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.

Kenneth B. Goldman - JPMorgan Securities LLC William B. Chappell - SunTrust Robinson Humphrey, Inc. Amit Sharma - BMO Capital Markets (United States) Brett Michael Hundley - BB&T Capital Markets David Cristopher Driscoll - Citigroup Global Markets, Inc. (Broker) Lubi John Kutua - KeyBanc Capital Markets, Inc. Andrew Lazar - Barclays Capital, Inc.

Farha Aslam - Stephens, Inc. Robert B. Moskow - Credit Suisse Securities (USA) LLC (Broker) John J. Baumgartner - Wells Fargo Securities LLC Christopher R. Growe - Stifel, Nicolaus & Co., Inc..

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 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..

Thank you, PI. Good morning, all, and welcome back to our TreeHouse. We have planned a 10th anniversary celebration today recognizing a decade of progress during which a dozen legacy companies have been combined to form a new private label market leader.

Instead, Dennis and I must explain a series of unforeseen developments that have led to yet another retrenchment in this year's earnings outlook. These developments center on the single-serve coffee market, which has undergone extraordinary change in recent months.

The confluence of events in single-serve coffee, California draught, foreign exchange, and avian flu constitute a 100-year flood in the course of our private label enterprise. While we could not have predicted this deluge, we can certainly contain its damage.

We must then seek sufficient high ground upon which to provide guidance for the next six months. Lastly, as the year progresses, we must also provide a vision of a renewed TreeHouse that will return to growth and prosperity in 2016 and the years to follow.

After nine years of virtually unimpeded expansion, we may seem to have stalled out in both top line growth and bottom line performance. That judgment, however, is incorrect.

As Dennis and I will soon demonstrate, that while we face great difficulty in coffee, our TreeHouse still stands, the private label sky has not fallen, and our prospects for continued growth lie just ahead.

In another six months time, 2015 will be seen in retrospective as an aberration, a departure from our established norm that arose from an improbable series of events affecting the private label marketplace.

Before Dennis addresses these matters in detail, I'd like to offer my strategic perspective on specific issues, our general circumstance, and long-term outlook. First, Coffee.

Caffeine has fueled our growth for the past three years, as we've pioneered what will soon become a $0.5 billion customer brand segment with astronomical growth that now accounts for 16% of all grocery channel K-Cup consumption.

Our initial success, however, has recently soured as the marketplace for both pods and machines has undergone a fundamental transformation. Product innovation based on consumer benefit has given way to a failed lockout technology. Consumers and customers alike remain confused and frustrated over the failed promise of new and better.

Household penetration of machines has stalled as price has become the principal barrier to consumer entry. Balanced marketing of licensed and owned brands of K-Cup's comparable margins has given away the bundled selling of national brands and private label.

The national brands incursion into the customer brands has doubled private label's market share, but eroded its margin structure as prices have fallen. Price gaps versus brands have widened from $0.13 to $0.21 per cup.

As a result, the entire category has been performed and the profit pool available to private label and case cup suppliers has reverted to the private label norm. Strategically, we must now use our total value proposition to adapt to these changed market conditions.

That metamorphosis has already begun, as we have won over another four customers, undertaken expansion of our small but growing direct-to-consumer channel and leveraged innovation, hedging and productivity, partially offset gross margin declines.

As both brewer and pot volumes are increasingly driven by lower prices, we must continue to invest in scale and cost reduction. By year's end we will have stabilized what was once a magnificent growth engine into another solid performer within the TreeHouse portfolio. Next, snacks.

Flagstone Foods, our portal to the store perimeter and millennial consumers has also endured more than its share of difficulties since joining us last July. Their second year, however, is already showing signs of real progress and recovery.

Snacks are now led by a seasoned TreeHouser and proven leader, who has authored many of our best-performing growth strategies. Innovation and merchandising initiatives, including a 3,800 store produce department rollout, have energized the whole of Flagstone.

The course of our top line has already been reversed and will generate escalating, double-digit growth across the third and fourth quarters. Margins should expand more than 100 basis points this year, as automation, hedging and productivity programs are installed.

Although a year later than initially planned, Flagstone will prove to be the cornerstone of an eventual multi-billion dollar platform in better-for-you snacks. Third, center of store. Our legacy business and pantry staples has formed the super structure of our TreeHouse since its inception.

In an otherwise flat market, margins of our center of store categories are now forecast to increase 150 basis points for the whole of the year, excluding acquisitions, foreign exchange and single-serve beverages. The inclusion of Protenergy Natural Foods further expands our industry-leading position in soup, gravy and broth.

The broad extent of our improvement is evidenced by gross margin gains in both dollars and percentage terms in 10 of the 12 product categories. The resurgence of this cash-generating complex, which ships 1,200 truckloads of groceries weekly, could not be more timely as we invest in innovation, technology and expansion beyond coffee.

In summary, while our anniversary will be quietly observed, we can proclaim clearly that once we clear away the clouds in our coffee, our TreeHouse will prevail and once again lead the private label marketplace.

Dennis?.

Thanks, Sam. From an overall perspective, our second quarter earnings exceeded our bottom-line expectations. However, the path we took was neither expected nor desired. Overall our sales were lower than we had expected, primarily due to a shortfall in coffee sales and generally lower sales in most of our other categories.

Part of this lower sales was due to the very difficult comps we had resulting from a very good quarter last year. In fact last year's second quarter represented one of the largest organic sales growth rates in our history, with North American retail grocery sales alone showing a volume mix growth of 6%.

In addition, we've become more focused on simplification, which means selling the right products and eliminating complexity and waste in our manufacturing process. While this had a minor effect on total sales, it resulted in better-than-expected margin improvement.

As many of you know, our annual goal is to find 100 basis points of margin improvement in our operating units. This past quarter, excluding single-serve beverages, we had 150 basis points of improvement throughout our legacy businesses. So despite a net sales decline in those businesses of 4.6%, we actually improved our margin dollars by nearly 5%.

