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Single-Serve Coffee Soars For Treehouse

Company expects food and beverage consolidation in private label in 2013

February 25, 2013

Treehouse Foods reported slight gains in earnings in the fourth quarter of 2012 from a year ago, but two main takeaways came from the company’s conference call with analysts.

The first was the runaway success of the company’s launch of single-serve filtered coffee in the quarter. The second was the company’s expectation for 2013 to see major consolidation in private label food and beverage companies, backed by private equity cash.

“I firmly believe that this market, the pricing and terms, are going to be largely a function of a private equity money that is abundant, and one with cheap financing,” CEO Sam Reed told analysts, according to a transcript of the call from Seeking Alpha. “2013 will mark the emergence of a Treehouse rededicated to our private label strategy and its manifest to go-to market opportunities. … After two years of prolonged activity, we anticipate that 2013 will usher in another era in food and beverage consolidation, affecting both the glamorous global brands and their more homely private label counterparts.”

Asked by an analyst if he planned to leave the company in the next year as he hinted at two years ago, Reed cited the M&A backdrop for his answer.

“With the deal market opening up as we believe it is, I just couldn’t possibly, in good conscience, leave and allow (Chief Financial Officer Dennis Riordan) and others to get the credit for the next big growth spurt,” he said, according to Seeking Alpha transcripts.

Reed said retail grocery business sales rose nearly 9 percent in the quarter from a year earlier backed by the company’s all-time high sales of hot beverages. The single-serve filtered coffee launch was at its heart.

“Hot beverages … are now a major organic growth platform thanks to last fall’s introduction of single-serve filtered coffee,” Reed said. “Having established ourselves as the private label leader, we now have the grocery base upon which to expand coffee capacity further in pursuit of foodservice and nontraditional outlets.”

Reed said the company saw firsthand at its last board of directors meeting what the single-serve private label landscape looked like.

“There are more entrants into this business than I would have expected,” he said. “And some of the smaller ones have done this stuff on a shoestring. … And a number of them have … extraordinary variances between what is the leading brand or the gold standard in this category versus their private label entries.

“And two, the opportunity that it offers to us over a period of time. … So that’s the view from someone that two weeks ago looked at every entrant in the marketplace and did it in the context of a highly objective analysis by others in the industry.”

The company generated sales growth in nine of its 10 largest private label categories and nine of its 10 biggest retail customers. Reed touched on a couple areas besides coffee on the call, mention sugar-free beverages and dry dinners.

“We have entered with the liquid beverage enhancer that, although we’re late to market, emulates leading national brand in that regard,” he said. “And we have, in compensation to being late, focused really on two things. One, a package that is far superior to other private label packages out there. … And then secondly, we’ve utilized the ingenuity and the consumer marketing activities at that particular low creation in the company to come up with varieties and flavors and combinations that will distinguish us there.

“In dry dinners, kind of two big headlines here. One that we have greatest improved our business during the course of the last year. And we had invested heavily in automation in microwaveable cups and also skillet dinners and … we were running against our production standards twice the share of aggregate production that was above our standard model (at the start of the year).”

Reed also took time to answer a question about the strength of natural and organic products in the portfolio.

“The premium segment of retail grocery has been our fastest-growing over the last two quarters at least,” he said. “And that has been a great opportunity for us across a number of categories and frankly something that has materialized in a bigger and faster way that I would’ve expected a year ago.”

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