my comments. Coffee now is a section that are single-serve beverages. There are over 200 brands currently in the market, excluding private label.

There are over 1,900 SKUs. And what has happened is that there's been a mad – there was a mad rush to make sure that one wasn't locked out that – from a technological standpoint. And ensuing in that, there were what apparently, as you look back, a real lack of category management discipline.

The whole thing was to get the new technology in, don't be locked out and we'll sort this out later. And what we're hearing from grocers now is they need our help. They not only want our product – and by the way, the products that we're selling, provided they all have the original weights in the cups, none of ours have been changed.

And a number of our customers have seen their private label products reduced in the size of the cup contents and that's what Dennis was talking to you about, the degradation of the product.

But this whole idea that we can provide, without being conflicted, a second voice with regard to category management, I think is – that's going to be the matter that brings us back in.

And we will have to compete in a – on the basis of cost in an instance where there is more idle capacity today than there was earlier, but that, too, will change over a period of time..

Okay. Thanks very much, Sam..

We'll now move on Robert Moskow with Credit Suisse..

Hi. This maybe more of a in the weeds kind of question, but I think, Sam, you said that the price gaps in single-served coffee had expanded with branded pricing going higher, private label kind of staying down and that it hurt your margins.

But does that mean that like last winter when you were making price contracts with your customers, you were talking very positively about those arrangements, but were you able to take price on single-serve coffee in line with underlying coffee commodity inputs or were you unable to take price in line with those commodity inputs?.

Our first concern was retaining the volume and share, and that required us to do, one, increase our costs with regard to replicating the 2.0 technology.

And secondly, it required that, regardless of underlying coffee, green coffee situations, this became a matter of direct bidding to retain business and we opted to retain that business as opposed to giving that up. I should indicate to you that on the pricing pressure it has come from both the top, the entry of the national brand equivalent.

And then also it is from the bottom of this industry where you've got marginal operations that – or have to generate cash in order to keep their doors open and it's been the combination of that.

And I think that we'll see that kind of account by account begin to subside as the grocers come to realization that this circumstance is not one that is working in the favor of their brands or their stores either..

Okay. Rob -.

So, if you would – yeah..

Give you a quick insight on those price gaps. As we look at kind of the main product categories and the most popular products from what we're seeing in the data, last year, the average price gap on a 12 count was about $1.70, and this year it's about $2.40. So, you can see it's gapped out significantly.

And frankly, we find that the price elasticity in this category is very strong, and that's why you see the private label numbers going up for the category, up by 40%, when the brands are only up 14%. In fact, some of the higher priced brands are actually running negative now.

I mentioned that our private label customers are seeing their business up 60%, so it's driving a lot of volume, but frankly, putting a lot of pressure on the margins..

Yeah. I guess I don't remember a time when price gaps in one of your categories got this big and it still was a negative for your company.

And do you think there's something unique about this category where it is going to be – continue to be difficult to get pricing up in line with commodities? Because that's the thing you could always depend on the brands to do, they could always raise their list price in line with what is a very volatile commodity.

How do you think it stands?.

Rob, the one factor that is different in this instance is that there was a period of time through intellectual property, in effect, a legal monopoly was allowed to exist.

And then when we took advantage of the termination of that period of patent protection and developed a private label counterpart to national brand, we entered into a phase where there was a real threat of technological lockout at a time that the business that brewer placements were increasing double-digit rates.

And the industry in its aggregate was growing at a phenomenal pace and you had this moment in time where the retailers across food had to decide whether they were prepared to risk technological lockout. And in retrospect, they've found that that risk really was far less than they had imagined for two reasons. One, we replicated the technology.

Secondly, consumers found that there were the promises of great – enhanced consumer benefit were, in fact, substantially overstated compared to reality. And that's the anomaly that our industries that we dealt with and that our industry and our customers are dealing with the aftermath.

But I think that once that passes, all of that behavior that you would expect would occur will – that will return. It will be a more competitive marketplace. There's no question about that. But at this point, I think you'd see that it will be a level – it'll be a level battlefield. I don't know that it's a level playing ground anymore..

Well, if it's any consolation, I guess misery loves company. Your competitor's stock is down a lot today too. So, I'll leave it there. Thank you..

Next question comes from Evan Morris with Bank of America..

