B&G Foods Inc (BGS) 2004 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the B&G Foods third quarter earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, President and CEO, Mr. David Wenner. Sir, you may begin.

Thank you Holly. Welcome everyone to the B&G Foods third quarter conference call for the 13 weeks ending October 2nd 2004. If you haven't received a copy of our press release yes, it is available on our web site at www.BGFoods.com. Before we began our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. The statements are not guarantees of future performance, and therefore undo reliance should not be put upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial conditions.

We also will be making reference, on today's call, to certain non-GAPP terms like EBITA. A reconciliation to GAPP terms is provided in today's press release and our SEC filings. As we usually do, I'd like to first turn the call over to Bob Cantwell, our CFO, to discuss the quarter's financial results. After Bob's concluded his remarks, I'll discuss the business highlights for the quarter, and some of the dynamics we see going forward. Bob?

Thanks Dave. During the quarter, net sales increased 8.6 million or 10.4% to 91.9 million from 83.3 million in the third quarter of 2003. The Ortega acquisition, which occurred August 21st 2003, accounted for 8.8 million of the sales increase this quarter. We experienced higher unit volume in our Polaner and Trappey product lines, and this was offset by sales decreases in B&M, Vermont Maid, and Emeril products during the quarter.

Increases included Polaner of 1.2 million or 13.9%, and Trappey of 0.8 million or 27.2%. The decreases were B&M, down 0.9 million or 17.7%, Maple Grove 0.7 million or 44.4%, and Emeril 0.5 million or 6.5%.

Gross profit increased 0.9 million or 3.6% to 27 million this quarter, from 26.1 million last year. As a percentage of sales, gross profit margin decreased to 29.4% from 31.3% this time last year. The decrease in gross profit percentage was primarily the result of higher cost of packaging and ingredients, including meat, chicken, maple syrup, and beans. The higher costs were partially offset by the favorable business impact of the Ortega acquisition.

Turning to first quarter operating expenses, sales, marketing and distribution expenses decreased 0.2 million or 1.7% to 9.6 million in the period from 9.8 million last year. As a percentage of net sales, these expenses decreased to 10.5 percent from 11.8% in the third quarter of 2003.

G&A expenses, which includes management fees, decreased 600,000 or 31.4% to 1.4 million this quarter compared to two million last year. The decrease was primarily due to a reduction in incentive compensation accruals. Operating income increased 1.7 million or 12%, to 16 million this quarter. This is compared to 14.3 million last year.

Operating margin was up 17.4% from 17.2% during the first quarter of 2003. Interest expense decreased one million or 12.2%, to 8.2 million from 9.2 million in the comparable period last year. Income taxes were $3 million, up from 1.8 million last year. Our effective tax rate was 38.6% for the third quarter 2004, up from 36.4% for the third quarter of 2003.

I'd like to take a moment to discuss EBITA. Our EBITA increased 12.4% to 17.8 million during the quarter compared to 15.8 million on a year over year basis. The LTM EBITA through 10/2/04 is at 73.8 million.

Capital expenditures in the quarter were 1.9 million and 5.3 million for the nine-month period. Most of our capital expenditures were for purchases of manufacturing and computer equipment. We continue to foresee minor capital expenditure requirements for the foreseeable future.

As we look at our balance sheet, as many of you know, our balance sheet has changed quite a bit since the third quarter ended. The third quarter's balance sheet obviously does not reflect the transactions that occurred after the quarter ended. So without getting into too many details, I suggest you refer to our latest S1 amendment that has a pro forma balance sheet for the transactions.

With our new capital structure in place, I want to provide a brief overview of the upcoming EIS distributions. We will be making the first dividend payment on the class A. common stock and interest payment on the senior subordinated notes on January 30th 2005 to holders of record as of December 31st 2004.

Those dividend and interest payments will be a partial quarterly dividend and interest payments for the period commencing on the date of the completion of the EIS offering an ending on January 1st 2005.

As our SEC filings indicate the Company's dividend policy, we intend to pay quarterly dividends of 21.2 cents a share of class A. common stock through the first four full quarterly dividend payment periods following the closing of the EIS offering.

