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.

Robert Moskow - Credit Suisse Securities (USA) LLC (Broker) Farha Aslam - Stephens, Inc. John Joseph Baumgartner - Wells Fargo Securities LLC David C. Driscoll - Citigroup Global Markets, Inc. (Broker) Christopher Growe - Stifel, Nicolaus & Co., Inc. William B. Chappell - SunTrust Robinson Humphrey, Inc. Jonathan P.

Feeney - Athlos Research Amit Sharma - BMO Capital Markets (United States) Andrew Lazar - Barclays Capital, Inc. Akshay S. Jagdale - Jefferies Brett Michael Hundley - BB&T Capital Markets.

Welcome to the TreeHouse Foods Third Quarter 2015 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 circumstance on which any statement is based.

For the purpose of our discussion, today's statements such as Private Brands or the Private Brands business refer to the ConAgra Private Brands business. Private label on the other hand refers to the customer and corporate brand industry.

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, everyone, and welcome back for a second time this week to our TreeHouse. Since your last visit, we have crisscrossed the Midwest with town hall meetings in Omaha, St. Louis and Chicago.

ConAgra Private Brands' employee reception has been universally positive with all intrigued with the many new possibilities soon to be before our combined business. As a result, both political parties in the Grain Belt are now pursuing Private Brands' interim President and COO, Dennis Riordan, as a candidate for national office.

Back home, as the year winds to a close, TreeHouse is showing signs of renewed strength in the midst of continued weakness in marketplace conditions. Specifically, personal consumption expenditures for food at home have trended down to 0.1% annualized growth, lagging far behind the broader measures of consumer sector growth of 3% or more.

For the very first time ever, as of mid-year 2015, foodservice dollar sales to consumers have exceeded those of the retail grocery industry. The general food and beverage market, as measured in as 102 categories by syndicated data, has reported negative unit volume trends across the retail grocery industry for each of the last four quarters.

While its composite dollar share across the entire store has remained constant at 18%, private label food and beverage has trailed national brands due to losses in heavily promoted categories led by Soft Drinks, Non-Chocolate Candy and Cookies.

In Single-Serve Coffee, category-wide unit volume grew 17% as private-label growth of 38% tripled that of national brands. Meanwhile, the single-serve brewer market shifted to an economy-first mode as 77% of brewers now retail for less than $100.

Conversely at TreeHouse, although we posted only fractional percentage growth in revenues this quarter, our operating units are making progress and giant strides. We have gained markets in nine of 12 major product categories led by Pickles, Baking Nuts and Mac and Cheese.

Our center-of-store staples, excluding Coffee and Snacks, continue to rally with third quarter profit growth of 220 basis points on a constant currency basis. Tacking against FX headwinds, E.D. Smith, our Canadian business unit, increased its constant currency earnings 20% last quarter, driven by product mix and productivity gains.

In better-for-you snacks, Flagstone's operating income jumped 24% on the basis of the recent launch of four new customer brand programs. And lastly, our fortunes in single-serve beverages have taken a turn for the better as the marketplace has segmented into three tiers.

Brands have settled in, into an average $7.29 per dozen cup price range, maintaining an 84% share, with growth of only 13% compared to 90% last quarter – same quarter last year. Private label has split into two sub-segments, essentially opening price point and national brand equivalent.

OPP, as positioned in only three retailers with an extensive small appliance offering, averages $4.49 per dozen or a 38% discount to brands. NBE, national brand equivalent, as positioned by virtually all major supermarkets, averages $5.69 per pack, reflecting a more normal price spread of 22% to the brands.

While others may chase volume for volume's sake or subsidize brewer sales, we have begun to win back grocery customers on the basis of our value without compromise customer brand proposition.

Dennis?.

Thanks, Sam. Overall, our third quarter results were in line with our earnings expectations. But we again saw a bit more softness in sales than we had expected. There were four key issues that came into play. First, currency continues to be a year-over-year headwind that affects our Canadian sales.

As reported, sales were down $14.2 million or 1.8% due strictly to the year-over-year decrease in the value of the Canadian dollar. Second, single-serve beverage sales were down 33% or $21.9 million due to the continuation of both lower average sales prices and lost business that we won't overlap until after the first quarter of 2016.

And third, lower soup co-pack sales as a large branded customer moves towards in-house production of their aseptically packaged soup, and finally, lower input costs in our Industrial business drove contractual price concessions. However, this was more than offset by higher margins.

Despite the lower sales of $34.2 million or 4.7% in our legacy business excluding Coffee, we were able to increase margins as a percent of net sales by 70 basis points due to our continued focus on simplification and operating efficiencies.

In single-serve beverages, despite the difficult third quarter, we are seeing positive developments as we head into the fourth quarter. In particular, we are continuing to land new customers and volumes are returning to an increasing trend.

In fact, we just finished the month of October with volume up 11.5% across both filtered and non-filtered products. This is the first month we've seen increases in shipments this year. We're confident the trend will continue as we look to add more customers over the next six months.

