Treehouse Foods Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: TreeHouse Foods, (THS)

Treehouse Foods (NYSE:THS)

Q4 2013 Earnings Call

February 13, 2014 9:00 am ET

Executives

PI Aquino

Sam K. Reed - Executive Chairman, Chief Executive officer and President

Dennis F. Riordan - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Brett M. Hundley - BB&T Capital Markets, Research Division

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Thilo Wrede - Jefferies LLC, Research Division

David C. Driscoll - Citigroup Inc, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Farha Aslam - Stephens Inc., Research Division

Amit Sharma - BMO Capital Markets U.S.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

Operator

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.

PI Aquino

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 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, 2012, and subsequent Forms 10-Q discuss some of the risk factors that could contribute to these differences. You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made when evaluating the information presented during this conference call. The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in its expectations with regard thereto or any other change in events, conditions or circumstances on which any statement is based.

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

Sam K. Reed

Thank you, PI. Good morning, all, and welcome back to our TreeHouse. Dennis and I have much news to share with you, especially regarding our strong finish to 2013, our bright prospects for the year ahead and our insights into the marketplace conditions.

Regarding the year end, today is the first time in 3 years that we can report real growth in the trifecta of earnings per share, operating cash flow and sales revenue. Adjusted net income increased 14% as legacy margins gained 130 basis points and our top line grew by 5%.

This improved performance emanates from our fundamental go-to-market expansion, operations and supply chain strategies. Highlights include all 3 of our go-to market segments, grocery, food service and industrial, posted across-the-board gains in revenue, gross margin and channel profitability. The private label single-serve coffee and hot beverage category, led by TreeHouse, rang up $180 million in grocery sales, achieving a 10% unit share at year's end.

The acquisitions of Associated Brands and Cains Foods expanded our market presence and dry blended products and salad dressing, as well as fueled record quarterly revenue and profits as the year ended.

Our consolidated market share in private label categories increased in single-serve coffee and hot beverages, thanks to category growth, and salsa, thanks to new distribution. In combination, these gains more than offset losses in soup and salad dressing, both of which struggled with deep discounting of national brands.

Despite a flat marketplace, the private label grocery industry made substantial gains across a broad array of supermarket premium and value line retailers. Syndicated data indicate that these grocers posted private label volume gains of 2.7%, a sharp contrast to the mass merchant channel loss of 6%.

Productivity gains and cost reductions in manufacturing, logistics and procurement improved legacy business unit gross margins by more than our annual target of 100 basis points even as overall market demand slackened. In their aggregate, these programs more than compensated for difficulties in the subcategory and challenges in the mass merchant channel during a time of lightweight market conditions.

After 2 years of disappointing performance, I for one am pleased to return to solid ground with the prospect of better times to come. Having established a revenue base of $2.5 billion, stabilized our basic operations and added specialty tea and mayonnaise to our growing portfolio, I'm ready to welcome the new year as the gateway to further growth and prosperity. Dennis?

Dennis F. Riordan

Thanks, Sam. As Sam indicated, we had a very nice finish to the year. Our sales teams did a great job during what was clearly another difficult year for many in the food industry. We achieved our fourth straight quarter of year-over-year volume/mix improvement, despite the challenges of consumer buying patterns. Alongside our sales teams' great success, our operating teams maintained their all-out effort to manage down costs by simplifying our business and focusing on our internal cost to serve our customers. The end result of those efforts can be measured not only by top line sales growth and margin improvement, but also in key internal statistics like increases in our order fill rates, reduced outbound freight cost and continued improvement in our plant manufacturing efficiencies. These improvements are the key foundation that we will build on in 2014, as we complete the integration of Associated Brands into the TreeHouse infrastructure.

Before getting into details on 2014, I want to recap our fourth quarter results. First, I'll focus on North American Retail Grocery. Overall, our retail channel had a very good quarter. Our top line sales increased by 11% to $479.1 million, aided by volume/mix improvement of 0.9% plus 10.9% from having our most recent acquisitions of Cains Foods and Associated Brands in place for the quarter. We had a very minor amount of negative pricing, while devaluation of the Canadian dollar had a more meaningful negative effect of 0.6% on total retail sales. I think the key takeaway for the quarter was volume/mix improvement of just under 1%. While that growth is not overwhelming, it does represent a pretty good result compared to other food companies that compete primarily in the center of the store, the grocery store.

One very important development we are seeing in our retail business is the reemergence of the traditional grocer. We actually had year-over-year sales growth to our traditional grocery customers for the first time in a couple of years. In addition, our sales to both value and premium customers showed positive growth as well. We believe our improvement in sales to these accounts shows the importance of maintaining and investing in a strong store brand assortment as a means of differentiating the shopping experience and staying relevant in a somewhat fickle consumer market. We expect that this trend will continue into 2014.

Direct operating income in the retail channel was down slightly to 14.6% of net sales from 15.6% last year. But in line with our communications with you last November, this was due entirely to the mix of lower margin products from our new acquisitions, as well as acquisition in integration costs. Excluding the acquisitions, our legacy product margins in retail actually improved 40 basis points from last year. We expect margins from our newest categories to improve next year as we complete systems integration activities and fully align their operations with our one truck, one invoice distribution network.

In the Food Away From Home segment, our sales increased 12% from $85.4 million to $95.7 million due entirely to the effect of acquisitions. Legacy sales decreased 2.7% as we lost some very low-margin pickle business last year. The increase in sales from acquisitions was due mostly to Cains Foods, which has approximately 50% of their total sales in the Food Away From Home channel. Offsetting the lower legacy sales was an improvement in direct operating income margins from 13% in 2013 to 14.8% in 2014. The improvement was driven by more efficient plant performance due to the SKU simplification program in both our pickles and aseptic sauces categories.

Our Industrial and Export business did very well with volume/mix improvements of 3.2% and the benefit of acquisitions of 12.3%. Total sales increased just over 13% to $85.5 million in the quarter compared to $75.7 million last year. The improvement in both top line and bottom line in this segment are the result of winding down some legacy co-pack business that was low to no margin, and bringing on new co-pack business that better fits our capacity models and gives us a more appropriate return on capital. While this will not become a strategic focus for us, it does show that there are opportunities to selectively utilize excess capacity and still produce positive margins.

On a consolidated basis, sales for the quarter were $660.3 million, an increase of 11.4% over last year due primarily to the addition of the Cains Foods and Associated Brands acquisitions. Excluding the acquisitions, we still manage to increase total volume/mix by 0.7% across all of our channels.

Gross margins for the quarter were also very good, improving to 20.7% from 20.1% last year despite the dilution created from the addition of lower margin categories from our acquisitions of Cains Foods and Associated Brands. Our margins in the quarter benefited from improvement in most of our product categories, as well as a better mix of sales associated with our single-serve coffee program.