Please remember that the dividends have to be declared by the Board of Directors and permitted by applicable law, in the terms of our existing indebtedness. The interest payments on the senior subordinated notes will be approximately 21.45 cents per quarter.

I will now turn the call back over to Dave for the business discussion. Dave?

Thank you Bob. Needless to say, we're pleased with our results for the quarter. The Company net sales increased 10.4%, almost 92 million, and year-to-date sales are up almost 22% to 276 million. Ortega added almost $9 million in sales, mostly because we had acquired the brand in August 2003 and we had some additional sales out of that gap, but we have now lapped the acquisition and have a full year's financial results under B&G's control within our numbers.

Ortega continues to perform well with us, and is up over 4% for the year. We gave back a little of the upward momentum in the brand in Q3, as we chose not to repeat some very aggressive promotions Nestle ran as the sale approached last year. We decided that those were not the right decisions to make for the business, that it was better to back off of some of those promotions, even though sales to retailers suffered slightly as a result. But we believe the business is still very healthy and is a growth prospect for us going forward.

Polaner increased 1.2 million or almost 14% due to higher unit volume. Many of you will remember that Polaner was a problem brand for us, but that has changed as the new sugarfree products continue to drive the business and are making it a growth vehicle for the Company, as we predicted they would.

We continue to expand distribution of these products in supermarkets and mass merchants, and the product is showing well wherever it's placed. We've expanded the line of regular size product with two new products, grape and orange, and we've also added a 27 ounce grape jelly product that's selling very well in Wal-Mart stores. So, that line has tremendous momentum and is very relevant to consumers with a sugarfree appeal.

The Trappey business increased $800,000 or other 27% due to higher unit volume. The retail portion of the Trappey business is stable, and the growth is coming from some new institutional business that should continue for the foreseeable future, so we look at that as a growth element of the business for at least the near future.

Those gains were offset slightly by sales declines in B&M beans, Vermont Maid and Emeril, as Bob said. In the case of B&M, which has been our most problematic brand, sales declined $750,000 in the quarter, down almost $3 million year-to-date. But we believe we've turned the corner on this brand with a new price parity structure that is just reaching the shelves now, and we think Q4 sales will improve as a result of that strategy.

A Bush (ph) price increase should also help our competitive position for the rest of the year and into 2005. Vermont Maid sales were down 700,000 for the quarter, as some of our promotional activities slipped into Q4. We expect to recover some of those sales in Q4 and see a better Q4 as a result. And in the case of Emeril, Q3 of 2003 saw us make -- of last year, I should clarify. Q3 of last year saw us make a major promotion and distribution push on the brand, investing almost $2 million on solidifying the retail business. We did not repeat that event in 2004 to the same degree, and we saw about a half $1 million decline on the business as a result, but that continues to be a very healthy business for us, and again, a growth vehicle for us going forward.

Gross profit improved in dollars, but declined as a percent of sales, nearly two points of sales. Slightly higher trade promotion and slotting were a small factor here, but they netted sales down a little bit, but more significantly, the third quarter was the most severe illustration of the cost increases we've seen in the last nine to 12 months.

Cost hit us with full effect, and our price increases were just coming into play to alleviate that effect. Q4 should be improved as our price increases kick in more thoroughly, but cost is still going to be an issue.

Energy has finally started to show in our distribution costs, although hopefully that's temporary. The latest back down in energy costs may alleviate that very quickly for us. We believe it will. We also have seen commodities, such as chicken and ham, pull that slightly in the last month or two, but they're still higher than last year and still an element going forward in our cost structure.

The B&G seasonal pack is winding down and we've seen the cost on B&G stabilize as a result of this year's pack. And alleviating all of that from a gross profit point of view is the fact that our pricing has pushed through to customers, in the vast majority of our business. We announced roughly 4% price increases in late summer on about half of our products. As a gross price increase, that would yield about $8 million of revenue, but we're hedging that down to three to $4 million in revenue, allowing for possible volume losses, although we haven't seen that yet, and trade promotion givebacks.