Good morning everyone..

Morning..

Just trying to, I guess, understand how the rest of this year plays out. I mean, I understand that the broader issues you've talked to them pretty well. But you give guidance for the second quarter. Dennis, you mentioned that the third quarter was going to be challenged.

I mean, I'm going to take that as kind of flattish year-over-year; correct me if I'm wrong. And if that is the case, then that suggests the fourth quarter to get to your guidance is anywhere from kind of 30% to north of 40% EPS growth year-over-year which is pretty significant.

So I guess what I'm hoping for is you've talked about some of the new wins and the expected shipments and the business that you know that's coming in the fourth quarter, if you can kind of help parse that out and put some numbers around it to kind of give us a sense how much that is to really bridge that gap from what's going to be three pretty lousy first – you know, three quarters to start the year at pretty lousy to get to a pretty big jump in the fourth quarter.

If you can help bridge that gap with some hard numbers, that would really help..

Yeah, Evan, I'm not able to give you the hard numbers, but the third quarter will be challenged, but not necessarily to the extent that I'm implying were flat year-over-year.

As I look at where most people had expected us to come out as I look at the consensus, it was for us pretty strong third quarter and a very strong fourth quarter, and I'm just – I'm saying it won't be quite as strong. As I said, these are seasonal shipments.

We actually start a lot our winter seasonal products late in the third quarter, and so I'm not able to give what I would consider really good third quarter guidance yet just because of the timing nature of some of these and how they hit.

There's a big difference between starting a program in the middle of September and starting it October 1 in terms of how the quarters go. So I'm confident with the range for Q2. I'm confident with the full-year number. We'll have a better sense of how three and four roll out as we get to the next earnings call..

Okay. No. And I definitely understand the timing of the shipments, but just, again, trying to understand the magnitude of the business.

If you exclude these new wins in the business that you've booked for the fourth quarter, if you exclude them from the conversation for a minute, I guess, where would EPS have settled out for the year? I mean, I know that's probably hard to parse out, but just I'm trying to get a sense of sort of where the base business is really tracking outside these new wins that you talked about, which will certainly help later in the year..

I can't really help you, Evan, on that one because part and parcel to everything is not just the new wins, but it's also the timing.

So some of the programs we're talking about weren't necessarily new wins, but when an account decides to do promos one year starting in Q2, and then the next year they decide we're going to delay those to Q3, it may not impact your total volumes significantly, but it significantly changes the timing.

So what we have here is a timing on the snack nut business. On the coffee side, it's the question of which customers come back and when their timing takes place. And that's not always easy to predict. Sometimes you can be awarded business and you might start shipping four months later and sometimes it's eight months later.

So that's the part that's hard to predict at this point. So when I'm talking about our numbers, we're talking about what we know about. And as long as we were taking our numbers down, we decided to make sure we took into account all of those and didn't bank on new business that we hope to come back but we don't have in the house..

Okay. Okay. And then just a question on Flagstone. When you made the acquisition, the growth rates were pretty strong. I mean, I guess it was our understanding that a fair amount of that growth came from a lot of new customer wins at Flagstone. You've now run into a couple of quarters of issues here. You've had a leadership change.

So I guess just trying to get a greater level of confidence in that maybe your view or the growth potential of this business is not a little overly optimistic at this point. Maybe those expectations have to be reset a little bit lower.

I mean, why isn't that the case right now?.

Well, this is Sam. Evan, as I'd indicated, we're starting at a lower position than we had initially planned. But what we see here is that the better-for-you snacks businesses, starting with trail mix and tree nuts, have an extraordinary promise in front of them as consumer preferences for snacking shift.

And that those trends are, over the next several years, really inexorable. And we are putting ourselves in the place to take advantage of all of that to a far greater degree than anyone else will be in private label.

And as I'd indicated, we've already taken those steps to reestablish at Flagstone that winning formula, although under different ownership in some cases with different leadership. But we intend, as Dennis indicated, to stay right – get right back on that double-digit track, and that's what we are absolutely committed to.

And you do have to, as we have recognized as our starting point as something different, but from a strategic perspective, there's absolutely not a single iota of change here with regard to the direction and our capability and strategy to have that play out favorably..

Okay. Thank you..