And at Flagstone Foods, a point of discussion for most of this year, our business continues to move back on track. During the quarter, sales were $173 million which compares to the partial quarter last year of $118 million.

The large increase was due mostly to the fact that last year had only two months of sales compared to three months this year, but what we really like is that our margins are up 110 basis points over the comparable period of August and September versus a year ago and we improved our manufacturing efficiencies through the increased use of automation.

Turning to our North American Retail Grocery segment, sales increased 0.9% as acquisitions more than offset lower legacy sales. On an organic basis, volume mix was down 6.5%. While the majority of the product categories experienced some level of contraction, lower Coffee volumes were the most significant.

With respect to Coffee, the conditions we talked about on our last call – on our call last quarter, specifically lower pricing, continues to impact our results in the quarter and we expect that impact to continue until we lap the issues early next year.

Despite softer Coffee sales and margins in the third quarter of 2015 versus last year, we've seen profitability sequentially improve throughout the year. Moving onto direct operating income, margins for our Retail segment were up slightly to 14% this year compared to 13.9% last year.

Last year's results included approximately $8.8 million of acquisition and integration costs. And after adjusting for those prior-year costs, direct operating income margins would have decreased approximately 140 basis points from last year.

That reduction is primarily due to reduced profitability associated with Coffee and the impact of unfavorable foreign exchange. Partially offsetting the reductions was the continued solid performance by our legacy product categories, excluding Coffee.

In regard to the Food Away From Home segment, third quarter volume mix was down 2.9% as increases in Mexican and Pasta Sauces were offset by reductions in most other categories, reflecting an increased competitive environment. Direct operating income margins improved nicely from 12.5% last year to 13.6% this year, primarily due to lower input costs.

And our Industrial and Export business showed a slight increase in top-line sales, up 1.5% from last year, as favorable volume mix of 7.2% was partially offset by the impact of lower pricing and unfavorable foreign exchange.

Increased volume mix from Pickles and Infant Feeding products were partially offset by lower sales of Co-Pack Soup and Coffee products. Direct operating income decreased 15.2% in the quarter versus prior year's 16% – last year due to a shift in sales mix to lower margin products.

Turning to our total TreeHouse results, margins were flat compared to last year at 19.9%. Included in last year's results were approximately $9.6 million in acquisition and integration costs associated with the Flagstone acquisition.

After considering these costs, margins would have decreased 120 basis points year-over-year, primarily due to the reduced profitability associated with Coffee and the impact of foreign exchange. These items more than offset gains made from operational efficiencies and favorable input costs. Moving to operating expenses.

Our selling, distribution, G&A and amortization decreased to 12.1% of net sales compared to 13.9% of net sales last year.

The decrease was primarily due to lower general and administrative expenses resulting from both cost savings initiatives as well as lower incentive compensation costs, as the downward adjustments we made resulting from lower than expected earnings affected those compensation costs.

As we look at the non-operating parts of the income statement, interest expense for the quarter increased to $10.9 million from $10.1 million last year as a result of higher average interest rates. And with regard to taxes, our effective tax rate for the quarter was 29.4% compared to 35.4% last year.

Last year's rate was higher due to acquisition-related expenses that were not deductible for tax purposes, while 2015 includes the benefit of state tax adjustments. We expect our fourth quarter rate to return to a range of 34% to 35%. Net income in the third quarter was $28.4 million compared to $19.9 million in last year's third quarter.

This equates to fully diluted earnings per share of $0.65 in the quarter compared to $0.47 last year before considering adjusting items. After adjusting for the items highlighted in our press release this morning, our adjusting earnings per fully diluted share for the quarter decreased to $0.86 compared to $0.89 last year.

Turning to the outlook for the year, we believe we're on pace with the full-year guidance we discussed on our second quarter earnings call, therefore we are reaffirming our full-year fully diluted adjusted earnings per share of $3.00 to $3.15.

Sam?.

Thanks, Dennis. Before we move to Q&A, I would like to reprise the tale of our whirlwind tour of ConAgra's Private Brands over the past two days. Our team of nine made presentations and took Q&A from overflow crowds in four locations.

In a first for us, social media flashed the news of these employees' personal impressions ahead to their friends and colleagues elsewhere. Our introductory video announcing the transaction to employees was viewed at work more than 2,200 times, in many instances by plant-wide groups.

It was readily apparent that most had also visited www.treehousefoods.com, as hits to our website increased tenfold over the daily norm. Also, we were graciously accompanied by ConAgra's senior executives, who sat through every session. We could not have asked for a better beginning. Vicky, you may open the phone lines for Q&A..

Thank you. We'll go first to Robert Moskow with Credit Suisse..

Hey. Thank you. So I just was hoping to understand the comments on coffee and Flagstone a little better. Is coffee going to remain having tough comparisons through the first half of next year or do you expect profit growth to begin that quickly? And it sounds like Flagstone is on track for sales and profit growth next year.