Operating expenses in the quarter were well controlled, with selling and distribution expenses dropping to 5.7% of net sales compared to 6.1% last year, and general and administrative expenses finishing at 5% of net sales. This rate is a bit higher than last year's unusually low rate of 4.3% of net sales, as last year included only minimal incentive compensation expense due to the difficult year we had in 2012. This year's fourth quarter rate compares favorably to the full year run rate of 5.3%.

Interest expense was $11.7 million in the quarter down from $12.9 million last year due to lower average interest rates despite having more debt this year. Total outstanding debt was $940.5 million compared to $990 million last year, with the increase due to funding the acquisitions we made in 2013.

Income taxes for the quarter were $11.5 million, representing an effective tax rate of 33.6%. This rate is generally in line with the tax rates of the first 2 quarters of 2013, but higher than the full year rate of 30.4% due to the tax adjustments that took place in the third quarter of 2013. Fourth quarter tax rate was consistent with our expectations.

Reported net income in the fourth quarter was $22.8 million compared to $25.2 million in last year's fourth quarter. This equates to fully diluted earnings per share of $0.61 in the quarter compared to $0.68 last year, before considering 4 unusual items. First, we incurred cost of approximately $0.13 per share due primarily to the previously announced Seaforth salad dressing plant closure and the restructuring of the soup business. These costs are now pretty much wrapped up and should have a minimal effect on our go-forward earnings.

Next we had ongoing acquisition and integration cost of $0.13 per share relating to the acquisitions of Cains Foods and Associated Brands. Cains Foods activities are complete, although we will have some carryover cost into 2014 relating to the integration of systems and distribution networks at Associated Brands. Also in the quarter we wrote off a minor investment in a pepper processing business that provided a small portion of peppers for our salsa business.

And finally, we had currency losses on intercompany notes between subsidiaries resulting from the devaluation of the Canadian dollar during the quarter. After adjusting for these unusual items, our adjusted earnings per fully diluted share for the quarter increased nearly 14% to $0.98 compared to $0.86 last year. Both our total sales and adjusted earnings in the fourth quarter were all-time highs for TreeHouse.

Now I'll cover the outlook for 2014. Overall, our expectation is that 2014 will have many of the same characteristics as 2013. Although some key economic statistics appear to be improving, we're still seeing consumer sentiments stagnant. As a result, we continue to be circumspect with regard to the retail landscape. Most consumers are still being very cautious about their food purchases and will likely continue to maintain buying and usage habits that stretch both their dollars and pantries as far as they can.

While this will translate into volume pressures for the industry, we believe our private label solutions will continue to outpace the growth of the broader food group. As such, we expect to see another year of positive volume/mix for our portfolio, but at rates similar to what we achieved in 2013. With volume growth of approximately 1% for our legacy businesses and the full year benefit of last year's acquisitions, we expect to see sales growth of 9% to 10% in 2014.

Note that this improvement also takes into account the headwinds from unfavorable Canadian exchange rates. The average exchange rate in 2013 was approximately CAD 0.97 to the U.S. dollar. While we expect the 2014 rate to be much lower in the range of CAD 0.90 to CAD 0.92 to the U.S. dollar. This negative rate movement affects nearly $400 million in Canadian-denominated sales.

As we look at our cost structure, we believe that food inflation will be muted, and although some agricultural inputs will decrease, other costs associated with packaging and energy will likely rise and offset any benefits from the lower ag-related cost. As such, we are not expecting significant input cost or pricing changes in 2014. In order to cover our normally growing internal cost, such as wages and benefits, we will continue to maintain our efforts towards simplification. We will focus on providing more efficient products, including flavors and packaging options that reduce cost and provide our customers with greater value. While we expect that the benefits of simplification, lower restructuring costs and an improved mix of sales will allow us to increase our gross margins by at least 100 basis points over the full year rate of 20.7% in 2013.

As we look at our operating expenses, we expect to maintain our current run rate of distribution costs, but we'll be making additional investments in our selling programs. As Sam indicated earlier, we've had considerable success with our single-serve coffee and related products. We've successfully become the private label leader in single-serve coffee. In 2014, we will be investing more significantly to grow that business even more. These investments will include increased capacity, product promotions and investments in new products. In fact, we'll be adding additional products and capacity this month to keep up with our customers' growing demand. We want to make sure our customers and consumers have access to great tasting and fairly priced private label options for years to come. These investments in programs and R&D will result in SG&A expense increasing to a rate of 13% to 14% of net sales, up from 12.7% at 2013.

Other key items for 2014 will be depreciation and amortization expense of approximately $105 million, with corresponding capital spending that should be in the range of $90 million to $95 million. Stock-based compensation will increase from $16 million to just over $20 million, as a result of previously granted shares and a higher average share price expected for 2014.

In regard to interest expense, we will undertake a refinancing of our outstanding high-yield notes that bear interest at 7.75%. The notes become callable in early March, and we expect the refinancing to occur very close to the call date. For guidance purposes, we are assuming that the notes can be refinanced at very attractive rates, generally, in the very low 5% range. We are not forecasting the onetime cost of the call premium in our normal operating results, but have considered the cash cost as additional borrowings with related interest costs.

In addition to the high-yield refinancing, we have begun working with our bank group to increase capacity under our current bank facilities in order to be ready for the next addition to TreeHouse. In total, we are modeling interest expense in the range of $41 million to $43 million next year.

In regard to our 2014 tax rate, we should see a more normalized rate of approximately 33% to 34% next year. The new acquisitions from 2013 have resulted in a greater mix of U.S. sourced income. Since U.S. tax rates are higher than Canadian taxes, our other primary source of income, we are expecting the mix to result in a higher tax rate next year.

Our EPS estimate for next year is based on an average shares outstanding of 38.3 million shares. Taking into account all the expectations I outlined, we believe that 2014 adjusted earnings per share will increase by a range of 10% to 13% from $3.19 in 2013 to a range of $3.50 to $3.60 in 2014. And keep in mind that our guidance for 2014 includes both the negative effect of the lower Canadian exchange rates, which we estimate will be an $0.08 headwind to 2014 results, and the higher tax rates, which will affect comparative EPS by about $0.16 a share. On considering just these 2 nonoperating headwinds, you get a much better sense of how well we expect our base business to perform in 2014.