We'll now move on to Chris Growe with Stifel..

Hi. Good morning. Just as a question first, if I could, please, on coffee. I just want to be clear on the softness, if you will, or the challenges in that category. There were some customers that you've lost, and I know that's a source of some volume pressure.

Is it that or is it – or maybe and/or the pricing that's eroding as well? I don't know if you can help give a little color on each of those factors, but I'm just not clear on what's really driving the weakness in coffee..

Chris, it's a combination. We did lose business. I mentioned the volumes are down from a year ago, and we're working diligently to try to get that back. And so, we do have a volume as part of the issue.

Second is that as the brand leader has made the aggressive move to try to win as much private label as they can, they've taken the pricing and the category down. Their wins have also been opened up in accounts where we aren't there, capacity with some of our other competitors.

So, we have, as Sam indicated, there's some excess capacity in the category, and those who aren't capable of doing a match on 2.0 technology have dropped their prices further to try to utilize their capacity. So, it was an interesting swing there.

And in order to be competitive, we've not been able to pass on pricing, and in some cases had to reduce pricing in order to retain business as a result of those competitive dynamics. So we have both a volume and a pricing issue.

What has given us great comfort, though, is the fact that our teams are doing a fantastic job in working with our – some of the lost customers and trying to get them back. And we see opportunity ahead. Unfortunately, that is two to three quarters out and leading to the situation we're in right now..

And you've lowered your sales growth expectations for the year for the overall company. Could you say how much of that, in rough terms, is beverages, or is that a majority of your reduced expectations? There's a lot of moving parts here with the acquisitions as well..

The primary factors are, as we'd indicated, in the beverages and also in the snacks businesses.

What we have not talked about is just the very fine growth in our center-of-store business, that while Dennis mentioned that we've had an increase in our contract business that – really in center-of-store, this simplification has driven margin improvement, and at the same time, in certain instances, shown substantial growth in the top line as well.

So it is the two factors that we identified in the headline and have talked about..

Just, if I can ask one more quick one on like the expectation for strength in the second half of the year in earnings, if I heard you right, Dennis, it's in relation to programs that are, you know you're going to be shipping those products in the second half, if I'm saying it the right way.

These are not things you hope will get better, it's actually programs you have in place already.

Is that correct?.

It's predicated on that, yes. There's always some level of new business that you're expecting to get; but, as I said, the good news is most of our shortfall that we had seen is being made up by, what I would call, in-the-house programs and in-the-house orders to be shipping anywhere from four to six months out..

Okay. Thank you..

Our next question comes from Amit Sharma with BMO Capital Markets..

Hi. Good morning, everyone. Sam, a clarification on what you talked about earlier in terms of the coffee category and the pricing pressure is both from the large branded competitor and also your smaller competitors.

Now, as we look to the end of the year or early next year, what gives us comfort that even if the branded competitor gets more rational in their pricing, how long is pressure from the smaller guys, who are like fighting for their survival at this time, how long will pricing pressure persist from those competitors?.

I don't have a specific time in mind, but I will tell you what I've seen happen time and time again. And it is that private label goes through an early stage in new categories where it is a cottage industry of small private firms.

In this instance, most of them were already in the coffee business in either private label or OCS and the opportunity to roast more beans and put them into – as portion packs or pods was kind of too tempting to pass up.

And what will happen, as it has in other businesses, is that the private label as the demands of the customers are focused as much on the strategic value of their customer brand, as what is the cost of kind of the opening price point here that those people start to drop out.

And I think we told you over a year ago that there were nine companies showed up in one grocery bid for a very fine piece of business. That business went through – that same business went through another bid recently. There were three of us there, and we won the business in its entirety.

But we've gone from nine participants on that one piece of business to three, and we'll see the same thing across the board as the year goes on where private label is – it is absolutely required by the grocery customers in a category like this. They can't decide not to participate with their brands in this kind of phenomenon.

And the demands that they will put out will be the – be met by only a few. And we're the only one that could meet all of those demands and do so without a direct conflict that imperils their customer brand in favor of someone else..

And then, one more quick follow-up, if I may, the new account wins that you talked about in the coffee, which should start to ship later this year, are those at pricing where you're able to capture higher green coffee costs and make margins comparable to what you're making last year or are those also at lower prices?.