Just maybe if you could give us a little bit of help as we're trying to model, how comfortable should we feel with both of those businesses being contributors next year to growth?.

Rob, Dennis. First of all, in terms of the lapping, the sales and margin lapping should take place towards the end of the first quarter next year. So it won't be first half. So first quarter. And as we mentioned in the numbers here, things are picking up.

So the business is moving absolutely in the right direction, so we're pretty happy with where that's going. But as we have said before, what we've seen is the stabilization of the margins to being a good margin category and we expect those margins should continue through next year.

As far as Flagstone, the operational efficiencies are offsetting some of the shortfall we had hoped for in terms of reaching near double-digit sales. So I'm not sure we'll see double-digit sales quite next year, it'll still be a nice sales growth. But our expectations is there's still lots of room for margin improvement at that business.

We're seeing it now, as Sam and I both talked about on the call, and there's no reason why that won't continue into next year as well..

Rob, this is Sam. On the qualitative side, what I'm really pleased to see with Coffee is that customers are now requesting that we come in, review their programs and put together the TreeHouse approach to Single-Serve Coffee.

And this division between opening price point and NBE offers great opportunity to us to compete on a basis other than price with supermarkets. With regard to Flagstone, approximately $1.3 billion of ConAgra's aggregate revenues are in what they call snacks. Some portion of that is better-for-you snacks.

And once this transaction has closed, we'll see our better-for-you snacks portfolio increase substantially, not just in numbers, but in capability. Thank you..

Okay. Thank you..

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

Hi. Good morning..

Morning..

First just a housekeeping, Dennis. Previously you had said FX would be $0.38 headwind for this year and Coffee would be $1 for 2015.

Do those still stand for the full year?.

Actually, the foreign exchange has been worse than we expected because when we started out with the $0.30, that was when we were looking at an average exchange rate of about $0.81. And I think we're sitting pretty solidly at about a $0.76 to $0.77 over this back half of the year.

So I haven't recalculated it, but it's pretty reasonably more than $0.30..

Okay. So it's still roughly around that $0.38 you told us last quarter because last quarter you said it was around the $0.76, $0.77.

And then coffee is still $1?.

Still the same. We're in the same boat. We're pretty much where we expected to be and no changes to that number..

That's helpful.

And just on Protenergy and your aseptic packaging and the loss of the large branded player, is that something that you can make up or is that still expected to be sort of a 10% grower at Protenergy?.

We're going to work on making that up. We had known about that transition that would take place, it just happened faster than we had expected. And so, what our teams will be doing is working hard to fill that up with retail business, and that retail business is obviously a better business than co-pack. So I think it's opportunity.

It's a short-term headwind, but it's a long-term opportunity for us..

Farha, this is Sam. There's a certain irony here that when we first started looking at Protenergy Natural Foods, it was the co-packer for both of the leading brands, both of the leading national brands in soup and broth.

And while this loss will affect us in the short term, what we really want here is a growing national brand presence in aseptic packaging and we can draft right behind them. Thank you..

Thanks..

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

Thanks. Good morning. Dennis, I'd like to ask about the pricing in the Grocery segment. It's the first time in almost two years where it's not deflationary, so wondering if you can just maybe speak to what you're seeing in terms of price competition, price gaps, any changes for the better on that front..

The one thing, as I look at the data, the price gaps are staying, in general, relatively steady, but what we are seeing is less promotion, and that's I think a positive for us in terms of keeping the gaps reasonable during promoted times. It's been, I would say, a pretty steady, steady time for pricing.

I've said before I thought the brands had taken about as much as they could do with their pricing and promotion and seems to have leveled out. So with input costs being flat and kind of a benign environment right now, we're seeing a pretty steady, steady situation with pricing..

Is it your sense that that will continue into 2016?.

That is my impression based on what we're seeing in the forward board prices for most of the commodities we deal with..

Okay. And just on Flagstone, it sounds as though you're a bit more positive on the margin opportunity there than maybe when you first acquired the business.

What's kind of moving more favorably as you dig more deeply into that business?.

This is Sam. What we've found out is that we can lower our costs in many of the value-added products through automation and simplification of formulas and packaging. And, John, we've just installed a line that – in PET packaging that dramatically improves the productivity of what are some of our largest selling items particularly. And so there is that.

And then I think that secondly, the receptivity of that business group to our programs of looking anew at costs and margins, it's been the best I've seen in many years..

Great. Thanks, Sam..

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

Great. Thank you. Good morning, guys..

Good morning..

What are the expectations in the fourth quarter as regards revenues? Shouldn't this be kind of the "easy comp" given that last year, you had the weak fourth quarter driven by two particular factors? Just to remind everyone, it was that sharp reduction in inventory from the large mass customer, and then it was the poor Snack/Nut category growth and issues there.