Sam mentioned the nice improvements we are seeing at Flagstone. Those improvements are showing up in the numbers as well. Margins have improved by 110 basis points and our EBITDA for snack nuts has increased over 30% in the quarter compared to last year's comparable but pre-acquisition quarter.

We definitely found new momentum as we head into the back half of the year. Turning to our North American Retail Grocery segment. Sales increased 30.3% with all of the increase due to acquisitions. On an organic basis, volume mix was down 5.3% driven primarily by lower coffee volumes and the effects of simplification that I mentioned earlier.

The key issue for this segment and the results for the company as a whole is the lower volumes and margins in our Coffee business. While we have not highlighted details in the past, I'd like to provide more information on our Coffee business so you can better understand the dynamics and why we are again adjusting our Coffee forecast.

First, our Coffee business is off approximately 12% in volume compared to a year ago. This decrease is due to the aggressive push by the brand leader to gain private-label market share.

Last year we estimated that we had approximately two-thirds of the private label market, while we now believe our 52-week share is down to less than 50% and we believe all of our share erosion went to the brand leader.

As we enter 2015, we knew we had lost certain coffee business based on the usual six month to nine month notification process that takes place in private label. However, we felt the lost business would be offset by higher overall sales to retained accounts based on our expectations of growth in the broader single-serve coffee market.

We also anticipated some pricing pressures, but we felt those pressures would not be significant due to the prices increases announced by the brand leader in 2014. For the most part, private label price gaps generally stay consistent in just about every category we compete in and we expected coffee to follow the same trends.

Since that time two key events have played out. First, the overall growth in the single-serve coffee market has not met our expectations due to the lack of growth in the brewer market.

Although recent introductions by non-licensed brewer manufacturers bode well for a possible rebound in Q4, the latest machines under the 2O (13:44) banner have been clearly priced too high and still have restrictive customer features.

Our best information suggests that there has been a marginal, if any, increase in household penetration of new brewers, a marked change from our initial view that the brewer installed base would continue to grow in 2015. The second and more critical issue is pricing within the private label segment of single-serve coffee.

When we began the year, we expected a very competitive environment in private label coffee and knew that we would not be able to price for higher coffee input costs resulting from both market prices of green coffee and our forward contracts entering into 2015, nor did we expect to fully recover higher packaging costs associated with 100% compatible cups.

So we knew our margins on coffee would able lower in 2015 than 2014. However, we did not expect the aggressive retail pricing on cups that began late in the first quarter. Although branded pricing of coffee cups increased approximately 4% in the first quarter, private label prices were down about 10%.

This pricing at retail was most aggressive at private label retailers supplied by the brand leader, something we had not expected since it would likely cannibalize branded offerings. For that reason we reevaluated our coffee sales and margins and made an adjustment to our full-year profit when we updated our full-year earnings last May.

Our expectation then was that we had seen the bottom in aggressive pricing. During our second quarter, however, pricing became even more aggressive.

Based on the latest measured channel data, we are seeing branded pricing up approximately 5% over the 13 weeks compared to a year ago, while private label pricing is approaching a 20% decline over the same period. These price declines have resulted in the private label price gap nearly doubling to about 30% compared to a year ago.

The combination of lower unit sales and lower gift selling prices, combined with higher manufacturing and input costs has resulted in us losing approximately 20 margin points compared to a year ago. We now expect our single-serve beverage sales to finish the year with net sales of approximately $200 million compared to $260 million last year.

From an earnings standpoint, this combination of lower sales and margins will have a significant effect on our EPS this year. As Sam mentioned in his remarks, we are having success in winning new single-serve business.

We're confident that we'll see more success in gaining private label share, but those benefits will be realized next year due to the normal lead times between being awarded and actually shipping new products. Moving on to direct operating income, margins for our Retail segment were down from 16.5% last year to 14% this year.

Approximately 270 basis points were due to lower margins in Coffee, while our mix of new Flagstone and Protenergy businesses further lowered margins by 130 basis points. Offsetting these reductions was the strong performance by our legacy product categories that contributed an additional 150 basis points to our margins.

In regard to the Food Away From Home segment, second quarter volume mix was up 3% due to good sales of cheese sauces. There was very little effect on sales from the acquisitions, as there are almost no food service sales at either Flagstone or Protenergy.

Direct operating income margins improved nicely from 12.4% last year to 14.9% this year primarily due to last year's margins being lower than normal due to operating inefficiencies at our cheese plant. Those issues have been resolved. Our Industrial and Export business showed a slight decline in top line sales, down 4.4% from last year.

New acquisitions offset lower volume mix, but pricing was also down due to lower commodity costs. Direct operating income, however, increased 4.6% as some of the lost sales were actually very low margin co-pack business.

As we've said over the years, our co-pack business sales can fluctuate from quarter-to-quarter so we look at segment direct operating income dollars as the best measure of performance for this segment. Turning to our total TreeHouse results. Our margins declined from 21.6% last year to 19.9% this year.

The bulk of the decline was due to lower coffee margins, while the mix of lower margin sales from the Flagstone Foods and Protenergy Natural Foods acquisitions also contributed to the decline. In addition, unfavorable foreign exchange between the U.S. and Canadian dollars resulted in a 60 basis point decrease in margins. Moving to operating expenses.

Our selling, distribution, G&A and amortization decreased to 12.8% of net sales, compared to 14.5% of net sales last year.

The decrease was due to operating efficiencies in distribution as we were helped by lower fuel costs and lower general and administrative expenses, as incentive compensation accruals were adjusted downward as a result of the lower than expected operating results.

As we look at the non-operating parts of the income statement, interest expense for the quarter increased to $11.4 million as a result of higher levels of outstanding debt this quarter. The higher debt is due to the acquisition of Flagstone Foods at the end of July 2014.

Our total net debt outstanding, which we define as short plus long-term debt plus cash on hand, was reduced by $43.2 million in the quarter. Our leverage ratio, a measure of net debt outstanding to EBITDA for bank compliance purposes, is now down to 3.29%. With regard to taxes, our effective tax rate for the quarter was 34.4%.