As many of you know, we rarely provide quarterly guidance except when warranted. This year, we will have some unusual items that will affect the first quarter earnings. First, we'll be incurring additional state income taxes relating to tax filing requirements as a result of the growth of our distribution network, which will result in a greater tax rate of approximately 35%. Second, the timing of factory variances also present a headwind in the first quarter. Both of these combined for a year over decrease in earnings of between $0.16 and $0.20 when compared to last year. Our increased sales and margins will fully cover these incremental costs, but this will translate into a first quarter earnings range of about $0.77 to $0.80 per share.

Overall, we believe our operating fundamentals are in very good shape. Despite the lethargic nature of the food industry, we are well positioned to find the growth in 2014 that most others aren't finding, and to capitalize on a very active M&A market. I'll now turn it over to Sam.

Sam K. Reed

Thanks, Dennis. With our guidance for 2014 in mind, let's turn to the major strategic themes of the new year, and the TreeHouse plans to address both the opportunities and the challenges ahead.

First, we expect little real growth in the consumer sector. And as a consequence, foresee only modest food and beverage industry growth over the next year. As median household income remains 6% below pre-recession levels, consumers will continue to demand value without compromise, either in the form of private label innovation or national brand discounts.

Grocers are divided along the line of demarcation, separating the strategic and transactional users of private label. As a result, we will concentrate our resources by most selected pockets of strategic growth in categories, and with customers whose house brands and custom products are regarded as strategic assets. In doing so, we will strengthen our market presence where it counts most, in growth categories with strategic customers committed to private label.

Next, we must continue to simplify our overly complex business in order to foster sustained top line growth and margin expansion. In simplifying our business, we will generate economies of scale to fund further M&A expansion and product innovation. In parallel, by standardizing business processes, we will propagate best practices to fuel further operational efficiency and organizational unity. An example is the integration of our product portfolio strategy across all categories with the allocation of R&D resources across all business units to ensure that our innovation agenda is both prioritized and unified across all elements of Bay Valley Foods. As a consequence, we will introduce new products more effectively and more efficiently.

Thirdly, we now regard beverages as a strategic growth platform in both customer brands and custom products. Our private label portfolio has evolved from sugar-free powdered drinks to single-serve beverages, first Grove Square and now roast coffee, soon to be followed by specialty tea. Opportunity that balances the private label portion of the single-serve coffee and hot beverage category should surpass an annualized run rate of $0.25 billion in grocery revenues before the end of the year. Additionally, adjacent categories may offer similar avenues for growth in private label, where global brands once held sway. The beverage sector, dependent as it is on consumers' non-ending thirst for convenience, innovation and value, should prove to be fertile ground, or should I say grounds, for private label growth.

Next, as you may already be aware, we have filed a lawsuit to ensure that the single-serve coffee and hot beverage market is not restricted by anti-competitive conduct. In doing so, we seek a marketplace that provides all participants with a level playing field, a broad array of consumer choice, extensive price competition and incentives to bring true innovation to consumers. In our view, it is free competition rather than the exclusionary abuse of monopoly power that is the engine that drives both economic growth and consumer satisfaction across the universe of food and beverage products. Accordingly, we intend to defend not only our business and customer brands and custom products, but also the rights of all of those who enjoy these products, be they consumers, customers, retailers, distributors or suppliers.

Lastly, we anticipate that the M&A market for private label assets will be quite active in the months ahead. Sellers have at long last returned to the marketplace while credit remains plentiful and as the general business outlook improves. Accordingly, we have expanded our corporate development team, reviewed our capital structure and initiated discussions with our private label counterparts across the industry. As always, our priorities will continue to be strategy first and foremost, followed closely by value and fit. When the tenets -- while the tenets of our expansion strategy will remain constant, their application will adapt to the changing grocery marketplace as private label growth migrates beyond the center of the store staples. Although -- even the most seasoned M&A veterans cannot predict exactly when and how, it is my sense that our TreeHouse will add more rooms in the year ahead.

Kayla, you may open the phone lines for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Sam, Gary Rodkin said earlier this week that private label across-the-board is under pressure from higher promotional spending from branded counterparts. I'm just hoping to get your take on that. Are you seeing a similar effect on your business? And if so, maybe what are your plans to counter it?

Sam K. Reed

Well, we do see the same general pattern. My interpretation of it is kind of uniquely TreeHouse. First of all, this activity varies a great deal by category. And as I've mentioned in our prepared remarks that, for us, that affected us negatively in the soup business and in salad dressing. The second matter is that it greatly matters about what the grocer is, what their use of private label is and their strategy. And I think the clear divide that we see is that in traditional supermarkets, also value line retailers and the premium retailers, those businesses across the whole of private label increased their unit volumes last year by 2.7%. And we would take that type of growth year after year compounded and regard it as quite healthy. There is one segment, the grocery retail business, mass merchants, where that class of retailer has succumbed to the temptation of branded products and deep discounts. And those instances when you take those customers as segment or as channel distribution, their unit volume for the year fell 6%. And that is a great difficulty for anybody in this business. What we've elected to do is go back to the portfolio strategy. Look at it from a product category standpoint, also go to the portfolio strategy for customers and put a disproportionate amount of our resources, whether they're money, people, innovation or science, put our money where the growth can be had, continue to serve the other categories and the other customers, but do so in a balanced way that will enable TreeHouse, even in another year of difficult market conditions, to continue to make real progress with regard to both our internal agenda of doing this cheaper, better and faster, and our external agenda by generating enough capital to continue with the types of M&A expansions that you've become accustomed to with us.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

That's very helpful. And then one quick one if I can, there's a mixed opinion on this. But the Nielsen data we have suggest that maybe some market share gains for private label K-Cups still growing but maybe decelerating that growth a little bit, I realized it's only measured channels. Obviously, total sales growth is still great, I'm just hoping to get your thoughts on the market share opportunity from here for private label K-Cups?

Sam K. Reed

Well, after 16 months in the marketplace, I think it would be both unwise and premature to think that this thing is about to top off. I don't have a particular number in mind, but I go back to our experience when we started the first entry into filtered coffee. We selected roughly a baker's dozen of our customers, our grocery customers, who had demonstrated a real commitment, not only to the private label brands and the strategy of making those brands a part of their shopping experience, but a real commitment to our innovation of coming out with a full line of products. And we have, since then, progressively expanded our production capacity as we rolled it out to a full array of our customers, or as we will to the full array, there's still more to go. And then the other observation I would give you is that there is, in this category, an extraordinary breadth and set of differences between those retailers who have fully embraced it and those who simply regard it as a passing transactional set of events. There are very fine chain of grocery customers in the different category, different segments, channels of distribution. But now I have 20% or more of their private label -- single-serve coffee business and private label. And those customers have demonstrated, shown us that their business in the category is far greater than that, growing greater than that of their direct competitors. At the other end of the spectrum, we have customers who have accepted only 2 varieties of this and tucked it away in a small corner. And while that may be consistent with their strategy of supporting the national brands and doing so through deep discounts, at some point, when they've recognized how much opportunity they've lost out, I would expect that at least some of those people will come back to private label in one form or another. So I think, and we watch the data as well, but I look at it more in terms of the longer-term trend and as important as the monthly data is, to look at what is our future book of prospects, unfilled orders, new products and further expansion.