Offsetting higher cost of goods, our sales marketing and G&A costs fell, as Bob said. We were more efficient in some areas, such as selling expenses, and we didn't repeat the Emeril spend that I referenced earlier. Beyond that, G&A costs declined due to lower incentive bonuses. That decline reflects the fact that our bonus plan incents (ph) management to drive the business well beyond the typical growth rates we've talked about in the past. And while 2003 was an exceptional year for growth and obviously, we paid higher bonuses as a result, 2004 is more modest.

All of this means we increased EBITA 12.6% to 17.8 million, from 15.8 million in Q3 of last year. Net income increased 49% to 4.8 million, although we consider that number less significant than EBITA when looking at our Company's financial health as an EIS issuer. EBITA really is the key number to us in terms of our ability to pay the interest and dividends on our units.

The quarter was very representative of our commitment to steady, consistent growth. The fourth quarter will be more challenging because last year was a 14-week quarter. This year is a 13-week quarter. But we're confident the business will be steady and we're confident that the growth prospects we have amongst our brands and our diverse distribution systems will continue to allow us to grow profitably.

We certainly have value brands that are performing well, including brands that capitalize on healthy living trends, such as the sugarfree products I referenced and our strong Mexican food sector. Las Palmas is doing well, as is Ortega. Our brand portfolio is diverse and well-positioned, and very defensible, and most of the brands in the portfolio are growing to some extent.

We continue to see exciting gross prospects in three key brands; Ortega, Polaner, and Emeril. And somewhat unexpected and a little unpredictable growth for Trappey. We also expect that B&M will not be the drag on our business that it's been so far in 2004.

We continue to operate the business effectively, leveraging the diversity of our customer base and our distribution systems, and we remain confident that that diversity will help maintain the stability of our financial results going forward, and our ability to capitalize on growth trends within products and within distribution systems.

A final night on the business is that, you know, we have been acquisition minded in the past, and we continue to be interested in acquiring further businesses. We're looking at several prospects now, but nothing is imminent. We have investigated the possibility of doing high yield financing to finance the appropriate acquisition, and we've been told that our company has the ability to do further acquisitions through that means. Certainly, our high yield offering as part of the IPO was extremely well received, and I think we have very good standing in that area.

We would, of course, remain within our covenants in any acquisition we might do in that vein, but given our successful history of acquiring brands and integrating them into the company, we continue to see this as a significant opportunity for growth beyond the organic growth in the company.

Finally, we're very pleased that we were able to complete the IPO early in the fourth quarter. As Bob said, we intend to pay the dividends, as described in the SEC filings. Our Board would confirm that event payment for the stub period here in the fourth quarter in January to be paid January 30th, and we look forward to that being the start of a long history as a reliable source of income for our investors.

With that said, thank you for joining us on the call, and Holly, we'll open it up for questions now.

Thank you sir. The floor is now open for questions. If you do have a question, please press star one on your touch-tone phone. If at any point your questions have been answered, you may remove yourself from the queue by pressing the pound key. We do ask that when you pose your question, that you please pick up the handset to provide optimum sound quality. Once again ladies and gentlemen, that is star one to ask a question. Please hold while I poll for questions. Thank you, our first question is coming from Mosan Gugid (ph) of RBC Capital Markets.

Hi David, hi Bob, how are you guys doing?

Fine thank you.

Just a couple quick questions. Can you tell me in the sequential cost increase how much of that was broken out between packaging, ingredients, and labor?

Well, our typical breakout of cost are 40% packaging, 30% ingredients, and 30% labor and overheads. The majority of our cost increases are coming from ingredients specifically meat, chicken, beans, and maple syrup are driving the cost increase. Packaging is also up, as it's up pretty much across similar companies in our industry, but it's not a huge effect on us.

And labor actually, if you look at labor ...

It's very ...

... per case is flat to maybe even down slightly, based on efficiency gains we've seen in some of our operating facilities. So, labor has not been an issue.

OK, and I know these product lines are a small section of your top line, but can you talk a little bit about the trends that are happening in Cézanne (ph) and Wright and Regina, some of the other ones as well? I think you've done a pretty good job of elaborating on the bigger brands, but can you mention a little bit about the smaller ones too.