This rate is very much in line with our expectations and full year guidance. Net income in the second quarter was $31.4 million, compared to $21.8 million in last year's second quarter. This equates to fully diluted earnings per share of $0.72 in the quarter compared to $0.57 last year before considering adjusting items.

After adjusting for the items highlighted in our press release this morning, primarily the refinancing, acquisition and integration costs last year, our adjusted earnings per fully diluted share for the quarter decreased to $0.66, compared to $0.84 last year. Turning to the outlook for the year.

I mentioned the challenges with pricing in our Coffee business. In addition we have two other items affecting our balance of the year forecast. First is the Canadian exchange rate.

When we provided our original guidance for the year back in February, we based our full-year earnings estimate on Canadian exchange rates averaging between C$0.80 and C$0.82 to US$1. Our estimate was that the rates would be low to begin the year, and gradually the Canadian dollar would strengthen over the course of 2015.

However, the opposite has now happened. We are currently seeing rates in the range of C$0.76 to C$0.77 to the US$1. Although we executed some second half 2015 forward contracts in the C$0.80 to C$0.81 range to mitigate most of the transactional effects of currency, we will still be subject to translation adjustments at today's market rate.

Those lower rates will pressure second half earnings by about $0.05. In addition, we've been having supply issues in regard to eggs used in our salad dressing business, primarily cream-based dressings and mayonnaise. During the second quarter and continuing into the back half of the year, we have seen a nearly 300% increase in the cost of eggs.

The good news is that our sales organization has done an outstanding job of getting pricing to offset the higher costs. However, we've also experienced delivery shortages, as key suppliers in (21:58) in regard to our supply contracts.

Shortages of egg whites and whole eggs will result in lower-than-expected sales for the third quarter, and we expect those shortages to continue into the fourth quarter, while egg laying flocks are replenished.

We've estimated that we will see an earnings shortfall of approximately $0.05 to $0.07 based on lower second half sales and inefficiencies at our salad dressing plants due to the lower volumes and inconsistent deliveries.

As both Sam and I have discussed, we are now expecting that private label coffee prices at Retail will not improve this year, and what we thought was a temporary margin structure for coffee is now a new reality.

This means that our coffee margins having reverted to a range that is consistent with our company average and down significantly from the average over the past two years. Our new estimates for coffee margins over the back half of the year have caused us to reduce our full-year guidance by another $0.28 to $0.30.

This large change is due to the heavy seasonal shipments in the third and fourth quarters being made at lower-than-expected margins. And finally, we have a modest increase in our estimated costs for corporate development expenses, as we undertake a full plate of potential business expansion.

We are seeing a wide range of possibilities across many of our product categories and have enlisted additional strategic analyses of these opportunities.

Normally, we have covered such costs as part of our G&A expense, but the current portfolio of opportunities includes both quantity and sizes of businesses that we've not seen in our 10 years of growing TreeHouse.

For that reason we've built into our balance of the year earnings estimates cost of approximately $0.03 in EPS to cover higher corporate development expenses. Overall, these matters more than offset the very good improvement we are seeing throughout our base business.

We now estimate that our full-year adjusted earnings per share will be in a range of $3 to $3.15. We believe we've now found the bottom range for 2015 and have built into our estimates very conservative ranges.

With regard to timing of the revision, we expect that most of the effect will occur later in the year during our seasonally heavy shipments of coffee. Consequently, we estimate that our third quarter adjusted fully-diluted earnings per share will be in a range of $0.80 to $0.85. I'll now turn it back to Sam for closing comments..

beverages, condiments, meals and snacks. Flagstone, which will retain its better-for-you growth dictate, will form the core of the snacks pillar.

The underlying rationale for this organization evolution is fivefold, execute our portfolio strategy in full, increase speed to market, simplify unwarranted complexity, improve financial performance and prepare for further growth.

In his three years as a TreeHouse resident, Chris has proven himself a worthy successor to David and Harry in leading our operating company. He and his team will address the new organizational structure in more detail at our annual Investor Day at the PLMA Convention.

Lastly, we have always been and will remain a diversified customer brands and custom products business built upon portfolio strategy, value without compromise and M&A driven expansion. Private label across various categories, channels and customers, remains the principal fount of growth in our industry.

Whatever its opportunity or challenge, we will pursue that growth both organically and through external expansion. Alisha, please open the lines for Q&A..

Thank you. We'll go first to Ken Goldman of JPMorgan..

Sam, I want to first commend you on sneaking a Carly Simon lyric into your comments. I think it just shows that you and I are old enough to remember what clouds in my coffee mean. Usually you do Shakespeare. This is a step down for you, though. Last night the branded leader in K-Cups highlighted "competitors stepping up promotions".

And this just seems to contrast a bit with what you guys wrote in your press release that "most of the competitive pressure is being driven by the brand leader". So I really don't want to get you into a he-said/she-said, but the blame game does seem to be on, and it's a bit confusing here on the outside.

So I just wanted to see if you could add any color on what's really happening with private label K-Cup prices?.

Ken, I'll search for another lyric. But there's no blame game here. This is a cautionary tale that we've seen before of the results of combining or bundling branded products with private label products.

That bundling was absolutely critical at the onset of the era of 2.0 technology, to execute a marketing plan that included not only new branded products, but also an attempt to close us out, close everyone else out through technology and also the bundling of products.

And as we've seen in other industries and we're seeing here now that while there may be temporary advantages of doing that, that in the long run the inherent conflict between the two puts – the onus is extraordinarily difficult to maintain over a long period of time.

And when one gets into the data, what's very clear here is that those retailers who have all of their programs for private label, licensed product, branded product and machines with one supplier that those retailers are still sellers of product, but the ones with the economic leverage over the manufacturer.

That's my interpretation of this whole matter..