Operator

And we'll take our next question from Brett Hundley with BB&T Capital Markets.

Brett M. Hundley - BB&T Capital Markets, Research Division

Sam, you mentioned at the end there about expanding your team on the M&A side. I'm curious if you could give us a little more color whether that was firepower, added firepower or expertise in a certain area?

Dennis F. Riordan

Brett, Dennis here, that is firepower. We've now got a team of 4, instead of Erik Kahler kind of carrying the weight, and it's part of our goal to look at a broader array of opportunities that could be both bolt-on, extensions and frankly, new platforms. So it's a great M&A market, as Sam indicated, and we're gearing up to take advantage of that.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay. And Dennis or Sam, I'm curious to think about how you set up your guidance and earnings expectations for 2014 and really with -- really, specific to single-serve coffee. And what I want to get your opinion on is how you think about potential overcapacity there and how your build is coming as we speak currently? Do you have any concerns about building overcapacity or what overcapacity could do to margins or is that not something that even enters into the equation as you believe that your future is bright there?

Sam K. Reed

Yes. Brett -- this is Sam. Let me talk about the coffee piece and then I'll ask Dennis to comment more broadly on earnings and our business plans. With regard to coffee, what we anticipate in 2014 and sometime beyond that, is that there will still be very strong double-digit growth across the whole of private label in both filtered coffee and other hot beverages. We do that based on a detailed analysis by our strategy team and our marketing team of looking at the marketplace by customer, by channel, by type of product and look at that as in terms of both the branded and the private label entries. And the models that we have indicate that we're still in the, despite the phenomenal growth there, that we're still in the fairly early stages of this. And remember that as many of these brewers are in homes, they still do not match the placement yet of other similar appliances that years ago, no one found in any kitchens. And today, they're everywhere. The second matter is that we have purposely restricted our distribution here to, I think Dennis explained this over a year ago, as kind of bootstrapping our way into the business. We have expanded several times, as Dennis indicated, we're going to do that again this month. And in each instance we've done that in response to confirmed interest by customers for distribution or consumers for new varieties. And the fascinating thing about private label is that we can actually order a new machine, have it delivered and installed, test run, go into full-scale production in a shorter period of time than many of our customers and go through the internal decision process to not only select the product, but also importantly focus on the consumer testing and package design and all of those matters. So we're able to really to kind of move this in lockstep. And then lastly, we have found that there is, outside of grocery stores, and that's where we're limited to only the syndicated data, that there are opportunities in both the food service segment of our business and in terms of the industrial, where we can manufacture product for other branded coffee companies. And so I don't see this as being limited in that regard in the conventional sense. Dennis, comments about guidance in general?

Dennis F. Riordan

I echo what you say, Sam. And Brett, this is, for us, it's still a growing category. As I indicated, we're adding more capacity. If you look at, with this category that includes our hot beverages, this year is going to grow almost 18%. And 2013's growth was almost 18%, so it's still -- we think there's still plenty of runway here.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay. That's very helpful. And then just my last question, just a quick one, Dennis. On I&E margins, are they pretty much sustainable from 2013 levels? I guess, what I'm asking is how sustainable is some of the new co-pack business that you picked up? And just how can I think about margins going forward there?

Dennis F. Riordan

Good question Brett, because that area does tend to bounce a bit in terms of the margin percent. What we tend to look at though is the margin dollar consistency, and I think the margin dollar consistency is generally going to be pretty good. But there is no -- there is nothing in 2014 that, at the top of mind, will have a significant impact on the run rates of Industrial and Export.

Operator

And we'll take our next question from Chris Growe with Stifel.

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

I just had 2 questions for you. The first one, if you look, Dennis, at the fourth quarter and with pretty modest underlying sales growth in North American retail, the operating profit was up a little less than I expected. Essentially you're getting the mixed benefit coming through there as well, I believe. So just curious if you could talk about this quarter and then, I guess, what allows for the stronger growth than in '14, is it just less cost inflation or better mix? I'm trying to understand kind of this fourth quarter and how it pertains going forward.

Dennis F. Riordan

Yes. The mix will continue to improve but I think, importantly, as -- we didn't really talk this time, very much anyways about excluding soup. I think, as we ended the year, we'll have lapped the big event that brought us down last year. So between that and some of the pickle business that was low margin and went away, I'm seeing 2014 as being the year we've lapped those items. So that will help stabilize the bottom of the legacy business. And you're right, our mix should improve a bit. And I think, importantly, as we look at the products from Cains and Associated Brands, and we've got them into the distribution network and we'll be able to recognize some of those transportation efficiencies that we have naturally, along with the purchasing efficiencies we'll be able to bring to Associated, those will be the basis for that strong margin improvement of at least 100 basis points next year.

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

And then just a follow-up question, if I could, on innovation. And one of the things that I think you mentioned, Sam, was bringing some innovation to the private label sector. I guess, I'm just curious in this state that we're in today with the consumer, and I know you have some unique examples like this single-serve coffee within this innovation will aid its growth, but is the consumer willing to pay for it? Are you able to get mix improvements or pretty much the margins from this new innovation, if there is any?

Sam K. Reed

Well, I think, the key thought here is like value without compromise. And what we've got to do is to improve our products for consumers, improve our service for customers in such a way that they believe that whether it's that private label product or that TreeHouse truck pulling up to the back dock, that this is a better alternative for them than either the national brand or in -- to another competitor. And across every aspect of TreeHouse, what you see is this consistent activity of small, many small improvements coming together to, in fact, do that. In some instances, we have products that are no longer the equivalent of the national brand, but are far better. And they're recognized as such by consumers. In other instances, we've developed logistics systems and category management and forward purchasing arrangements with customers that take some of the expense and some of the risks off the table. But it is, in every one of those instances, a matter of that active margin what one has to do is make refinements on a continuous basis in order to have that superior proposition.

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

And so you need to get your cost structure down to be able to provide this sort of value without compromise, is that the right way to look at it? There's a lot of internal things you can do to help drive this innovation that doesn't result in a significant price change for the consumer?

Sam K. Reed

I'll tell you what, if the person -- if you're not a low-cost producer, you're not going to have too many conference calls like this. That's the price of admission here.