Sure. Sa-Son is a stable business overall. Quarter to quarter you see jumps up and down and, as they say, it's a very small piece of our portfolio. It's so small that the individual shipments to Puerto Rico and the distributor in Puerto Rico make the quarterly results hop around and that's what you'll see quarter to quarter. But Sa-Son is very stable, very flat with a little bit of growth coming out of the U.S. as we do a little better in New York with that brand.

Wright's is doing well overall, it's very -- it is growing slightly. Fairly stable in the retail part of the business and doing well in the food service part of the business and the sales between those two in Wright's are 50/50. So Wright's is a nice profitable piece of business that's growing very modestly for us as our food service people do a good job of having the product spaced out in chains as a specific use for things like barbecue sauces.

Regina is growing slightly. We have launched some new products, specifically a raspberry balsamic vinegar that's doing very well. We have done a pretty good job in food service as well. We intend to do some more new products under Regina next year, specifically around cooking wines and things like that and we hope that that would add some more growth to the brand. But again, good stable brand with some modest growth out of some new products.

OK. And finally, with the price increases in effect and some of the cost pressures from ingredients and packaging reducing a little bit, would it be reasonable to assume that there should be at least a 40, 50 basis point sequential increase in EBITDA margins?

I don't think EBITDA margin necessarily is going to increase out of that whole dynamic. We basically aimed our price increases as offsetting the cost increases and I think it's too soon to call whether the cost increases are really over or not. We're hearing -- as commodities back down in some areas a little bit, we're hearing more rumbles from the steel container people and steel containers are a factor in anything that we put in cans. They seem to be getting more and more aggressive. We've been insulated from that to some degree by contractual arrangements and so far it hasn't been a big issue, but I think that promises that it could be an issue going forward. We're hoping next year all the cost increases balance out with pluses and minuses, but there are certainly some dynamics that are still to be seen.

The other thing that's looming at us, and I don't want to sound real negative here because I really do think it's going to be a fairly neutral year next year, but the other thing that's looming over us is the fact that the dollar is very weak relative to the Canadian dollar. That could impact us on maple syrup purchasing in April, May timeframe next year, depending on where the dollar is. There may be an opportunity to increase price further there. In fact, we're better positioned than our competitors in that all we're paying for is the maple syrup coming out of Canada. Virtually all of our other major competitors buy finished goods out of Canada, so they're buying the entire package and have much more exposure to the dollar vis-à-vis the Canadian dollar than we do. But it's a very dynamic landscape out there and for me to say I'm going to increase my margins as a result of cost versus price would be very aggressive and I hesitate to do that.

That's fair enough. I just wanted to see what your thoughts were going forward, but that's a fair enough answer. Finally, once last thing, cash balance guidance, is it still going to be in the 20 to 30 range? That's what you had said earlier.

Yes, it will be. By the end of December this year that's what you'll be looking at.

OK, great. Thank you.

Welcome.

Thank you. Our next question is coming from Risa Bajav (ph) of Lehman Brothers.

On the cost side, Dave, Bob, do you expect the raw material cost to actually rise at a higher rate or you seem to indicate that some of these costs are coming down actually.

Yes, I don't see it rising as a higher rate. I think a lot of them have peaked. We're actually seeing a little bit of, let's say aggressive stance on things like corrugated. Some of the commodities like ham and chicken, as Bob said, have started to back down just a little bit, but they're still a lot higher than they were last year. But the point would be that they're not cranking up like they have been for the early part of this year, so there is some stability coming in. I would expect to see things like corn pull back some; it has already. So there's going to be some -- there's going to be some things we're going to gain ground on, there's still going to be some things that we potentially could lose ground on, but the net of it again is that we're hoping it's neutral. That was certainly not the case, say, six, nine months ago.

OK. Now on Ortega, you mentioned that the prior owner, prior year had some aggressive promotions, but obviously in the fourth quarter you owned the brand (inaudible) 2003, although they probably programmed the promotion still. Do you expect your year over year comparisons in Ortega to be difficult still in the fourth quarter?