This sector is going to remain highly competitive for the foreseeable future and what we have done internally is to adapt to that.

We've developed a program of simplification, cost reduction, a greater – more – a greater look at hedging the internal cost, means of revamping our production, our packaging costs, et cetera, so that, in fact, we can take costs out that will offset the additional cost of the 2.0 technology..

Got it. Thank you..

We'll now move on to Jonathan Feeney with Athlos Research..

Good morning guys. Thanks very much..

Good morning, Jon..

Good morning, Jon..

Dennis, when you reviewed – or Sam – did you – I know you want to be careful about what you say about the single-serve coffee, very competitive.

You don't want to give any data away, but on an organic basis, could you tell us what the volume mix was for the business? You told us it was flat with the acquisitions, could you tell me what organically it was?.

We've never given that, Jon, in our history on a particular category in terms of -.

No. I mean for the business as a whole..

The business as a whole, we – again, we don't do that, but I will tell you that this afternoon when our 10-Q comes out, since it'll be published then, that last year in the first quarter, our beverage business was about $124 million, and this year it's about $111 million. So, you get a sense -.

Okay..

...of how that's coming down..

So it sounds like there'll be a lot of that data in the K then – or the Q rather..

(57:23) In the Q, yes..

Okay. And I guess one other follow-up to that, Dennis, if you look at the disclosure you gave us, 26.5%, I think you said, was a contribution from acquisitions.

When I look at press reports at the time of the Protenergy and Flagstone acquisitions, it's sort of – even with the – using today's currency rates, it's like CAD 110 million – was CAD 130 million, was disclosed as, I think, 2014 sales – or 2013 sales for Protenergy, and I think with $697 million in Flagstone.

If I add that up, it gets to, like – and divide that by $4 million, it gets to a little north of the $163 million. That would be 26.5% contribution to sales this quarter.

Was there, like, some – was there some significant decline in any of those businesses, or is there some – versus when before you owned them? Or is there some seasonality that I'm missing between those two?.

Both of those are highly seasonal in terms of the first quarter. So you have to take that into account. The soup business, by far and away, Q1 is the weakest, and frankly, it's the weakest for the snack nuts, too. So, you're not going to be able to do the math off this quarter to get their contribution..

All right. Okay. Anyway, thank you for your help..

Thanks, Jonathan..

We'll now move on to Brett Hundley with BB&T Capital Markets..

Hey, good morning guys..

Morning..

I had a question on your Canadian business.

We've seen one of your branded competitors there talking about taking in-country pricing higher in February, and it was at least – it was at least from my understanding, that if there was some pricing in-country there and currency stayed relatively range-bound from where it is from Q1, that there could be some margin recovery there.

Can you speak to your business and the trend that you're seeing in that country?.

Yeah. We are getting hit by exchange there and there's been a little bit of pricing we've been able to get through; but frankly, it – we have not been that successful. And I think as you look at other companies who do business up in Canada, frankly, nobody's talking about recovering much in the pricing up there as a result of the exchange.

So when we did our guidance for this year, our assumption was we weren't going to get any; and unfortunately, I think that assumption's proven to be right..

Okay. And Dennis, just switching gears a little bit back to your Flagstone business and some of the program timing differences that you talked about.

If you gave this, I apologize; but do you have any idea what some of the motivating factors are this year as far as the shift in timing or being pushed out on those retail programs?.

One, we're getting more placements than we had originally anticipated and we'll be in 400 stores by the end of the year.

The second is that the number of – the holding power of this display unit, when we were forced to go back to the drawing board, we actually were able to increase the holding power to where it will now hold 80 SKUs of a proprietary label that is found only in these freestanding displays and that those displays from the time they go in will remain up not until the original deadline but for the same intervals starting at a later period of time.

That's not a tradeoff that I would have preferred but it is a – once we get up to that run rate, we'll be pleased that it will contribute more on a run rate basis than we had expected albeit later..

Thanks for that, Sam. And just one more for you. Your approach to deals, the company has messaged, at least in the past six to nine months, on wanting to move further into the healthy space, healthy snacking, et cetera.

But I'm curious to hear what value TreeHouse might find in consolidating center-of-store private label further if such larger opportunities were to present themselves..