Operator

We'll take our next question from Bill Chappell with SunTrust.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

I'll ask the 33rd question on single-serve coffee. Just help me understand kind of the game plan. I mean, as far as Green Mountain's, I guess, strategy with their 2.0, you would be locked out of the system if their smart technology works. So trying to understand from the lawsuit, do you hope and do you think by the time we get to the fall, you can stop that? In your conversations with retailers, who are -- might be worried, "Hey, why do I want to sign with you for another 2 or 3 years, this can be obsolete?" How does that play out? I'm just kind a -- just trying to understand how you can -- can you do stuff in the near term and is it affecting you in the near term in terms of negotiations?

Sam K. Reed

Well, Bill, we thought you'd never ask. I'm going to -- Dennis and I will tag team on this and try to answer it in context of what the other 32 questions might have been as well. And so I'll kind of as a waterfront here in the course of doing that, address your issues also. I mean, this is fundamentally about consumer choice versus monopoly power. And in this instance, every one of us at TreeHouse is pro-choice. The lawsuit is regarding a -- not one piece of technology, but a long-standing pattern of anti-competitive behavior. And it's important to read this entire complaint to get a full sense of the litany of acts that have come before. With regard to the technology, it was simply the catalyst for me -- for us to say, enough is enough. I think with regard to our response to it, we -- it's the kind of the lifeblood of private label manufacturers to deal with competitive innovation on behalf of the global brands. And where we do best is where the brand is, in fact, the leader in capital letters and that they focus on true innovation. They focus on consumer benefit. They focus on communication of that, and then technological advance. And this matter is different in small ways but not large ways from what we've encountered in one category after another with one global brand after another over the past 8 years. The -- and I think you'll see that, that's generally our pattern. Our belief here is that -- simply what we're trying to do is we want to be on the playing field, not locked out of the stadium, and have the opportunity to compete. There is some confusion here about kind of the role of innovation versus technological lockout. And I think the key matter is that true innovation, really, is based upon consumer benefit and that's what brands focus on and what we try to follow. I think the other matter is that one can ask all the hypothetical questions of what if this, what if that. I, for one -- not for one, but as a head of an organization, I'm entirely confident that we will continue to provide the private label alternative to the brand here that will lead the private label segment. And that, one way or another, we will be able to present to our grocery customers and their consumers still a choice. I talked about earlier that value without compromise. And I'm not going to lose any sleep over it. After doing this for 8 years, I just know this is another one of a series of responses that we have to make to competitive behavior. I think that I'll offer one personal comment that -- what is different here than other competition? This is about the rule of law and the access to open markets. And we're prepared to compete fully, fairly with any and all. They are always bigger, better and faster than we are when they have great brands. But it's the -- and we're prepared -- we just expect that others will conduct themselves by the same rules that all of us should abide by. And this is another example -- it will be seen as another example of the TreeHouse way and we will prevail in this instance, in both the marketplace and in the courts.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

So I guess in terms of -- just to follow that, there's nothing in terms of your negotiations with customers, that's not really been a big issue at this point?

Sam K. Reed

Well, all of our -- not all, many of our customers have been contacted by the branded organization and presented with the option, if not the ultimatum, to change their private -- from TreeHouse to another private label supplier. Other than a few who started out with another, there's been no indication of a loss of business or a change of heart. And one thing to remember here is that our customers, these are business people, and they're looking out for their own self-interest. And have, in any category, particularly one that's showing this kind of growth in this kind of margin, incremental margin to customer, to be faced with the option of a monopolist on the other side of the table, that doesn't sit well with the customers that I talked to.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Got it. And just switching actually to the traditional or legacy business. As I'm looking at kind of your volume/mix outlook for this year, is that the assumption that you're gaining share and the categories are down or, I mean, are you just kind of assuming share and new customer wins are pretty flat and the category is pretty flat?

Dennis F. Riordan

We actually think that we've got opportunity to gain share, so the fact that we're showing a positive volume based on our best modeling would imply private label shared gains. And what we're looking at, Bill, are the same syndicated data you're seeing and hearing the same results from the larger branded food companies in the center of the store, who are experiencing negative volume. And so while the 1% doesn't sound all that glamorous in reality, we think that is a share increasing number for TreeHouse.

Operator

We'll take our next question from Thilo Wrede with Jefferies.

Thilo Wrede - Jefferies LLC, Research Division

In order to protect consumer choice, if this lawsuit don't turn out to be successful, would you consider getting into the actual brewer game?

Sam K. Reed

Good morning, Thilo. I just mentioned, there are a lot of hypothetical questions that could be asked. As I said, what if this, what if that. I frankly think that's such a far-reaching hypothetical. It's beyond my -- really, beyond my ability to comment on it.

Thilo Wrede - Jefferies LLC, Research Division

Okay. I thought I give it a try. The other question I have was, given your -- I think you made a statement that you see little growth in the consumer sector, what's your level of confidence that your pricing won't have to turn negative this year?

Sam K. Reed

All right. I think that the -- every year, we face the prospects that in private label business, that our customers will instigate, requests for proposals and pricing. We also faced a volatile commodity and energy market. And we built into the everyday fabric of our business kind of dealing with both of those matters. And the best thing that we can do is be transparent about input costs and as they move, adjust those so that we maintain our business. And when they go down, when they go up, make sure we adjust the pricing to keep our margins. And then most importantly, focus on product innovation and customer service, and do those small things that at the margin will benefit us in a way that is something other than a call for a price adjustment.

Thilo Wrede - Jefferies LLC, Research Division

Okay. Then last question I had, are there any major SKU rationalizations planned for this year?

Dennis F. Riordan

No major rationalizations at all. We'll continue with our simplification program, which is really trying to get more efficient SKUs and not necessarily to chop down the branches, if you will. So I don't expect that it will be anything significant in terms of any top line and any simplification is already built into the guidance numbers for next year.

Thilo Wrede - Jefferies LLC, Research Division

Okay. So there was not really anything in the Cains or Associated business where you decided that these are items that you don't necessarily need?

Dennis F. Riordan

Not in any large respect. There'll be a little bit of pruning, I'm sure. And not just there, but everywhere. But nothing that would make a material effect on our top line.

Operator

We'll take our next question from David Driscoll with Citi.

David C. Driscoll - Citigroup Inc, Research Division

A couple of details, the lawsuit costs, the expected cost, the D&A for 2014 and CapEx for 2014, Dennis, can you rattle off those?

Dennis F. Riordan

Yes. All the numbers I gave in terms of the SG&A, which I gave a range of 13% to 14%, is all-in and encompassing everything we know including all of the activities we have today. On the depreciation and amortization, it's roughly $105 million for next year and cap spending, $90 million to $95 million. So very consistent with where we were this year.