So bottom line, does all this kind of pull together to say that NARG volumes in Q4 should be up high-single-digits, maybe even double-digits?.

David, Dennis here again. We don't provide that kind of granularity when we do our outlook, although you are correct. We did have some easier comps last year. We had two things going against us. You mentioned the inventory. We also had a challenge in Snack/Nuts as we were dealing with that big input crossed increase in almonds.

One of the things that I take positively is that in the quarter, the Snack/Nut sales were about $173 million – which Q3 is not our biggest quarter, Q4 is. But if you annualize that, you're looking at close to $690 million in revenue. So that $700 million plus that we're talking about is definitely a possibility.

So, we should have better comps going in on the top line. We will have more challenging costs though as we look at what's gone on with coffee and we look at foreign exchange, so there'll be a little plus and minus going on in Q4..

And then just following up on maybe that Flagstone comment, in the third quarter, I think Flagstone is in the organic revenue base for two of the three months, yet volumes are down like 6.5%. So, I worry that volumes in NARG ex-Flagstone are really down much larger than that.

I know that there's a big bunch of this year that's related to single-serve, but it still seems like, ex-Flagstone it's like minus 10% or even worse.

Can you just comment on this a little because it just sounds like such a large negative decline?.

As I look at the numbers, we've had some declines in some of the other categories, but it's not that high. The Flagstone numbers are actually looking fairly good. Our big issue on volume on a year-over-year basis primarily is coffee, and that's been really the big driver. I talked about the numbers there in my script.

And I think we're seeing some general softness, as I said, through most of the categories, but it's a very low single digit in general, so part of this – and I'll go back to simplification. One of the things we talked about is, we're finding those bits of our business that aren't adding value.

We've found out that roughly, I think 10% of our SKUs, maybe even a little more, contribute less than 1% of the revenue. I mean there's a lot of opportunity there for savings and we're going after some of those, I'm sorry, that was of our profit, not revenue.

And we're going after those SKUs, so you're going to see us take a more active role in trying to find ways to streamline the efficiency. It might have a little bit of top-line effect, but we'll make it up in margins and that's – with the exception of coffee, we're having great success in doing that..

And David, this is Sam. I'd go back to some general market conditions. We – of the 12 categories that we track private-label market share on a detailed basis, we showed unit share growth in nine of those 12. The outlier, as Dennis indicated, is clearly coffee. On a trailing basis, we're running about 40% share of private-label there.

And then when you look at the general marketplace across all of the stores, the food and beverage has now posted its fourth consecutive unit loss year-over-year while private-label has held its share constant. And so I think some of this is market conditions as opposed to internal performance. Thanks..

Thanks, guys. Great stuff. Thank you. Pass it along..

We'll go next to Chris Growe with Stifel..

Hi. Good morning..

Hey, Chris..

Hi. I just had two questions for you if I could. I do want to ask, Sam, in relation to your comment about this final segmentation of the Coffee category, in particular in private-label between opening price point and national brand equivalent, that obviously bodes well for you.

Do you see more of the opportunity obviously in the national brand equivalent? Is that where most of your share and your sales reside today? Do you have any opening price point and is that an opportunity?.

The opening price point is among only three retailers across the whole of North America. We have single-serve coffee and other products in each of those, but they are also stores that have a heavy reliance on small appliances.

And I think what you're seeing there is that they're leading – they've developed a position that's different from grocery in that they are moving a great deal of private label at low prices.

And at the same time, when you walk – if you come to our Investor Day, what you'll see is a whole array of new appliances that, before promotion, are marked at less than $100. And I think that that's an indication that there is a segment of rapidly-growing, economy-minded consumers.

And my belief is, and as we've stated over the last several of these calls, that those consumers will be new to the category and broaden the base. And that is always a good proposition for private label..

Okay. Thank you for that. And then just one follow-up question. The press release in a number of different areas talks about the competitive intensity in your categories.

I feel like a lot of your comments, though, about the business have been just the opposite and quite positive, whether it's on Coffee or Flagstone or even the core center-of-the-store business.

I wanted to try and put those two together, is the competitive intensity is driven by lower input costs in some areas, but you're seeing better growth elsewhere? I feel like I'm a little confused on, as I look ahead really to volumes, what's really the key trend here across your business?.

When I last checked, and this was a few weeks ago, on a year-to-date basis, our customers' requests for competitive bids are 40% higher than they were last year. It is largely a matter of trying to adjust to lower input costs and our – the rate at which we are winning these auctions is up about 10 basis points.

And it's very nicely tied to our individual customer and category strategies where we know, depending on the economics and the profile of that customer, we can decide whether to compete vigorously or in a less fashion for that particular piece of business.

And it's something, Chris, that in our tenth year of running this business, we now know day-by-day what the status is of all these bids..

So would you say the – go ahead. Sorry..

That speaks to their importance and that, to me, is the leading indicator of the degree of competition within private label.