I don't think they'll be as difficult as they were in the third quarter. You're right, they did program September and that's about the last -- that's about the last period that I can -- excuse me, October, that's about the last period I can throw any rocks at Nestle. After that I've totally controlled it and anything that I do is my responsibility and we feel that we're going to do well going forward out of that. But one of the things we identify as a -- when we compare on ourselves on Ortega is the fact that there's some what we call "dead customers" in the portfolio, the Fleming's (ph) of the world, if you will, and then some other people that Nestle was selling product to that we don't think it's appropriate to sell product to. When I look at that number, year to date that's a $9 million number that we have filled that gap, if you will, in sales. So we're very pleased with where we are on Ortega vis-à-vis where Nestle was and we think we have a lot of upside going forward. We have some exciting new products we're going to launch next year in the line. We think it's going to be a very good line for us continuing.

Right. And then what about Emeril? I know your year over year comps will not be very easy for a while, but obviously third quarter comps are very difficult year over year. What about fourth quarter comps?

Fourth quarter comps should be fine. We should do well with Emeril. We again are positioning some new products and with Emeril and through the specialty distributors (inaudible) one of the things we've discovered is that new products are very important in terms of keeping upward momentum on this line and we're launching new products in a variety of the categories we're in to try and drive further growth on the line. But the line in general is doing very well. When you look at consumer business on Emeril, it's not bad; it's growing. We've been losing business in the Bed, Bath and Beyond's of the world, all those kind of specialty retailers that, as I've said before on conference calls, walk away from these kind of businesses once they're not the next hula hoop and they're readily available in grocery stores. And when we look at our comparisons, that's the kind of business we're losing. We're gaining business at retail; we're doing well in Wal-Mart Supercenters with pasta sauces and salsas. We continue to think the line will grow for us.

On B&M you mentioned a new price (inaudible) making you more optimistic about the future. Is that just a function of the B&M price increase or have you done something to your pricing as well?

We did not increase price on B&M; we actually net net to retailers reduced our list price. But you need to understand in that dynamic that we didn't sell much at that list price and I think I've talked about this on past calls where the vast majority of B&M sales are done at promotional pricing. And we've actually analyzed what the net pricing was to a lot of the major customers and it's certainly nowhere near our list price and when you -- but our shelf price on an everyday basis reflects our list price. We think we're better served finding a vehicle, whatever the vehicle is depending on the retailer, to get our list price on the shelf down to parity with Bush and fight an even fight with Bush on an everyday basis and then take our chances on promotions where we actually do quite well on promotional activity in our core markets. So we're doing that and it's interesting in the case of some customers who only bought on deep promotions, now that they perceive that they're getting a promotional price on an everyday basis to get us to that price parity, they're actually buying products at a higher price than they would have last year. And our net pricing to some customers is actually increasing, even though we're in effect lowering our price. That was a very complicated explanation. I don't know whether you followed it completely or not and I apologize.

No, I think I've got it. I actually took advantage of a lot of your deep promotions myself.

Well, that's the idea is to get consumers to buy things. So I'm glad they worked.

And was it B&M -- was the Bush price increase, I mean what sort of increase do you think it was?

It's such an increase that it will probably raise their shelf price about 10 cents a unit on the shelf.

OK. Is that...?

Not a huge price increase, but enough that -- in our initial moves we had aimed for price parity at their old price. There's actually going to be places we'll be 10 cents below Bush on the shelf until we decide what the right strategy is after they -- given that they've announced a price increase.

OK. And then lastly, when do you think you will have a better idea that the price increase is going to stick and it's going to stick at a certain level? Is it going to take a couple of more months?

No, I think it's there.

OK.

No, I 'm seeing the price increase on orders now. Customers are buying product at that price. It's there.

Thank you.

Thank you.

Thank you. Our next question is coming from Brian Regan (ph) of Stearn Aggey (ph).

I was just curious, I've done a lot of reading about Unilever and Nestle selling off brands and it seems like it should be a buyer's market with all these guys looking to divest of brands.

Right.

However, you pick up the newspaper every day and you read about these private equity shops snapping up everything they possibly can, with that being a big trend right now. Are you seeing an increasingly more competitive environment with these private equity shops out there?