Thank you. And then one more from me. I went back a few years and I just skimmed it, but I couldn't find another instance when in its press release TreeHouse called out expenses for M&A that had not happened yet. So I was just curious why you felt the desire to include those words this time.

There's some speculation that it reflects a high level of confidence that a particular deal or set of deals will be completed? Or am I just reading too much into that? I just wanted to follow up there as well..

Hey, Ken, Dennis. You're right. We've not called out an earnings adjustments for that, but the reality is, as I said, there is a lot of activity going on right now, and we are spending a considerable amount of time looking at a variety of opportunities.

You've heard us say in the past, we've said it many times, when there's a private label opportunity, chances are we will know about it and chances are we will kick the tires. There's no guarantee.

There's no promise that something will happen, but I can just say that the activity levels are very high, high enough that it will result in higher expense than we would normally have, and that's why we included that in our guidance for this year..

Thanks so much, guys..

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

Morning..

Morning, Bill..

Morning.

I just wondered again if it's possible to dig even further into the coffee business. If I look back, for argument's sake, numbers have come down for this year by almost $1. I think Street estimates were originally around $4 plus. Now we're talking about $3 plus.

You said the biggest issue, at least recently, is coffee, but we're talking about what's 5%, 6% of the total business. So even with great margins, maybe it was generating $0.40 to $0.50 to total earnings last year.

Is that a way to say that you're losing money now on coffee? And if that's the case, is this a business you really want to go forward with in a big way if it's a money-losing business for the foreseeable future?.

Bill, Dennis. One of the reasons I gave a lot more information than we have in the past on this segment is because there had been – I saw research that at times indicated that this was still a very high margin and at times said there was no margin.

So I wanted to be very specific that last year this part of our product categories was about $260 million. I mentioned it's $200 million this year, and that the margin drop is 20 basis points. And so the math would imply a fairly significant earnings shortfall.

But I also wanted to be very clear that this is a business that is in the range of our corporate average, and this is not a money-losing business whatsoever.

And with some rationality taking place, probably not in the third quarter or fourth quarter, but as we move forward and price gaps revert to what should be the norm for a category with this type of a high-level price point, we think there's opportunity.

But there's clearly not opportunity this year but opportunity in the future that this could revert back to a very good category. But I wanted to be clear that this is still a good category. It's just not a great category it was the last two years..

But just to be clear, so it will be profitable on a full-year basis this year?.

Absolutely..

Okay. And then just switching, because this will be one of I'm sure – one of the second of the M&A-type questions, but a year ago or at least with Flagstone, I think the original thought was we'd really like to spend our incremental dollars on growth industries, try to get to the faster growth, perimeter of the store with the Flagstone.

Should I look at the changes today as the M&A landscape has changed where something you didn't anticipate a year ago? Or maybe the Flagstone move wasn't really – maybe that strategy hasn't panned out the way you expected and so it's back to kind of more the blocking, tackling, looking for more center-of-the-store type acquisitions as well?.

Bill, it's Sam. We have been quite constant and consistent over the last year to indicate that our strategic objective, goals and acquisitions were focused on three high priorities, and they remain the same.

Specifically, it was better-for-you snacks, beverages and center-of-store adjacencies where we saw great opportunity to upgrade or modernize our center-of-store position. And those remain the same. And let me take them in turn.

With regard to beverages, we have a business here in sugar-free powdered beverages, if they have such a term (36:42), that was essentially a one-customer business in one product line.

And now I look at the beverage space and I see that we have several businesses and different product shapes, forms, and we've taken that across a wide array of customers, principally in retail grocery and we're investing in innovation internally in that same regard.

With regard to better-for-you snacks, the explanation is what I'd said, that we're a year late in where we wanted to be. When we started out, we found that combination of the California drought and the delay or changing in several customers' retailing programs meant that we had to take a new point of view.

From where we ended the year, we will post four consecutive quarters this year, each with increasing growth both in dollars and percentages. And across quarters two, three and four, we'll have double-digit increases and revenues in both and we continue to escalate.

Internally I'm so pleased that with all the problems we expect to finish the year with 150 basis-point improvement in margins, while we're developing innovative products in three different categories. So, I'll repeat it. It's going to be the cornerstone of a multi-billion dollar business because that's where millennial consumers have gone.

And then lastly with regard to the center of the store, I think you can take a look at Protenergy and see an example of modernizing this. Those will be the three prongs of the strategy. There'll be other opportunities that we continue to look at just as we always have..

Okay. I'll turn it over. Thanks..

We'll go next to Amit Sharma from BMO Capital Markets..

Sam, just to follow up Bill's questions on the M&A or prospective M&A.

I hear you that you still want to make (39:19) your portfolio but the speculation that if you acquire large center-of-the-store businesses, would the organization still have the ability to focus as much on this part of the portfolio, or this gets further pushed into the background, especially given the performance?.

Well, good morning.

I think that as we talked about the reorganization of our operating companies, what we've found over the last several years is that the original model that we developed when this was a $700 million business confined only to center-of-the-store and run personally by the five founders, we found that as the business has grown and we're now fivefold larger than we first started, that we really need to develop organizational structures, methodologies that allow us to address markets as defined by the combination of category, customer and now consumer.

And we've taken the two-by-two strategy that was originally only designed for categories and then extended that to customers and now consumers.

And each of these pillars that we discussed are organized around a particular set of consumers in each states and each will be able to develop in its portfolio the key way so that growth businesses will get capital and innovation. Businesses that have little in the way of growth prospects will be organized to generate cash flow.

And I think we're far more able to do that in a decentralized way that specializes around a particular set of consumer need states, customer requirements and the economics. So if anything, we're going to be more able than we have in the past to handle a challenging agenda that really is dictated by the changes in the private label market..

Got it.

Then, Dennis, could you please remind us what are your leverage ratios? And under the current agreements, how high could you be?.

Yes. The actual leverage ratio is 3.29 times debt-to-EBITDA, and we are allowed to go up to four times for acquisitions under current covenants. So obviously we've got quite a bit of headroom within our leverage..