Well, with regard to M&A, we are a strategic acquirer in both the center of the store and the perimeter, and one that has a deserved reputation for doing these things quite well. With regard to the center of the store, there is a great deal of opportunity that remains there.

It is the big cash generator of this business, and what we will look for – we'll always look for are adjacencies that fit nicely. And we have acquired Protenergy within the past year.

And then I look at what we've done there and when I see the spread between consumer growth and paper packaging and decline in cans across the whole of the industry is 1,200 basis points that tells me that there is something to be done in that center of the store, and we're committed – additional capital to do that.

And I think what we have to look at is – and as I said, those old standbys for my generation, look at how are they being modernized or made more relevant to millennials and that will lead us to acquisitions there. With regard to the perimeter and snacking, the dietary habits of this country have changed dramatically.

And you're seeing it in not only foods that people eat, but how they shop. And the biggest change that we've undertaken there with regard to M&A is that this is all about following the consumer around the store and getting consumer insights and applying those to our acquisition model.

And that – we won't deny industrial might, but it won't be the only part of our M&A program going forward..

Thanks, Sam..

And our next question comes from Akshay Jagdale with KeyBanc..

Thanks. Thanks for taking the question. My question's on coffee. If you just take a step back, at your Investor Day you were expecting significantly more growth than what you now expect. Things have clearly changed.

Can you comment a little bit more on just visibility on this business? And it seems like it's been lower visibility than most of your other businesses because of some unique operating conditions, if I may.

So can you just talk to that a little bit because, clearly, there's conflicting messages from you and the national branded competitor, and what we hear in the marketplace, and it's been quite confusing. So if you can just help us out as to why the predictability has been so low on this business for you..

Akshay, Dennis here. I'll give you my thoughts first and then I'll turn it over to Sam. But I think what makes this unique for us is that this is – it's so unusual to have a private label category with a brand leader who is involved in the category.

And it causes us to take some step back and look at what's happening because it's, frankly, very unusual.

I think based on what we see in measured channel data, we see significant increase in private label, and we see the brand leader being the beneficiary of a lot of that share gain; and meanwhile, we see negative volumes in the brand leaders' branded products.

And that's the dynamic that just typically doesn't exist where the brands are sacrificing the brand in order to drive private label volume. And so, that has caused that visibility to be rather murky because it's, frankly, not a very logical step.

And that's a consequence where we just don't usually see that and, at least from my perspective, that's been the challenge..

Yeah. And I think Dennis has described it well. Let me turn to what I'd expect. What will be the future outcome here? And there are – I don't know – three major factors that will determine it.

First of all, with regard to consumers, what we have seen is that this is a highly price elastic category, and that what one has to do is whether you're in – no matter where you are in the spectrum of brands of private label, one has to be highly efficient, highly effective and in private label, most importantly, in complete consonance with your customers' brand.

Now that's one factor. The second factor is, with regard to consumer communication, consumer innovation and benefit and in that regard, absent a technological lockout, everybody wins when the national brand leader in effect leads through innovation and consumer communication, it culminates in real benefit.

And whether it's coffee or coffee creamer, we welcome that without reservation. And then the third matter has to do with the intermediaries here and that, in this instance, it's primarily grocery retail industry.

And grocers will, as they always do, put their interests first and a key matter in increasingly competitive retail grocery business is the role of brands, not just private label that were transactionally developed, but in fact, customer equities now that make their stores a destination.

And what you will see in coffee is that the present circumstance when we look back in from the future, it will be seen as an anomaly that came and went. And that, so those are the three factors that drive us and it's all about the long-term strategic perspective..

Okay. And then just a follow-up, Dennis, the factors you mentioned are more sort of category management factors.

But from a customer specific perspective, why is the visibility so low wherein in short periods of time, you have to change your plan by this magnitude? That's – and I understand the category dynamics are very unique and different, but what is it about the customer specific plans that are different in this case? It's our understanding that a lot of these decisions to move over to Keurig or made at a level above the buyer.

So I'm just trying to get more color into that, so as to better figure out what's going to happen in the future with you're saying you're gaining share starting in fourth quarter. I'm sure Keurig's going to refute that. So we're just trying to make sense of the whole situation..

We have good – reasonable visibility on retail brands and when they – retail customers when they move, Akshay, and generally, we've got enough notice to factor that in.