We absolutely are. The multiples are very high in some cases, more than we're going to pay for a brand. And those things go in cycles and if the timing isn't right for us to buy things at a reasonable price, then so be it. The timing isn't right and we'll wait until it is. The discussions I've had with high yield guys on financing further acquisitions, they're seeing the same kind of thing that you're alluding to and they're seeing the leverage getting taken up on some of these things and they're already making plans for their workout activity two to three years down the road because people -- we're getting into an environment where people are going to be overpaying for things and they will pay for it down the road.

Right. And if you look at -- I mean the other big trend obviously are these Dollar Stores nowadays. I was curious, how do you take like a brand like Ortega, where you don't want to damage that brand, and expand into a Dollar Store? I mean I'm curious how you get some of these brands without damaging the core brand and breaking into a Dollar General or a Big Lots.

Well, we've done it by formatting a line that we're showing right now to Dollar Stores under the Las Palmas name, which products similar to Ortega, but not branded Ortega because we think, as you obviously think, that that's not appropriate for Ortega and it's not something we want to do to damage that brand. Las Palmas has no brand equity in the Ortega type of products. Right now out on the West Coast and Southwest, it's an enchilada sauce and chili business so there's no damage done to Ortega by putting a line of taco sauces, seasonings, taco shells, et cetera, into Dollar Stores and that's the opportunity we're trying to take advantage of right now.

OK. In terms of regional brands, like a B&G, I understand where the Life Savers or an Altoids, you may have the private equity shops sitting on that, but are there some regional opportunities? You know, a pickle manufacturer in Chicago or (inaudible) competition? Is that where you envision B&G...?

There are regional opportunities in other categories. That's not a good example of a category we would probably pursue an opportunity in. It's at the lower end of our margin structures in terms of the kind of things we're looking to do, although B&G's not a bad brand, but I'd prefer to buy higher margin brands than lower margin brands, number one. And number two, the pickle business is a capital-intensive business so if I can buy something that's less capital intensive, I'd be more interested in that. But there are regional opportunities in more attractive categories and we will continue to pursue those.

And the question is, are the private equity guys coming over those as well? Regional.

Not so much in smaller business, so if I had -- and I'm not saying there is one out there because I don't know of one -- if I had a competitor to Wright's, for instance, which is a relatively small business, you're not going to have a private equity guy all over that because he can't build -- he can't build an infrastructure around a brand that size. That's a good one for us to go after and be able to buy at a reasonable price.

OK. Thank you.

Thank you. Our next question is coming from Andrew Lazarre (ph) of Lehman Brothers.

Good evening.

Good evening.

Hello.

I realize you had a lot of puts and takes this quarter over the various brands that were up and some that were down and some of the (inaudible) Thompson (ph) things, but as you look forward to sort of sales growth that you would budget for and look for in '05, particularly because you also have -- will have some of the benefits of a price increase so it may look a little different than perhaps your typical kind of growth algorithm, how would you peg that for next year? Would it be in that same kind of 2 to 3% range, but would a bigger percentage of that be sort of price mix rather than volume? Or will overall top line perhaps be even greater than usual because of the pricing on top of the volume?

We're not going to give specific guidance, but you're right. Our typical growth in the past has been 2 to 3% a year organic growth. The price increase would be an unusual event within that context, so all things being equal, it would be an additive thing.

OK. And then if -- with the pricing sticking in many of the areas which you've taken it and you now see it there, I should also kind of basically get a sense, then, that most of your key competitors in most of those areas then also were active in the same regard such that your gaps, let's say, have remained pretty consistent. Is that a fair comment?

That's a very fair comment. We're a follower, not a leader, typically in price.

OK. And then lastly, just what -- there may not be a lot of things you can get into in terms of detail on this, but with what you can discuss, are there any other sort of innovations coming up or new items that you think are somewhat more meaningful to the portfolio as you go into '05? You mentioned some things on Ortega. I don't know if you're ready to discuss them yet, but what can you discuss, if there are some things?

Well, as I said, with sugar free we're definitely expanding that and have products out into some distribution now with the Polaner sugar free, the grape and the orange products at the regular size, and the 27 ounce product that we specifically designed for Wal-Mart Supercenters and went and showed it to them and they bought it right away. That's out there selling in those areas. As I said, we're going to do line extensions on Emeril in what we think are the most attractive categories, that would be pasta sauces, seasonings. And we are going to try and relaunch the salad dressing line with some of the vinaigrettes that we think are doing very well for our salad dressing business and other areas that we think will do well within Emeril. Beyond that, I'm not ready to talk about the Ortega products yet. They haven't been shown yet and I have enough competitors without telling them what I'm trying to do.