Got it. Thank you very much..

Sure..

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

Hey, good morning, gentlemen..

Hey, Brett..

Dennis, I just want to push back a little bit on something you said on coffee, and I want to push back just to get an understanding of yours and Sam's thinking, because certainly we've been more positive recently that coffee can improve for you guys in periods ahead. But I really want to question if this is a good category.

You have a branded competitor that's very irrational, it seems, and it's really not the branded competitor that you guys have typically seen in your categories. It's a category where margin deceleration likely should have happened over the next five years. Instead it's been brought to the forefront here.

Your branded competitor was talking last night about being more aggressive in food away from home as another example.

And so I'm just curious, going back to Bill's question, if ditching the business or selling the business in some way has run through your mind at all? Or if in fact you really do see a pathway where volumes and margins can maybe reinflate for the company?.

This is Sam, Brett. And Dennis and I will tag team this answer. First of all, if you look at our beverage business in any perception other than looking back at what it had been, you'll see that this is still a very fine business and one that fits well within the dictates of our private label go-to-market strategy.

And with all the difficulties I went back and looked at our original plan, and we exceeded our expectations by threefold in terms of that.

Going forward what is key here is that there is the opportunity to develop a highly-differentiated segment, tiered layer of brands and private label that will – as it works through the category, that differentiation and segmentation of consumer demand will lead to the continued growth of the category.

And in my perception here, the highly developed portions of this tiered hierarchy are really at the private label end and at the premium end led by Starbucks.

And we've got 1,900 SKUs and 200 brands in the category, and grocers are going to demand out of the leading brands category management and SKU discipline and more merchandising, advertising, differentiation of product, and that is the perfect place for private label to be.

I think that with regard to the competitive behavior of the lead brand, what has happened here is something that none of us, whether here or elsewhere, could have expected. But now that it's happened, what I think you will see is that there's nothing like results to affect future behavior.

Dennis?.

Not sure what I can add to that, Sam..

That's fair. That's a good answer and I appreciate it. Then just a follow-up question here, Dennis. I'm trying to think – I know it's early here – but I'm trying to think about 2016, and specifically the type of snapback in revenues and/or earnings that can be realized. I know there's many different moving parts that have affected this year.

But maybe you can help us focus in on two, three or four that we can be thinking about in some type of scenario analysis for how earnings can potentially snap back next year, whether it's through a resurgence in volumes or profitability coming back better than expected, that kind of a thing?.

I think some of the headwinds we had this year are going to snap back. I think we'll get our way through the egg business. I think the snack nuts in Flagstone in particular the trends are looking really good, and we're getting back to that pace of growth that we had all expected. The teams with Flagstone are just doing a fantastic job.

With the new products and new distribution, and I think we're really thrilled with the sales organizations have together to cross sell, we're getting some real nice success there. So that will be a big positive. A bit of a wild card, but I think it's upside opportunity now as opposed to a long-term reality is coffee and coffee pricing.

And to the extent that price gaps go back to what should be the norm for that type of category, I think that presents some upside as well. I think we're going to have to see how that plays out in Q4. I think the brewer market is going to be lively.

I think both the brand leader and other participants in the brewer market are getting a little more excited about what the opportunities could be for Q4, and we absolutely welcome that. We'd love to see that household penetration number get up into double where it's at.

And when that happens, I think you're going to see a big re-push to the coffee volume. So it's early right now, Brett, but I see far more optimism for next year, but the reality is we have to get through 2015, and the numbers we talked about today I think reflect the reality of 2015.

But hopefully a lot more promise when we get together for our Q3 earnings call when we start highlighting some of the 2016 opportunities..

Thanks, Dennis..

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

Great. Thank you and good morning..

Morning..

Hey, David..

Sam, it may be no consolation, but this brand-leader stock is doing far worse today than yours. So I can't really imagine that there's happy people anywhere on this topic, but I'd like to continue with it.

If second quarter coffee margins were down 20 percentage points, and by the way, Dennis, you said earlier on that question to somebody, you said 20 basis points. I believe you meant 20 percentage points..

You're right..

Sorry, go ahead..

You're right, David. My mistake..

Yes, just making sure it's not unclear. Minus 20 percentage points in 2Q, and you exceed your projections in the quarter.

Why or how does coffee get worse in the back half of the year? So something doesn't make quite sense to me that if we're hitting the numbers in the quarter, yet the coffee margins are down in the quarter, why does everything get worse, if you're meeting your bottom line EPS numbers in 2Q?.

The Q2 numbers did not meet our expectations in coffee. The reason....

No, I meant overall, though. I meant overall.

So if the overall number hits and coffee is a disaster, why can't you meet your full-year guidance previously written?.

Because what's happened is the deterioration as we've entered through the quarter, remember we talked about we entered with 10% private label pricing down coming out of Q1. Now it's 20% down. That 20% down momentum is going to carry through the back half of the year. We had not anticipated that originally.

So we did not meet our coffee expectations in Q2. We won't meet them compared to where were for Q3 and Q4. That's why we took that number down. I think the rest of the businesses, as I said, are doing very well, but you take that coffee and frankly you throw the eggs and FX on, and that's where we're at.

But, David, I do think we've hit the new bottom and the other challenge is timing. I mentioned in the script, Q3 and Q4 are the heaviest times for coffee shipments, so the relative volume and number of shipments in the back half of the year will far outweigh Q2 which traditionally would be the lightest of our coffee shipments for the year..

Okay. And I can further assume that the minus 20 percentage points in the coffee margins in 2Q, it then gets worse? So if you saw pricing at the very end of the quarter get much worse, then coffee margins aren't down 20 percentage points in Q3 and Q4.

They're down something well in excess of that? Is that fair?.

Down, but I wouldn't say well in excess of that, but down..

Okay. Then just kind of finally for me on this one is just kind of nowhere in the conversation did I hear the word capacity.