We were taken a little more surprise by some of the contract manufacturing customers where the difference between win, loss and shifting is far more – far tighter and that frankly took us by surprise. And I know you follow the brand leader, and they've talked about some of those contracts that they won; and, frankly, we lost some of those.

So that's where we had a change in visibility and that was a key driver. And I mentioned that in my prepared remarks earlier..

Okay. And just one last one on Flagstone.

Can you talk a little bit about the category dynamics, the growth you had mentioned in the fourth quarter that there was a slowdown in category growth and some inventory deloading by specific customers? Can you just update us on that? I mean, it seems like the issues that relates to growth on Flagstone from where you sit are timing-related and specific to programs that you're executing on.

But any update on the category growth and any changes in sort of inventory?.

This is Sam. You were correct in remembering that fourth quarter was an aberration with regard to holiday sales that, it affected not just private label, but in fact, the whole of the nut industry.

And my model indicated that revenues for the fourth quarter were $74 million for the category, $29 million for private label, below the projection, and over 60% of the stores that we track individually, chains showed an absolute reduction in volumes.

In the first quarter, the good news here is that in the four categories that we track, snack nuts, trail mix, baking nuts, and dried fruit, private label increased its share in all four of those categories, and on a composite basis increased share by 170 basis points.

We're all waiting to find out about the almond and walnut crops, and we'll have to adjust accordingly. But based on what I saw in the first quarter, I was very pleased with the uniform movement, in a positive way, with regard to our share of the market..

Okay. Thank you. I'll pass it on..

We'll now take our final question from John Baumgartner with Wells Fargo..

Good morning. Thanks for the question. Dennis, just wanted to ask about the natural and organic portfolio in terms of what you're seeing there with new distribution and in growth. Is that still running in that 20% sales range? And then I think you also mentioned that the premium price point for that private label over branded.

What's driving that premium, and how sustainable is it? Why wouldn't you see downward pressure on prices there over time as well?.

Yeah. First of all, let me clarify in that I mentioned 30%. It's a 30% average higher unit price than our private label, so basically with the price gaps in that 25% to 30% range, it effectively puts it at parity with national brands.

So the value side of that is that you can buy a Simple Truth or a Nature's Harvest brand of an organic product at the same price as a more processed national brand. So that has been continuing to grow. The volumes, especially in that organic side, are up significantly. The premium is up as well, and I think there's a lot of room.

Sam mentioned that this is starting to approach 12% of our sales. I think a year ago it was about 9% of our sales in retail.

Frankly, I think we're going to continue to see that same shift take place, and we're going to see more of our retail customers shifting over to – we used to call it private label, and then we called it corporate brands, and I think the real term we've been using now is signature brands.

And it's those signature brands that are driving great volume for so many of our retail customers, and that's exactly where these products lie. So I don't think this is a fad at all. I think it's a secular trend and as you look at where the growth is, it's – private label's the biggest beneficiary of that shift..

Okay. And then, Sam, just one last one on single-serve coffee. I think, historically, there's been a quality issue with some of these smaller independents that are out there. As the excess capacity in this market, it sounds like independents have been a little bit of a headwind for you there in terms of sustaining your share.

Are you finding the quality of the independents has gotten better over the past two years?.

I think the quality issues are not related to the independents. Most of these are privately – they're all privately held from my recollection, a lot of family businesses, long-term multi-generations in coffee. But primarily through whole bean or ground roast coffee.

And we see there that they've done what small businesses do so well, they find a single niche and then develop an expertise there.

The difficulty on the independents side has been where there is new capacity put in for single-serve beverages, when they face the possibility of not running at all or running at rates that will keep them at least at cash flow breakeven, they will opt for the latter in the short term.

Over a period of time, what they'll have to determine is can they develop the kind of local expertise in this business that really demands national scale? And I think for many, the answer will not be.

The other matter I wanted to mention just with regard to pricing is that the lowest prices on the market are now opening price points by several major retailers who are traditionally have large-scale housewares departments.

And when there is a backup of coffee brewers, we know that by NPD that the national brand brewers' business dropped 14% in the last quarter as the independent brewers came in and grew 19%. That – a way to move those brewers through the system is to drop the price of coffee, and that has had a very big effect on the private label pricing there.