David C. Driscoll - Citigroup Inc, Research Division

Okay. On North American Retail Grocery, just to be clear, Sam, about one thing, so excluding K-Cup, do you expect positive volumes in the core in 2014?

Sam K. Reed

Well, I'll just comment on the total business. I think we'll see certain categories do very well, others will struggle. It will be a function of the extent and the depth of the national brand discounting and the extent and the depth of innovation that we bring to the category. I think that what we've seen over the last 9 on rolling 12-week periods has been that there's been a parallel improvement in small ways, in both private label and brands. And that's indicative that the market is moving and ever so slowly into a slightly better position. And so those are the factors we've got to deal with. My expectation here is that, as I said, there'll be a little growth but I think, we, in particular, will see positive growth.

David C. Driscoll - Citigroup Inc, Research Division

Okay. That's helpful. On -- just to verify, I think you guys said, but I want to make 100% sure I heard this right, you said the outlook for single serve K-Cup is for double-digit growth in 2014? Sam, I believe you said that, but will you confirm that?

Sam K. Reed

I said that the outlook for the private label segment for 2014 and beyond would be to continue to have very strong double-digit growth.

David C. Driscoll - Citigroup Inc, Research Division

And as the leader in private label, you would be in line with those trends?

Sam K. Reed

Either that or ahead of them.

David C. Driscoll - Citigroup Inc, Research Division

I'm fine with ahead. We like ahead. Final question for me is the savings on the soup and salad dressing. Dennis, you probably -- you know I'm never going to let this one go. As you close those plants, we're looking for a fairly sizeable $30 million benefit, I believe, was kind of original guidance. Sometimes these numbers change over the course of time. You're finally through, I think, the closure of these plants. Do you expect to see the $30 million benefit? Or if it's a different number, can you give us some color on the savings from those closures?

Dennis F. Riordan

It's so difficult to do that, David, from a number we estimated 2 years ago and then changes in the market, another dynamics, and Cains is now included in the salad dressing. I would say that every -- all of the opportunity in savings are incorporated into next year's numbers. In hindsight, because of the soup volumes being down, the reality is we probably didn't get the full $30 million that we were expecting to get because of the volume declines that eroded further in the soup. But at this point, I don't even track that anymore, and we've now moved into 2014. So it's awfully difficult to do that kind of backwards analysis.

Operator

We'll take our next question from Akshay Jagdale with KeyBanc.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

I'm afraid I'm going to ask to the list of single serve questions.

Sam K. Reed

You would disappoint me if you didn't.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So Dennis, you mentioned an 18% growth number for the year. Was that for powdered deficit in '13?

Dennis F. Riordan

That was for our category called beverages. That was the increase in that from 2012 to 2013, which will be a number that will show up in our 10-K when it's filed next week.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So that's a different category now? Because previously you had powdered drinks, and that's where single serve...

Dennis F. Riordan

That's still there. That's still in that category.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So what was powdered drinks up for the year?

Dennis F. Riordan

We don't disclose those separately. We just have the total category, which includes coffee, powdered drinks, liquid beverage enhancers. That's all part of that same category, and so we don't break that out, Akshay.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Yes, yes. But so the definition of that category hasn't changed from last quarter, correct?

Dennis F. Riordan

Correct.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Right. So if that was up 18% year-over-year, that implies, I believe, a pretty significant decline year-over-year in the fourth quarter. Is that correct?

Dennis F. Riordan

No. That's not correct.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. So I'll follow up on that outline. So I think at your Analyst Day, Sam may have mentioned an estimate for your K-Cup sales are going to be -- or something -- I remember you saying something close to $100 million. Is that -- can you help us with the size of your single serve hot beverage business today?

Dennis F. Riordan

We've -- Akshay, what Sam was talking about was always private label category. We reiterated that again today regarding the 170.

Sam K. Reed

Or was it 180?

Dennis F. Riordan

That was private label category, 180. We've never talked about the size of our internal single serve or coffee program. So all the references are broader segment.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And Sam also mentioned, I think, getting closer to $0.25 billion. Was that in relation to the 180 today? Is that for that particular segment?

Sam K. Reed

I was looking at the totality of private label coffee and hot beverage.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. So just going back to sort of, in theory, what this lawsuit really means. I mean, it seems very unusual, and you explained why. I understand it. I've read the whole complaints. But typically, you want a brand leader and you don't want to be the fastest follower, right? So are you still trying to follow in case the 2.0 is successful? Or does this lawsuit in any way imply that the barrier to entry is too high in your opinion? So I mean, are you able to pursue replicating food platform technology? Or is that -- as a result of this lawsuit, can we assume that, that's not going to happen?

Sam K. Reed

Akshay, it's a basic tenet of our private label strategy: to be a fast follower with regard to innovation or product differentiation that the national brands or the global brands bring. And whether you're talking about single serve coffee or pickles or a non-dairy creamer, it's -- the strategy and its application are one and the same. And we will compete fully in every category that we're in and compete in the marketplace in every category we're in. We don't see any instance in any of our businesses where we're going to be limited in that regard.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And in terms of pricing, can you answer directly, are you -- do you expect a major margin degradation in your single serve business for '14? Because again, we've talked about this in the past, but some industry observers believe that there is an overcapacity in an unlicensed side of the business. Do you see that happening? And if not, can you just give us a sense of what you're seeing for pricing dynamics within your particular segment?

Dennis F. Riordan

It's actually Dennis. What -- the good news is there has been, I think, so far very minor pricing that's taken place in the category so far if you read the syndicated data, down slightly. But I can't tell you there's overcapacity. I'm not one of your industry experts. I can say that we are working day and night to maintain -- with our business, and we're adding to our capacity because of demand. So we see it as still a very robust market, and based on the syndicated data, it's had minimal price erosion. So I'm not entirely sure where that overcapacity theory is coming from.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And just some basics on your guidance. Where did we end up with CapEx for this year, Dennis?

Dennis F. Riordan

Yes. It'll be just a little below $90 million. It'll be in the high 80s.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And as far as your guidance goes for sales, on my math, it implied about 2% organic growth, if I exclude the FX impact, which seems to be about 1 percentage point. Is that roughly correct, like organic base business growth excluding FX of around 2%?

Dennis F. Riordan

Very close. Right, it's in that range. Yes.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And then the EPS accretion guidance from your acquisitions still $0.20 for '14?

Dennis F. Riordan

That's correct.

Operator

We'll take our next question from Jonathan Feeney with Janney.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

I wanted to ask a -- 3 questions. First, you mentioned, Dennis, you called out the effect on gross margin of both the acquisitions and coffee. Could you give me a sense right now for the fourth quarter you just reported and maybe into the year, where we would be, apples to apples, on the business, x those 2 factors so that the business, the private label business x coffee minus the acquisitions? Are we seeing a little bit of margin expansion with commodities flattening out and maybe turning into a tailwind? It would be my first question.