So yes, there's pricing pressure from the brand leader, but there's a question here why? And I think, Sam, in prior conversations there has been some talk about excess capacity across the industry as the brand leader expanded its K-Cup capacity and then consequently moved into private label.

That movement then bumps up against your capacity and the other private label makers, many of which weren't as successful on the 2.0 compatible cups.

So, Sam, can you just expand on this? Is this a straightforward issue of overcapacity, the brand leader yes they want their volume in private label, the market's just not growing like everybody wants it to, and so everybody is running smack into the middle of a massive excess capacity situation? Is that the right framework?.

That is a factor, but it is not the right framework. Let me lay out three or four matters that you then can piece together. First of all, it's clear that there has been a reduction in utilized capacity. That has principally been at TreeHouse.

As Dennis indicated when he talked about our share, we believe that virtually all of what we lost went to one competitor. The second factor is that there had been entry into this category by roasters who already had businesses in either private label roasting ground, OCS or other coffee businesses.

And I had mentioned that we had gone to – in one auction there had been nine of us, and then a year later there were only four. And there has been in a number of instances entry into the category without great capital commitment in the same way that we did where we emulated the brand.

And there have been a number of those people that have reverted to their traditional ways or their traditional customer base. So we have a major competitor, not the national brand, that has a very fine combination of roast-and-ground packed coffee, whole bean coffee, and it's complemented by some single serve, and they've adjusted to this.

And so I think that the idling of capacity has largely been something that has affected us in the most substantial way, and we've indicated the adjustments to it.

The other matter there is that when you look at the single-serve business and are able to look at it at the individual customer, what you see in the last quarter was that there were three mass merchants that accounted for virtually all of the price reductions in the entire business, and that they are mass merchants who acquired their coffee, their private label coffee machines and all the ancillaries from only one source.

Their reduction in prices, though, has been driven a lot of volume for their stores, there has been a secondary effect when others come forward, and that's made this a dramatically more price competitive basis.

Last point and I'll stop, is that we did indicate that now we've gained four new customers or four new instances of distribution, and that's why we believe that we're at that point that this has bottomed or bottoming out and that bottoming out is reflected in Dennis's guidance for the third and fourth quarter. Thank you..

Thank you, Sam. I'll pass it along..

We'll go next to Akshay Jagdale from KeyBanc Capital Markets..

Good morning. This is actually Lubi filling in for Akshay today. I just wanted to ask quickly on the comment you just made. You said that you've had some success gaining new business in single serve. You just mentioned four new customers. I'm wondering if you could give us any additional color on where that's coming from.

So more specifically, are these other non-licensed players, so excluding the branded leader, because on the earnings call last night, the branded leader is saying that they had not lost any customers. So just wondering if you could provide any further clarity there..

Hey, Lubi, Dennis here. We're happy with what we've gained. What we've done is we've gained distribution at four accounts, as Sam has said, and that distribution represents kind of a cross section of retailing with coffee, both in large accounts and grocery accounts. So I think it bodes well for our opportunities in the future.

As I said that most of that shifting will take place in very late 2015 or early 2016. But I think it's showing the momentum our sales teams are having as we go about basically reclaiming or getting into new business.

Not necessarily all of that business would come at the expense of one other private label supplier, but nonetheless good wins for us and a cross section of retailers..

Okay. And then if I could ask a question on Flagstone, and I apologize if you commented on this already. I joined a little bit late.

But could you talk a little bit about how Flagstone performed relative to your internal expectations this quarter? And I know you said that you've made some good progress on margins, but if you could provide any sort of additional color about what's driving the improvement? And then where you see potential further opportunities for improvements in that business? That would be appreciated.

Thank you..

Sure. I'll reiterate the business. If you looked at it on a year-over-year basis for the quarter, our actual quarter last year pre-acquisition, their EBITDA was up 30%, margins up over 100 basis points. They're really coming back on track.

I think when you go through a sales process, as they did last year, there's a lot of distractions, and those distractions are gone. It's a full-fledged, new products, new customers, and cross-selling opportunities with the Bay Valley Foods sales force have resulted in some new wins.

So where we were disappointed with how we kicked off last year, and frankly they were too, what we are all happy about is the great momentum that's coming through with the team. And I can't credit them enough with their product development and the sales organization up there. They've all done a great job.

And as Sam said, we're really pleased with the progress, and we see – what we thought we were buying, we bought. It just took a little while for everything to get back on track..

Okay. That's helpful. I'll pass it on. Thanks..

Okay..

We'll go next to Andrew Lazar of Barclays..

Sam, in some of your comments on your three kind of core M&A priorities or thrust, it was better-for-you beverages and then center-store adjacencies where there's a chance to kind of modernize the portfolio.

I'm trying to get a sense of where do maybe large-scale businesses that are center-store, but don't necessarily modernize your portfolio, maybe they bring with them additional scale, or cost synergy opportunity, but not necessarily change the tenor of the type of center-store businesses that you necessarily have in a more modern way.

Is it you just need to see the potential to improve on a margin structure, or a business that's been miss-executing? Is that enough? Or ways to use the simplification processes that you've done in the core Bay Valley legacy and apply that to another large center-store business? Is that enough? I'm trying to get a sense where something like that fits in? So it wouldn't seem like that necessarily fits with the three priorities essentially that you laid out, if you get my point..

Andrew, I do get your point. And as our mutual friend, David Vermylen always reminded both of us, we develop the strategies on the cocktail napkins, and then we go outside in the real world and have to put them into effect. I think that there are instances where certain acquisitions are ideal fits, and others are less so.

And we've got to take a look at the – kind of the entirety of what the opportunities are out there.

What is really important here is our ability to deal with circumstances in center of the store categories is far greater than what we started with, because we now look at the strategic matters in the context of not only the category, which we started in 2005, but then we added customers in 2010, and consumers now in 2015.

And that gives us a lens here that we can look at these in a far better way than in the past. And that can lead to strategic insight about things that others would see as flawed, and we may see as ones that have great opportunity for us. And that we have to consider all of those matters.