We have product out there on an everyday basis now of a dozen pods for less than $5. And so it's that compounding effect, and as I said, I think both of these things will work their way through over a period of time..

As you've seen the smaller competitors come in, I think back in 2012, 2013, out of the gate there were some issues with the packaging quality from some of these smaller guys, it wasn't as fresh as TreeHouse was.

Have you seen that the packaging quality improved? Has the overall product on the shelf become better from these smaller competitors?.

We're the only one that completely replicates the national brand program in every regard with regard to the product and the packaging. And the packaging has proved to be an area where the smaller ones simply don't have the capital and the resources to replicate it. So those differences I think will remain..

Okay. Thank you, Sam..

Thank you..

And we'll now move on to Jon Andersen with William Blair..

Thanks for taking the question. I apologize if this has been asked; I just jumped on. So the guidance revision on the top line for the year is about, I guess, 6 percentage points or a couple hundred million dollars in sales.

Is there any way to quantify that, how much of that is due to kind of a different outlook for the single-serve coffee business versus maybe – it sounds like Flagstone is the other area where it's coming in below plan..

We don't give those breakouts, Jon, but you're right, those two are the substantial reason for the change in the outlook on the top line..

Maybe another way.

Did you update kind of your expectations for organic growth in the North American Retail business for the year?.

I did not give that out, but I think that would – it'd be indicative that we'll have some organic challenge in some of the other areas only in the sense of timing. The first quarter numbers, we mentioned the volume growth was down in retail, we're relatively flat for the total company.

So a little lower than we expected, but most of that was, in fact, driven by the coffee and the timing of the Flagstone business..

And then the new outlook still seems like it implies kind of a recovery in the fourth quarter, kind of minimum in those businesses.

What's your level of kind of, I guess, visibility on some of this new – I think you mentioned new single-serve business coming online later in the year? And then also, what are some of your specific plans to kind of improve the performance of the snack nut business?.

When we talk about the visibility, we only talked about ones that we know about. We're not hedging on taking in customers that have not made a formal commitment. So I think we're pretty good with the coffee.

On the snack nuts, we – as we would typically have, you're selling in in April for the winter season, so we're pretty comfortable with where we're heading with that business. It's, frankly, doing better than I thought we would be doing at this point. We've made a nice recovery in terms of the programs and the sell in.

I can't say enough about the sales team up at Flagstone and all the work they've put in to drive this incremental volume with products and displays and promotions. So inevitably, you always have risk in every forecast, but we're pretty comfortable with where we're at right now..

Last one I have and, again, this may have come up but just some of the changes that have happened from an organizational standpoint. And I guess the maybe the level of integration you're looking for now out of Flagstone versus kind of, at the time of the acquisition, thinking of running it more as kind of an operating – separate operating unit.

Can you talk a little bit about some of the changes that you've made there and what we should read into that?.

Jon, this is Sam. Let me start with we have appointed a new president of Flagstone. It's Karen Kelly, who's been with us since the acquisition of E.D. Smith and prior to this, had not only run the Canadian company, but also a business unit here in our North American Retail Grocery business.

And we're very pleased that Karen and the Flagstone team will kind of form a very fine go-to-market unit very quickly. With regard to other thinking, as I'd indicated, we've committed to a full SAP implementation and that will provide us with the extraordinary go-to-market visibility that is going to be required to pursue this growth.

And then I know you joined us late – we remain committed to creating a multi-billion dollar snacks platform, better-for-you snacks platform, with – around and use Flagstone as the cornerstone of that business. That commitment has not changed at all.

And beyond that, we've got our full agenda of – as we look at ways to put these companies together, inevitably you'll find big savings in certain areas and we will achieve those to the benefit of both companies..

All right. Thanks, guys..

Right now, it's all about kind of re-establish that momentum. Dennis had talked about double digits and then we're firmly – we're absolutely sure we're going to be there..

Okay. Good luck, guys. Thanks..

And at this time, we have no further questions in the queue..

All right. Thanks everybody. We're looking forward to seeing many of you. We're going to visit more than a dozen cities this year with our Investor Relations team and we'll look forward to plenty of one-on-one in small groups. Thanks again..

That does conclude today's conference. Thank you all for your participation and you may now disconnect..