Dennis F. Riordan

Well, on my prepared remarks, what I did say was that most of our categories showed margin expansion in the fourth quarter. They were a couple down, but more were up and down. So the fundamentals of a legacy business are getting better, and I think we can owe that to the operating efficiencies. So that's the effect without the coffee mix in there. Coffee is a good category. We've talked about that, so that has a positive effect on total margins. The new acquisitions I mentioned at the investor conference were roughly 200 to 300 basis points in margin lower than the legacy business. So that'll be a key objective for us next year is to try to improve on that and kind of bring them into the legacy fold of margins.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Great. I know David asked this question but poked at it a little bit, but we -- what about -- he talked about going forward volume guidance. How about for this quarter, the second half past year, any time period, portfolio x coffee on an organic basis? Are we down mid- to low singles? Or are we up? Can you give us any kind of guidance as to where we are in that portfolio x your single serve business?

Dennis F. Riordan

Yes, I'll just give you general concepts, and you can kind of get a sense and look in at the category numbers in the K and in the Qs. We clearly had big negatives in the soup business as we talked about, and that drives the overall portfolio down. But most of the categories, there were -- a few were up nicely and you could see that in the numbers. We had a good year with salad dressings. A couple were down, pickles a little bit flat, nondairy creamer relatively flat. So I think most of the categories mirrored the market with the exception of coffee. It was very nicely up, and soup was unfortunately, well, down and kind of offset that. So the rest of the categories, I think, in general, were matching what you would see in syndicated data.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

That's helpful, Dennis. And just one last one on the -- I don't want to be the only analyst to not have asked you about a more detailed question about single serve and Green Mountain. But pursuing this lawsuit, you mentioned a number of other constituencies who are disserved by the worsening of free choice and the competitive environment. Have you had conversations with a lot of these retailers? And maybe has there been any retailer-specific feedback to your viewpoints about Green Mountain trying to reclose the system here and feedback to your -- and news a couple of days ago, filing the lawsuit?

Sam K. Reed

This is Sam. The only discussion we've had with customers is about our coffee programs and what we're bringing forward with regard to new flavors, new marketing and a further development of the category fully.

Operator

We'll take our next question from Farha Aslam with Stephens.

Farha Aslam - Stephens Inc., Research Division

A few quick questions. First, relating to the Associated Brands and Cains acquisitions. I believe that was supposed to yield about $0.20 in EPS accretion in 2014. I just want to make sure that's kind of what's your trending to and they're performing in line with your expectations.

Dennis F. Riordan

They absolutely are, and we're actually hopeful that we'll do even better on that. But Farha, the challenge is once it's mixed into the fold, you start to lose the identity of the separate companies, so it becomes a little more difficult to do the comparison. But I will say that both are exceeding our expectations at this point.

Farha Aslam - Stephens Inc., Research Division

That's helpful. And then second one was again on M&A. In terms of the size of deals you're seeing and the source of those deals, are they from private equity? Are they from strategics? And in terms of size, small, large, and are they kind of -- what is your optimal size for M&A at this point?

Sam K. Reed

This is Sam. What we're seeing is more activity across the board from the very largest strategic opportunities that could in fact be transformational all the way down to a lot of activity and kind of the bolt-ons and the immediate adjacencies. Dennis talked about expanding our team. It was with the specific thought that we could feel simultaneously on as many as 3 different activities, and we've -- we're at that capability now. And in terms of the ideal size, I think it's -- really, I'd rather comment on the ideal nature. One, clearly, is to find a market leader in a category that is compatible but outside of our current portfolio. And we've done and those deals tend to run in the $100 million, $500 million range. But we've also found out, as Dennis indicated to you, that these smaller bolt-ons are really quite accretive and tend to fit quite nicely into our expansion plans. And so when those small ones come around, if it's a good strategic fit, we know that we can take them on similarly and quite quickly and do so with much larger proportion with our purchase price being devoted to tangible assets.

Operator

We'll take our next question from Amit Sharma with BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

Sam, you said earlier, in response to, I think, Dave's question or I think it was Ken, that branded pricing pressure appears to be mostly concentrated in the soup and salad dressing categories for you for now. I mean, is there any reason to believe that? Or are there any structural differences why we wouldn't see a similar pressure in some of your other core businesses?

Sam K. Reed

Yes, there are really 3 big factors here. One, of course, is the inputs on commodities and energy. And at this point, those numbers appear for the coming year to be rather moderate. The second factor is the national brands that there are those times in those categories where the brand has -- if a lack of innovation or a lack of communication that they resort to the deeper discounts. And there are grocers out there that prefer that to developing their own brands. And those are the factors that really determine it. I don't think that you can look forward with any degree of accuracy and predict it's going to be in this category versus that category other than looking at kind of current and past behavior in trying to understand that.

Amit Sharma - BMO Capital Markets U.S.

Got it. And then the other thing was perhaps, at least, I noticed for the first time you've mentioned the powdered beverage segment, the opportunity in foodservice and co-packing. Is that a little bit different than what you've said in the past? Or is there something more to read into it in terms of potential for future growth in those 2 segments if retail sales growth decelerates for whatever reason?

Sam K. Reed

I think beverages are like all of our -- virtually, all of our categories will, first and foremost, be focused on retail placement and growth. But since we've -- our teams in the foodservice, Food Away From Home and Industrial, Contract and Export, those marketing teams, those business teams have been greatly strengthened in the last year. And they've got more capability and their customers are seeing in the grocery channel growth opportunities that they'd like to participate in their own marketplaces with their own customers. So it's more of that than anything else.

Amit Sharma - BMO Capital Markets U.S.

Got it. And then one final for Dennis. Dennis, did I hear that right that compensation expenses are going to be a $4 million headwind on the operating line?

Dennis F. Riordan

That's on the stock compensation expense, exactly.

Operator

We'll take our next question from Bryan Spillane with Bank of America.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just couple of questions. One, just I guess, Sam, in terms of the M&A market, it being more active, there being more properties now potentially in the market to be sold, can you comment at all on just what you're seeing in terms of valuations maybe now versus other periods of high activity? I mean, the market food industry has slowed significantly from where it had been historically. There's -- are you really more pressured? So is that having any effect you think on valuations maybe versus some of the deals that have been done historically?