As Dennis indicated, he thought that on the branded side, with the, I think, the exception of the three categories I mentioned, carbonated soft drinks, non-chocolate candy and the one other that the brands are not undertaking those kind of volume-building deep discounts..

Okay. And just to follow it on, and maybe it's a question for Dennis.

Would the volume this quarter, excluding Coffee and North American Retail, be more like kind of a low single-digit decline? Is that what your – the underlying results would show?.

That's the right range. Yes..

Okay. Okay. Thank you for the time..

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

Good morning..

Morning, Bill..

Hey Bill..

Just kind of building on Chris's questions, when you look at the competitive landscape and especially in light of Walmart's recent commentary and leaning on suppliers, TreeHouse has historically tried not to do it in blind auctions or blind bidding and compete just on price, but is the market changing or getting worse where your customers are primarily just going to go after price or do you feel okay as we move into next year that we can maybe get some volume growth?.

No. You're right. We can't compete with the Internet auctions and things like that. That's not where we compete. I think we are finding ourselves as being competitive on the value-add and we're being successful as we branch out beyond the national brand equivalent mainstream to the premium products, and those continue to be the point of growth for us.

Value continues to be a point of growth for us as well, the surprising thing. And I guess maybe it's market condition, is national brand equivalents is where we see the softness in the volumes.

Just as branded companies are having challenges with the standard, everyday foods, we have the same issue in private label because consumers are moving left and right, left being value, right being the premium. So there'll be competitive activities going on in that national brand equivalent as volumes get a little lighter.

And we're working hard with our margin profile to be even more competitive in those areas. But in the meantime, the investments we're making in value and higher-end products is paying off..

Okay.

But just to be clear, the legacy business declines are largely in private label category overall, not necessarily market share excluding Coffee?.

Exactly. And that's what Sam indicated about the categories we're gaining share in, but it's been tough on some of the categories..

Okay. And then just on Canada, I realize the majority of the issue is transaction-related versus translation. And I thought that part of that had to do with where you were sourcing and pricing.

Are steps being taken now three quarters, four quarters into that to change that and maybe mitigate some of the issues as we move into 2016?.

They are. Among other things, we're qualifying the Winona plant that is primarily in jams and jellies to be able to produce condiments for the U.S. market and export those in instances where pricing is particularly tight in certain of the U.S. accounts. Beyond that, the E.D.

Smith stands out as a real standard within our company in terms of closeness to the customers and they have really done extraordinary work in gaining distribution of newly acquired businesses and margins around that will continue to be tight, but we want to make sure we've got the largest and most industry-leading presence out there..

So, just while the impact has gotten worse on the Canadian dollar this year from your original, it should be better next year?.

Well, I'm not sure we can factor in – we're not planning on the exchange rates being at least substantially different. In fact, they're almost right on the money for next year's where we're planning as to where they are this year. But as Sam indicated, we're working hard to try to find more U.S.

sources for the products made up in Canada to take advantage of the exchange rate going the other way. And it takes a little while to get those into play. But as Sam said, with the new products being qualified, we think we'll have an opportunity to take advantage of the exchange rate next year as opposed to being just purely a headwind..

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

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

Good morning. Thanks very much.

Dennis, forgive me if you don't disclose this before, but can you give us a sense, two things, how that 33% decline you told us about in Single-Serve Coffee splits between volume and price and what that would be ex the one significant customer loss?.

It wasn't one significant customer loss. Unfortunately, there were multiple ones compared to last year. And, Jon, I don't recall the exact split between the volume and price, but I believe I gave that last quarter. During the earnings call, I gave the information on the margin drop.

And I think we said we were down at least 20 basis points in margin on a year-over-year basis, so that would be related primarily to the pricing. And the volume side, I talked about the sales being down, so I think you can work through the math. I'd do it for you, Jon, but I just don't have that handy right at the moment.

But if you go back to the last quarter's earnings call, you can pick up the pieces..

Yeah, I got you. Yeah, just wanted to check on that. Thank you. And then, I guess following up and related to that, and, Sam, too, we've talked in the past about capacity. And Brian Kelley talked last quarter on their call about a lot of excess capacity that's out there. I think it's the price reductions and presumably profitability reductions.

Are marginally single-serve private label competitors – and I'm not talking about your major competitor here, but other same size or smaller private label producers, are they in single-serve coffee? Are they exiting the business? Have you heard of capacity reductions or is capacity coming in? Any comments you can tell us from what you've heard around the industry and from customers would be helpful..

I think this is evolving into a three-horse race with regard to large-scale operations, one leading a national brand, one that is building capacity for office coffee services and then thirdly ourselves. And we are presently running full out on both our filtered and our non-filtered lines. I regard some of that as seasonality.

But as Dennis had indicated, quarter-by-quarter, we're seeing sequential improvement in our business and that there's been, across the whole of the category, relative price stabilization. But I think that's the structure that you'll see developing. Others will be in the business in small ways with individual accounts.

