March 23 (Bloomberg) -- TreeHouse Foods Inc., whose roots trace back to Keebler elves, said the recession hasn’t stalled plans to make “substantial” acquisitions and reach $2 billion in sales in a consolidating private-label food industry.

The recession has spurred growth as buyers turn to private- label goods from name brands to save money, Chief Executive Officer Sam Reed and two other top TreeHouse officers said in an interview. TreeHouse, whose largest customer is Wal-Mart Stores Inc., has gained 26 percent in the past 12 months, compared with a 37 percent drop in the Standard & Poor’s Smallcap 600 Index.

“We’re really well-positioned not just because the economy’s tight, but because it seems to be a phenomenon that should last and grow,” Chief Financial Officer Dennis Riordan said.

Sales of private-label goods are rising amid the worst financial crisis in seven decades and the highest unemployment rate since 1983. Thirty percent of consumers are buying more private-label items than a year ago, Wal-Mart said last week. The largest seller of groceries in the U.S. plans to offer more than 80 new products under its store brand to attract bargain hunters.

Available capital and established credit terms give TreeHouse an advantage to take on new acquisitions this year, even as other companies hoard cash, the executives said. Spun off from Dean Foods Co. in 2005, Westchester, Illinois-based TreeHouse has since bought five companies and increased revenue each year by at least 23 percent.

‘Substantial’ Buys

The company’s ideal growth scenario is making two, or possibly three, “substantial” acquisitions that position TreeHouse as a leader in a new product category, Reed said.

TreeHouse, the largest maker of non-dairy powdered creamer, said it’s focused on pursuing a purchase in the U.S. or Canada and declined to discuss specific targets. Chief Operating Officer David Vermylen, 58, said the company is interested in “longer shelf life products that ship at ambient temperatures.”

TreeHouse in 2007 bought E.D. Smith Income Fund, a salad dressing and jams company in Canada, and San Antonio Farms, a salsa maker. The two acquisitions boosted the business and garnered attention from grocery customers, Reed said.

“We said at the beginning we were creating an infrastructure for $2 billion of dry grocery business,” Reed said. TreeHouse is moving toward this near-term goal as the company had $1.5 billion in sales last year compared with $707.7 million in 2005.

Keebler Ties

TreeHouse’s products are sold under brands including Cremora, Nature’s Goodness and Second Nature. The stock rose $1.16, or 4.2 percent, to $28.82 at 4:01 p.m. in New York Stock Exchange composite trading.

Dean Foods approached Reed, a former CEO of Keebler Foods Co., to invest in the spinoff of its specialty foods division. Reed, Vermylen, and others formed the company into TreeHouse. Keebler, the cookie maker represented in ads by tree-dwelling animated elves, was sold to Kellogg Co. in 2001 for more than $4 billion.

Private label represents about 18 percent of the grocery market in the U.S., TreeHouse said. In 10 to 15 years, that may expand to 30 percent, Vermylen said.

No ‘False Confidence’

TreeHouse’s past supports making an acquisition even amid gloomy economic conditions, said Travis Sell, an analyst at Minneapolis-based Thrivent Asset Management. Thrivent owns 622,400 shares of TreeHouse as of Dec. 31, according to Bloomberg data.

“It’s not a false confidence,” Sell said in a phone interview. “They’ve been very successful in integrating these acquisitions into their business and increasing their breadth of product.”

As credit markets tightened last year, TreeHouse executives realized the company needed to act fast to ensure enough liquidity to stick to its acquisition-focused strategy. Riordan, 51, organized a task force to slash inventory and create cash flow so it could pay down debt and operate within the confines of its existing credit agreement.

TreeHouse lowered its finished goods inventories unit by 25 percent from May through September without hurting customer service or sales, Riordan said. The company paid down $145 million in debt last year.

Credit Lines

“We’re an acquisition vehicle,” Riordan said. “We did not want to be out of the deal market.”

The private-label food industry is “highly fragmented,” creating opportunity for consolidation, Vermylen said in the March 18 interview. Hundreds of smaller companies serve retail giants like Wal-Mart, Kroger Co. and Safeway Inc., Vermylen said. Private-label is about a $50 billion industry in the U.S. and TreeHouse’s retail business in North America makes up about $1 billion, he said.

The company has a $700 million line of credit with terms and conditions that Riordan said aren’t likely available in today’s market. Per that agreement, $600 million in revolving credit is due Aug. 31, 2011, and $100 million in senior notes remains until that same date in 2013. TreeHouse ended last year with about $200 million in available credit, he said.

TreeHouse’s major obstacle to making acquisitions is the wariness of sellers who are reluctant to divest their businesses because valuations are so low.

“They don’t want to get out at the bottom,” Reed, 62, said. “A lot of sellers now don’t know whether this thing is about to turn around or fall even farther off.”

Wal-Mart Plans

TreeHouse supplies Wal-Mart with soups, salad dressings, non-dairy creamer and marinated sauces. A “great deal” of the items are sold under the Bentonville, Arkansas-based chain’s Great Value brand, Vermylen said.

Wal-Mart has “been underdeveloped in private-label because their orientation has been national brands at a low price,” Vermylen said. “But they are beginning to shift.”

TreeHouse will “definitely be there to support” the chain’s greater focus on private-label, Vermylen said.

Three out of 10 consumers in a new study by New York-based GfK Custom Research North America are buying more store brands compared with a year ago, Wal-Mart said. Nearly three out of four say current economic conditions are “important” in deciding to buy more private label.

“For all of us in that fleet, the recession is making those boats rise together a little bit faster,” Reed said.

To contact the reporter on this story: Elizabeth Campbell in Chicago at Ecampbell13@bloomberg.net.

Last Updated: March 23, 2009 16:14 EDT