Sam K. Reed

Well, I can comment in relation to the immediate past. The historical perspective all lead to others, but we're seeing now that there is an upward movement to multiples, particularly properties that offer further growth and great significant strategic value. And we -- it's fairly early to see how this will sort out, but our internal preparations are that we have hopes of doing significant expansion in the coming year. And that as I'd indicated, the first criterion will be strategy, and it will be the second and third as well. And there'll be those instances where something has an intrinsic value to us that it does not have to others. And we will hope to acquire those businesses and then roll out those benefits across our portfolio and our customer base.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Then just in terms of strategic direction and appreciating the comments you've made already. Just sort of a quick, maybe even yes or no, in terms of -- or hot or cold, maybe in terms of your temperature on packaged beverages, and then also natural and organic.

Sam K. Reed

Well, let me just say as a global matter, what we see -- beverages, we think, are an extraordinary opportunity for private label. And clearly, there are segments of it where -- will it be better qualified and people more readily adapt to private label and we're focused there. I think with regard to kind of what that sweet spot is or those things that we'll attempt to stay away from, it's really premature. I think the important matter here is that where we started this company and looking only at center-of-the-store food, we're now looking at food and beverages.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay. And the natural organic is also -- is that more of a sort of interest at this point?

Sam K. Reed

I think in a broad sense that the health and wellness trends are clearly ones that are -- got growth, consumer interest and ones that they're going to be maintained. And we have to be able to compete in those businesses where Health & Wellness provides a different product and a different consumer benefit. And we'll be all over that.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay. And then just one last one. Has TreeHouse Foods seemed or seen Keurig 2.0 or seen how it's worked? Just trying to understand the sort of the standing on or the view on it not being differentiated enough? Has the company actually seen the product?

Sam K. Reed

I really don't think there's anything to comment about there.

Operator

We'll take our next question from Robert Moskow with Credit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

Well, I waited this long. I might as well get my question in, I guess. You're a $2.5 billion company, You've got a $50 billion conference call here, so?

Sam K. Reed

Well, the fact that you're on the line just indicates how important this is.

Robert Moskow - Crédit Suisse AG, Research Division

It is. Who needs soybean crushing? So I guess, I'll just ask about the warehouse cost you're incurring in the first quarter, a little more clarity on what that is. And is that just kind of like a onetime kind of event, setting you up so that you have the distribution you need and you don't have to do it again in 2015, say?

Dennis F. Riordan

Rob, let me clarify that. That is the manufacturing variances that are rolling into 2014. And last year, we had very positive variances rolling in off the manufacturing plants, stuff that was capitalized into inventory and then helped first quarter margins in 2013. Those will be a headwind in 2014 just because of the timing and how the factories were running in the fourth quarter. So that headwind is roughly $9 million difference between last year's positive and this year's negative. So we want to make sure that was called out. That's activity from last year that rolled straightforward, obviously, there's nothing you can do about that now. But I want to be clear in terms of the first quarter numbers. All of that's built into the full year guidance, so it's only timing but it's definitely a headwind in Q1.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. And then the tax issue, the state tax issues, is that unusually high in the first quarter? Or is that now just part of the base, maybe the tax rate's 35% in the first quarter? Is that right?

Dennis F. Riordan

We said 33%, 34% full year, 33% to 34% and first quarter, that will definitely be in the 35s. So we just want to make sure that was taken into account in the Q1 estimates, but we'll revert to the full year rate over the course of the year.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. Last, last question, Dennis. If I look at my model for '14, I'm getting operating income growth around 11%. And you mentioned the FX headwind, I think it's about 2.5 to OI. You mentioned some executive comp. Maybe that's another 2% or so, but then the acquisitions, I think, could add another 8%. So I think I'm getting something rational, something along the lines of high single-digit growth for OI x acquisitions. I know several people have tried to get you to tease that out. Am I in the right ballpark that, that's what you're expecting the base to do?

Dennis F. Riordan

To be honest, Rob, I don't actually look at it quite that way because after we make an acquisition, all financing and other related costs go into the kind of the parent company and no longer in the acquisition. So it looks a little bit different. I will just say off the top of my head, it sounds pretty reasonable the way you're looking at that, as long as you get to that $3.50 to $3.60 at the end.

Operator

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

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Sam, thinking about the single serve business here, I guess, part of your growth strategy is building more SKUs per customer. But if I look at the scanner data, it seems that the 12 points of distribution for private label single service kind of flattened over the past 2 or 3 months. How are you thinking about that? Is this the temporary pause in the adoption across the industry? What's your interpretation of that?

Sam K. Reed

It may be that the short period of time you're looking at is just kind of a statistical aberration. There is a pipeline of more points of this, more customers taking more items. It's quite full, and as I said, I'd expect that we'll see continued very strong double-digit growth in the private label sector here for coffee and hot beverages in the new year.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Okay. And then just as a follow-up. Just more broad in terms of private label, maybe if it's back to the increased discounting by brands. But given the pressure on the consumer in the past, call it, 6 months, so are you surprised you haven't seen more private label scare going into the industry? Maybe going forward in 2014, how are you thinking about the impacts in the foods spend cut? Do you see more savings?

Sam K. Reed

I'd tell you what surprises me is the broad array of differences from one retailer to another during a difficult period for consumers. And we've got certain customers and certain channels where like, if you look at their data and the growth is quite strong and you think that there are not economic difficulties. And then there are other channels and other customers, as I'd indicated, the mass merchant channel. When you look at private label across all our food and beverage being down 6% units for the year, it surely must pose a difficulty on those retailers as well.

Dennis F. Riordan

And if I can jump in and just say that in light of the time and our insignificant market cap, we'll take one more question.

Operator

We'll take our final question from Jon Andersen with William Blair.

Jon Andersen - William Blair & Company L.L.C., Research Division

Most of my questions have been asked, so I guess I'll just -- a brief one. The 100 basis points of core gross margin expansion that you're looking for in 2014, Dennis, is there a way that you can, I guess, kind of rank top 2 or 3 drivers of that just to give us kind of order of magnitude, where that improvement, where you see that coming from?

Dennis F. Riordan

The good news, John, is that it will be across all of our product categories. I think we'll probably continue to see some challenges in the soup business, but if you look at the rest of the categories, we expect to see generally positive numbers. We will really be focused on some of the margins in our newly acquired companies. And we'll have -- we'll continue to have a small business mix in there. It won't be as great though, because as I said, we'll lap the pickle business, the low-margin pickle business that was lost, and lap predominantly the bulk of the soup business that went away. So -- but again, almost all of our categories are expecting to see at least marginal improvement in the gross margins.

Sam K. Reed

Thanks, everyone. We appreciate your following TreeHouse and staying on the line, and we look forward to seeing many of you in the months ahead. Thanks.

Operator

And this concludes today's conference. Thank you for your participation.

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