And then I've got to always remind myself that when I don't look in the rearview mirror and I look forward, I see a business that is in the hundreds of millions of dollars at operating margins that are at the very head of the pack. And we're delighted to have it.

And the other structural matter is that this segmentation in the marketplace is going to define a natural sweet spot for us, just as it has in other private label categories where you can segment and differentiate the product and match up a customer brand image to the promise of that image to the fulfillment of it through a product and packaging..

Thank you, Sam. One final follow-up. You showed us a chart at the back-to-school conference about the gap between private label and branded at about $0.19. You showed us how that had expanded through July, but you segmented the business a little differently today.

Has that $0.19 gap improved, stayed the same or gotten a little bit worse in the context of your comment today about those, I guess it's $0.37, I think that solves to $0.37 or $0.47 a cup, the OPP, as you called it and the NBE levels?.

For the last quarter, there is a $0.10 per cup differential between the opening price point and all of the other private label. And then there is another $0.10 to $0.13 on the brands in comparison to that national brand equivalent. And you're right, Jon, I didn't chart the exact same comparison.

But when I look at pricing trends and volume trends, you can see these things converging into what will be an ongoing steady state of slowed aggregate growth pending the introduction of these machines that are less than $100. We'll have a whole array of those machines on display at our investor conference.

My money's on really a strong fourth quarter for machine sales again..

Great. Well, thank you very much..

Next we'll go to Amit Sharma with BMO Capital Markets..

Hi. Good morning, everyone..

Good morning..

Dennis, a couple of modeling questions. Can you give us Flagstone year-to-date sales? You said $173 million for this quarter.

Do you have a number for year-to-date?.

About $485 million..

Okay.

And then OPP versus NBE, can you give us a dollar breakdown of sales in the Single-Serve business, like how big is OPP segment?.

Well, as I'd indicated, there's three large-scale retailers and I'll restrict the comment to that. There's a one-for-one correlation here to those that have large-scale commitments to small appliances. We've identified it as a separate segment..

Got it.

And then, Dennis, the Ralcorp business or the ConAgra business, can you give us a sense of how much exposure do they have to the Canadian dollar both in terms of dollar sales and manufacturing capabilities there?.

I don't have anything in detail, but I can tell you that based on our review, they have a much smaller percentage of their business going through Canada than what we have. And so that will mitigate quite a bit, at least compared to us, the issue of foreign currency for them..

And then, Sam, a bigger question for you.

Can we talk about the visibility in the Private Label business? I mean the challenges that we have faced in Flagstone last year, Single-Serve continuing and even in the core business, is there anything you can do to improve predictability and consistency of operating performance in the core Private Label business or are you always going to be exposed to what's happening from the retailer perspective or from the competitor perspective?.

Well, I think the underlying issue that we will continue to have to deal with is that in this grocery industry now, when you've got, across the whole of the store, four consecutive quarters of the units being down, there is a – our customers are groping and struggling to find an answer.

And that leads to changes in strategy that, in some instances, are well thought out and well executed. And one only has to look at Kroger's use of Private Label and their 12 years of same-store comps improvement to see that when well conceived, well executed that these programs have extraordinary legs and sustainability.

And then there are others where there is a constant tactical churn trying to find one improvement or another. I think that the biggest thing we're doing to improve that is the reorganization of Bay Valley Foods along the lines of the four big meals, big foods groups and the decentralizing of the operating authority from the center into those four.

That, coupled with the fact that our go-to-market teams have been organized in accordance with our customer segmentation strategy, and we are focused on those large customers in a way that they'll get a great deal more of our attention, our resources, our manpower and that type of customer intimacy will lead us in a way that when you couple it with internal simplification, ought to, over a period of time, substantially improve our ability compared to that of other private-label manufacturers grope at – at dealing with the inherent volatility of the marketplace..

Got it. Appreciate this. Thank you very much..

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

Good morning, everybody..

Morning..

I guess one follow-up, Dennis.

I think you'll probably discuss more of this potentially in a couple weeks in Chicago, but if we think out to next year just on the base business, not including ConAgra asset for a minute, maybe you can talk about even just directionally, a couple of the big buckets of items that you know now that are kind of puts-and-takes to the core earnings base.

I assume one would be incentive comp because I know that's kind of helped margins this year and as that gets built back into next year, that's, I guess, a discrete headwind we need to think about, I don't know if there's a way to dimensionalize the magnitude of that for next year.

And maybe any other buckets that we need to consider because I'm trying to get a sense for what the base business looks like next year before we layer on the acquired asset?.

Yeah. We don't give guidance, as you know. We'll do that in February, but I think I can make a couple of general comments. One is on exchange rates, the expectation based on the flatness we've seen in the Canadian dollar over the last relatively three, four, five months is that where we're at today is likely to be where we'll be at next year.