The – we will in any instance, though, it's always about strategy first and being prudent in what we do, and we'll continue to apply those principles..

Okay. Thanks for that.

And then just I guess as a follow-up, are there any maybe snippets or tidbits you can pass on about what you're hearing from some of your large retail customers in single-serve coffee, just about maybe their level of – I don't know if there's frustration building on their part about sort of the turn that the overall category is taking, and that the brand leader has kind of been – the way in which maybe the brand leader has been managing the category in certain respects.

Like is there – do you get the sense there's a building sentiment that they're looking for some change, even if a lot of that hasn't yet played through necessarily to your advantage just yet? You know, I'm trying to get a sense of what's kind of brewing under the surface a little bit, well, no pun intended..

Well, I'll offer kind of two observations from – in taking the long view.

The first is that if you looked at, for the grocery industry, the aggregate size profitability of roast and ground coffee over a long period of time, what you saw is a virtually static situation of large quantities of products sold in red and blue cans at very small margins, but in fact things that had to be in the store.

The – what we see now is that the physical quantity, the weight or the volume, of that same grocery store business is virtually unchanged, but there's been a dramatic and positive shift that has affected grocers in that within that middle tier of people that want branded good coffee, but neither premium nor OP (1:05:11) price point, a huge amount of it has been converted into a far more convenient and highly profit – and more profitable form.

And one has to, I think, look at the grocery business in that way. And if you take that in context, this is an extraordinarily positive thing for our customers.

The big opportunity going forward, Andrew, is in my view we've seen something that I've – you've got to presume that what's recently transpired is one of those just extraordinary events that is highly unlikely to be repeated.

What will happen – what's happening in the future right now is what grocers are looking at is they got – we track 1,900 SKUs and 200 brands. And there are some grocers out there that have very defined strategies and branded hierarchies that work quite well.

There are others that this – their merchandising is a collage of confusion, and grocers are going to demand out of the leading brands and the – and I'm talking about brands, not manufacturers.

They're going to demand category management, and what will happen as a result of that is there'll be fewer SKUs, fewer brands, better merchandising, better marketing, and the stores that will benefit from that will differentiate themselves extraordinarily from those that stay in the throes of a manufacturer-driven program rather than a consumer program.

And by the way, I've been dealing with all the same grocers for 40 years, and if they're winning they get over the past real quickly. That's an old man's perspective from a long time out..

Well, from one old man to one that's certainly getting a lot older by the day, but I'll see you in a couple weeks. Thank you..

Thanks..

We'll go next to Farha Aslam with Stephens, Inc..

Hey. Good morning..

Morning, Farha..

Can we just continue on the M&A topic? Could you share with us kind of how you think about valuation in the space currently? Kind of what ROIC you're targeting on these deals.

If you want accretion in year one, and you'll only do a deal with accretion? And historically you've not given us synergies that you get from M&A, but kind of could you give us a historical context of what kind of cost savings and synergies you've been able to realize from past deals?.

Farha, Dennis, and you're right. We haven't given synergy numbers on acquisitions. It's always been a frankly a rule for us, and I don't have – can't say what the future holds, but I can just tell you we have not done that. And historically most of our acquisitions, if not all of them, have been accretive within a quarter or two quarters.

So, that's also where history has been. You can't tell for sure where we're going to go in the future. I don't think there is such a thing as a multiple that is to be paid. Our multiples over the past few years have gone from the low sevens to a double digit one as we had with Flagstone.

It depends on the size, the growth, the margins, that there's a lot of depends that go into those. Every deal is different.

So unlike maybe some brands where you can kind of peg a standard multiple, you really don't have that luxury in private label because every business is different, and almost every business is private, and almost all the businesses have non-disclosed information that is subject to interpretation and evaluation.

So, I know it's not an exact answer that I'm sure you would like to have, but that's just the way it works in these private-label deals..

And then when we look at your Flagstone business and Protenergy businesses, are they back on track in terms of double-digit top line growth? Kind of, Flagstone was growing in that 15% to 20% before acquisition, and Protenergy was growing at about a 10% rate.

Is that what we should expect from those two businesses going forward?.

Well, our original goal for Flagstone, and that's really the main one. Protenergy has been on track, they've been on track from an earnings standpoint as well. Flagstone we thought we would get double-digit top line. We'll be just slightly below that, at least for this year. Our goal is, of course, to get it back to double-digit at the top line.

If you look at the earnings number though, our earnings expectations for this year are going to be very close to what we originally said when we bought the business in terms of EPS because we've done a better job and have gotten on to the margin structure more quickly.

So, overall, where the top line may not have come through the way we had expected, the business is now driving towards the earnings numbers we had actually expected. And I think that sets us up well for the potential to get back to double-digit growth next year..

Great. Thank you very much..

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

Hey, Sam. If you want to lighten the mood at your 10-year anniversary party, I do have our initiation document on your stock from June 27, 2005, with a target price of $34, very audacious target price, and an outperform rating, so....

Rob, you've always been a party animal..

Yeah. Well, PI and I pulled an all-nighter to do it, so she deserves some responsibility or credit for it, including the BCG matrix that shows non-dairy creamer as the star of the portfolio. So, a lot has changed and you and your team deserve a lot of credit for transforming this company and following your vision.

So, I guess, I just have one more follow-up on Flagstone. When you said earnings are back on track, or close, Dennis, I think $0.24 to $0.28 accretive was the goal originally for 2015.

Can we start to think of that as possible for 2016? And then also, what kind of a sales number are we looking at this year? I think we were looking at over $1 billion originally. I thought maybe $750 million was where you would end up this year, or am I close to those numbers or can you give us a range..

Yeah, let me – from an earnings, let's start with the EPS number. It's really difficult a year out from an acquisition to get a good handle on it, because you can't really – we don't reallocate debt and cash flows and all that good stuff in the share count.