So somewhere in that $0.76 range. We started last year in the $0.81 to $0.83 range, so you'll see some headwind there. You are correct on incentive comp. We've talked about that on a couple of our earnings calls. We've taken that number down in light of where we started the year with our expectations.

And you recall that we were originally guiding much more in a range of the high 3% and now we're into the very low 3%.

So you'll see that, and it manifests itself in G&A where you can look at the statements and see that the more typical rate for us is in the 5.5% to 6% range for G&A and we're obviously lower than that and that's almost entirely due to incentive comp.

The pluses though are that the lapping of the coffee and picking up new coffee business, albeit at today's margin rate, not quite where we were in the first quarter, but that'll be a plus. The margin enhancements we're seeing will be another plus. And even as nice as the margins have been this year, Andrew, we've had some operating issues.

We're not perfect. And we've made some nice fixes to some of our factories that had some challenges, so I'm pretty confident we're going to continue to see that 100 basis points margin improvement as we go into next year, not just in the so-called legacy business, but across Flagstone, Protenergy and all of our businesses.

So those are kind of the two main ones. Volumes, we don't have a volume number yet, but this is a tight volume market right now. And we'll be working hard internally to continue to emphasize the natural, organic and better-for-you products and that'll be a point of investment likely in R&D and Culinary as we look to reformulate.

There's a lot of regulatory things on reformulation that are taking place, so we'll be working hard at that, but overall we're optimistic for next year despite those headwinds and we think we'll have another strong year next year in the ConAgra Private Brands business which hopefully will be in the first quarter, will add an entirely new dimension to everything we have for next year, so there'll be a lot of changes afoot in 2016..

Andrew, from my perspective, the underlying movement is that we talked about organization of the operating company to get closer to the market. We've talked about simplification and its effects and all of this is in context of a strategic outlook that at the very beginning was confined only to product categories.

It took us five years to develop and be able to quantify customer strategies and overlap that with categories, and now five years later, we have a delineated consumer strategy where we can take any instance of category, customer and understand not only the category economics, the customer RAND strategy, but now the demographics and the behavior of the people that shop in those particular combinations or permutations.

That's the type of conceptual basis that leads to steady improvement of operating because we know our marketplace better. Having done this for a decade, my only regret is, I wish I didn't know now what I didn't know then..

Okay, thank you. And I'll see you in Chicago..

Thank you..

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

Good morning. Thanks for taking the question. First one's on Flagstone. Dennis, so I remember you had initially said that you expect I think double-digit growth off of like a $675 million base for Flagstone and your commentary today said above $700 million.

So is there a change there or can you just give us a little bit more granularity so I can put (54:12) the two?.

Yeah. We actually, I think, last quarter, I mentioned that we probably weren't going to see that double-digit increase that we had hoped, that it would be in the higher single digits. So, I think we're still going to be in that ballpark. The focus has been really on the margin structure as we've said, and the almond prices didn't help either.

So, we're off that higher number, and we're back to that strong single digits as opposed to the weak double digits..

That's very helpful. So, just on my rough math, the $173 million implies double-digit organic growth somewhere in the 10% range. Is that roughly correct? And if I assume 6%, 7% growth, it implies a pretty big acceleration for that business.

And I think it makes sense because you had some discrete issues there, but are we thinking about that correctly and can you just help us understand again what the acceleration in that business's organic growth's all about? I know you have these new products and also you have an easy comp, but if you can give some – little bit more color, that'd be great..

You hit on the two. We do have some new products for this year which are helping. We've got better comps because remember last year, early last year, before we bought the business, we knew we were going to be losing parts of one business and had already lost parts of another business, so the comps will be better.

And we had a weaker than expected Q4 last year, if you recall, after category dynamics growing at 5% to 7%, suddenly they were negative last year in the fourth quarter. So we are not expecting to see that same negative happen again this year, so that's where the comps come into play as you pointed out..

Okay. I was just noticing the Mexican and Other Sauces business has been somewhat weak leading up to this quarter.

I think you called out some competitive activity there, but can you give us a little bit more color on that because that business has been doing really well until the fourth quarter of last year for a while? Can you give us some color there as to what's going on?.

Yeah. That was, as I indicated everything, we're not perfect all the way through, and that was one location where we've had some operational challenges. We've had some – just getting stuff through the factory and we wound up with weaker than expected fill rates on some of our customer shipments.

I'm happy to say that the team has rallied together and we're seeing some nice improvement, but that was definitely an operational drag and that affected sales as well during the last quarter to a quarter and a half..

Perfect. And just one last one on Coffee for Sam. So you mentioned that there's a significant percentage of the brewers out there today that are below $100. I know there's been a number of non-Keurig manufacturers who have come up with machines, but their share so far has not been as significant.

But just overall, I'm trying to understand if having a significant amount of machines at a lower price point in your opinion is good and going to drive a lot more volume? Is that basically how you're thinking about it? I just wanted to make sure I understand the significance of having lower price points..

Well, let me give you some specifics and then I'll lead to a general conclusion. On the brewer data that we have, and there's a lag here that's longer than the monthly IRI data, 77% of the brewers sold in the last reported period were sold at less than $100. 16% of the brewers sold were by manufacturers other than the Keurig.

And it is my belief that based on, not just intuition and experience, but based on analytical studies by a third party that there is a point at which the price elasticity will really drive or shut off volume.

And in the brewer market, there is a change in attitudes with regard to in-home use of single-serve coffee machines around $100 and then there is another change in the curve at $85 per machine or thereabouts. And we've talked about earlier the data on cups themselves.

So I think we're getting to that inflection point, if you will, in the fourth quarter where what we should see here is a substantial pick-up in, if not total machines, the $100 or less machines. And, in my belief, that will lead to more household penetration, that will lead to more users and more cups for all of us.

And I think that it is an inexorable change that cannot be reversed and it has come about in a way that we can't go back to those old days. But we're going to make the best out of that current situation.

And for the long term here, if you get to beyond 16% household penetration and get to the 50% that Keurig has advertised for years, then I can deal with the tripling of the base..

That's helpful.

So do you actually think that the market penetration could double if price points continue to come down on brewers or do you have a view there?.

I have data from an empirical study that says that conceptually that is what one would expect based on a detailed analysis of the data. And that's simply one input. We can go back over the last hour's worth of commentary and questions and you can see that there is a great deal of variability in outlook, results, forecasts.

So I won't speculate on that, but I want to make sure that we're completely prepared for it..

Thank you. I'll pass it on..

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

Hey, guys. Good morning. Just one from me on Coffee. I think some of your newer wins this year – or regaining of business rather has been partial. So some of these accounts that gave business to other participants maybe at the end of last year that some of the business that has been won back has just been partial.

And I'm just curious if you or if you're hearing of situations where you've been able to win back full accounts and if that transaction is occurring in the marketplace?.

I think the model here will be other than opening price point and perhaps OCC, the OPP and the office coffee services are going to be the areas where it will be an all-or-nothing proposition.

And as I'd indicated, I think that's going to get down to three of us, one specializing in national brands and one in the office coffee services and ourselves in the national brand equivalent business.

And I think that when we last looked, there were 1,900 SKUs in the category and 200 brands and it is, in that respect, something like the salsa or condiments business where you've got a real quest for variety and consumer trial in trying something different.

My last comment is that as you see grocers develop category management programs like those that we offer, I think what will happen is that the number of SKUs and the number of brands will go down as sales per linear foot of shelf space go dramatically up..

And, Brett, Dennis. Just to be clear, in Private Label, even though we'd like to and we would justify to any retailer why we should be the sole source of all of their private label in that category, the reality is most retailers will split.

So we had the good fortune of being the first out to market in single-serve for Private Label and now it's the competition's catching up, so having a split program is not unusual at all..

Thanks for the thoughts, guys..

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

Thanks for taking the follow-up, guys. Just two things for me. Sam, can you comment on Walmart's been out there talking about higher labor costs and the need to push back on the manufacturers to get the manufacturers to share some of that burden. How does that play into private label? Is the first question.

And second question is, I didn't hear natural and organic talked about today.

Is there any update on how your efforts in that area are going?.

Dennis can brief you on natural and organic. And with regard to Walmart, as we've always said, we never disclose anything specific about any particular customer. You can go to the 10-Q and the 10-Ks and see that they are our largest customer and the one that we report specifics on. And we enjoy a great relationship with them.

And we have a new opportunity once the ConAgra deal closes to present them not with programs for 12 categories, but in fact programs for 20 categories. And I think in every respect, we will see an opportunity to improve the relationship and the economics, not only with them, but their competitors..

And then just quickly on those categories we talked about, the good news is that the shift continues. The premium and natural organic now represents roughly 14% of our retail sales. And remember just a year or two ago, that was in high single digits. The value side continues to grow as well.

And I mentioned a little earlier, David, it's that where you see the volume challenge, it's in the national brand equivalent.

And as consumers, I believe, look at the offerings of brands and they look at the private-label equivalent of those brands, they're making a decision to either trade up to the clean label and organic offerings or they're trading down to a lower price point.

And so we're working hard to reformulate, to find the right answer to move those national brand equivalent products into the natural space and satisfy the consumers who want that type of product, and then leveraging the efficiencies we're generating in our simplification program to be able to offer really good products at that value price point where the rest of the consumers seem to be going.

So, NBE is still the bulk of our business. It still represents probably 65% – 63% to 65% of our revenue. But it is the area that would be more challenged in terms of volumes than any of the other categories..

Thank you very much..

Thanks, everyone. In closing, I'd like to note that we look forward to speaking with many of you next week on Monday at the Private Label Manufacturers Association trade show and our annual Investor Day in Chicago. See you there, and thanks..

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