But based on the best estimate that I can come up with on a – as close as I can to what our expectations were, Rob, that earnings number you talked about as 2016, we'll be there in 2015. So it's – that's really much closer to where we'll be this year. Again, it's every quarter out becomes even more difficult to do that as new shares come in and so on.

In top line, our original thought was this would not be $1 billion, when we bought it we thought it was a $750 million business opportunity this year with 10% growth.

And the reality is, and you can see it in the snack nuts that we disclosed, it's going to be closer to a little over $700 million, it ended last year at about $662 million, so low $700 million. So we won't get the 10% we had expected, but certainly high single digits.

And the goal for next year is to get it back into the double digits, so when our 10-Qs and 10-K comes out, there's a category page that shows sales by category, snack nuts, that's all Flagstone. So, it'll give you a very good sense of what those sales are..

Okay. All right. Thanks a lot..

Sure..

We'll go next to John Baumgartner from Wells Fargo..

Thank you. Good morning. Dennis, it sounds as though the cross-selling of Flagstone is occurring a lot sooner than you typically see after an acquisition closes.

Can you speak a bit more in terms of what's driving that? Have there been internal changes or improved collaboration among your businesses, and does that enhance the cross-selling going forward with future deals?.

Yeah, the – what we've been able to do and typically I've always said that year one of an acquisition, you get very little opportunity to grow your business. Year two is when you start to see it and that's because of the normal seasonal cycles.

What's a little bit different here though is that some of the categories, Flagstone's in, are not fully penetrated at private label.

And the other opportunity is, we've got customers from a Bay Valley Foods side, that frankly had nothing from Flagstone, and they have customers, especially in the convenience and drug business, where we had very little presence.

So, bringing the two sales forces together has resulted in small business wins that were outside of what we had expected, that we think have great opportunities. And having a new leadership at Flagstone, who is intimately familiar with our go-to-market organization, has also been a big help.

And the collaborations we're seeing between those two sales organizations, frankly, is better than I think we've seen in any of our acquisitions in the 10 years, and that's paying dividends where we're not waiting the two year kind of typical hold process to see the benefits. So that's been a real plus..

Great. And maybe just a follow-up in terms of premium private label, didn't hear much about that thus far.

Is there a growth that you can point to for Q2? And then maybe just discuss any new business or distribution wins there?.

Yeah, we – I didn't mention it. It seemed like we had a lot of other news that was more to the forefront, but the reality is that we continue to grow that premium natural and organic business.

The organic growth rates for that what we call Natural better for you, that volume in that category was still up about 50% in net sales, volume up about 42% in terms of tonnage. So it's still clearly where things are going.

And it's one of the reasons why our simplification is really focused on streamlining so that the kind of typical center of the store and value propositions are more streamlined, more cost efficient, and pushing resources and R&D more towards the reformulations for organic and clean label products.

So I think that trend has been very consistent at about 40% to 50% growth. Again, a small piece of our business, but that's really where the opportunity for long-term growth lies..

Okay.

And I apologize if I missed it, but did you provide updated sales guidance for 2015?.

We did not..

Okay. Thank you..

We'll take our next question from Chris Growe from Stifel..

And this will be our last call based on the time. Thank you.

Last question?.

Okay. Good morning, and thanks for squeezing me in here..

Thanks..

I had just two follow-up questions if I could, please. The first one be just in relation to coffee again, sorry to hit that again, but you have four new customers if I heard correctly coming in the year – the business in coffee.

And have you – can you give any sort of sense of the size of these customers? Or are you gaining back customers that maybe you lost? Is that there's some kind of indication here for the future if you are doing that? I'm just curious if you could respond to that?.

Hey, Chris. It's Sam. In four instances with four different customers, we've either gained new products, new distribution, or a new customer. This is most all – largely focused on retail grocery business, and as Dennis indicated, the lead times here, particularly in the development of new packaging, go on for many months.

But it is a highly salutary development from our perspective about the – where this market is and what our long-term prospects are..

Okay. Thank you.

And then just to understand as we look for the second half of the year, and we'll worry about 2016 later, but are you assuming that pricing just holds where it is right now and then just related to that should we expect that cheaper machines, there's been some discussion of more aggressive discounting, that customer even more prone to buying private label, is it really the volume growth that we're looking at then as the key driver of revenue from here for private label kick-ups just with the hope that cheaper machines may drive more private label penetration?.

Well, I think that from – the key thing here is, I think, we've hit bottom. I think, we're there on the pricing and that's what we built into our forecast internally, and Chris, I think the – your point about increasing the household penetration by lower-cost machines is exactly on track.

I think that is the number one driver that will drive this market forward. You know everybody has opinions, but our strong opinion is that more expensive machines may not – aren't going to attract the consumer who's not in the space now.

Lower-cost machines will do that and when the machine comes down it makes the experience work with single-serve coffee, so based on what we're seeing, based on frankly what the brand leaders said with their machines, but importantly what we're seeing with other machines hitting the market, there should be a lot of machines in that sub-$100 mark, maybe even into that $60 mark, and that's the stuff that I think drives a lot of household penetration and drives cup usage up..

Okay. Thank you.

And just one – if I could do one quick follow-up on Flagstone, did the new products to those 3,800 stores, does that ship in Q2 or does that extend over into Q3 as well?.

Well there's extensions going in. The good news is that where some of those distribution points are maybe old display, the replenishment is taking place, so we're starting to get the benefits of that particular program that we had talked about in the last quarter, so again that's going to help drive the back half of the year as well.

So, I think, we've got all of our timing issues behind us at Flagstone, and as we said, a strong second quarter year-over-year and from what I've seen in the sales numbers, very nice momentum going into the back half of the year..

Okay, that's great. Thank you for the time..

Thanks, everybody. We very much appreciate you joining us today. We look forward to seeing a number of you in our fall investor meetings which begin next week, and if not there at the private-label manufacturers show and our investor day in mid-November. Thanks, again..

That does conclude today's conference. We thank you for your participation..