Sure.

And we'll do some other things and some more modest things in some of our more modest categories. We tend to try and grow smaller pieces of the business piecemeal. Those are going to be the major efforts in terms of where we're going to invest what resources we can in slotting is Polaner, Ortega and of course Emeril we tend to try and do without slotting. Those are our three major efforts for 2005.

And the very last thing is just with respect to organic sales in this quarter being somewhat flattish or what have you, was that basically in line with what you had sort of initially thought and budgeted for?

Well...

Or would you say that's still a little bit below where you really would have liked to have seen it, excluding Ortega?

It is below what our high end goals were and I guess the fact that our incentive bonuses aren't fully accrued for indicates that we had a higher goal that we would have liked to have hit and probably, as I said, the biggest drag on that was B&M. We lost a warehouse club business this year that is hurting our comps versus last year when it was a new business for us. We picked it up last year. But I think we're going to solve that one and without that drag, you're talking a nicer growth rate.

Thanks very much.

You're welcome.

Thank you. Our next question is coming from Stephanie Rosenberg (ph) of KKR Financial (ph).

Hi, guys.

Hello.

Good evening.

I'm just wondering if you could explain the accounts payable number. It looks a little higher than normal.

It's very consistent with timing comparative to last year same timeframe. There are some payables in there as it relates to the deal and cost of -- expenses of the deal that were not paid as of September -- as of the end of September that were paid as part of the deal when it closed. But it's typical that payables is going to be high in the second and third quarter because we've built some inventory in both the B&G and the Maple Grove lines and it's just kind of timing. That payable balance will be very consistent by year-end with the year-end balance of last year.

Great, thanks.

Thank you. Our next question is coming from Rick Lever (ph) of Buckeye Capital (ph).

Yes, the increase in EBITDA from last year to this year, $2 million, how much of that was related to Ortega?

We don't break out EBITDA by brand, but certainly Ortega was a factor in -- significant factor in that increase.

Was it more than the 2 million? In other words, would your EBITDA have fallen had you not had Ortega as part of your brands?

No. No, you have to remember Ortega was only -- the year-to-year difference on Ortega is only the stub period there. It's not a full quarter's effect.

OK. Thank you.

Thank you. Our next question is coming from Mark Emerick (ph) of CIBC World Markets.

Evening, gentlemen.

Evening.

Just a quick question on your acquisition growth comments that you made earlier about using high yield to make accretive acquisitions. Now, were you thinking of issuing the high yield as straight paper or as a combination of another EIS offering?

It was -- in the context I was talking about, it would be offered as an add-on to the high yield we already have as straight paper. And that's just one possibility. I just wanted to allude to that in terms of it's -- we do have the ability to do it. I'm not saying we're eminently going to do it. In fact, there is nothing eminent, but we have at least confirmed in the marketplace that it's very feasible. You know Lehman underwrote the high yield offering and they're extremely confident that we could do it up to a certain level. We have covenants that we can't exceed and we would certainly stay within those covenants.

And where are those covenants right now? I think that your total debt to EBITDA is about five and a half times, is that correct?

That is correct. We're allowed -- and we wouldn't do a structure that would take us really above that, but we're allowed to go to six times if -- within our covenant structure today.

Yes, we...

...where we're going to go.

What we have in mind -- and again, this is absolutely speculation so you shouldn't sit there and say, "Oh my god, they're going to do this tomorrow." We think reasonable leverage in that kind of a context is about five times, which would actually, in the total structure, deliver you.

OK. Thanks very much, gentlemen. Appreciate it.

You're welcome.

Thank you. Our next question is coming from Omar Abisson (ph) of Piper Jaffrey.

Yes, good evening.

Good evening.

Could you talk about your sales to Wal-Mart now and your opportunities there?

Wal-Mart is a little over 6% of our sales. It is growing very quickly, probably -- it's certainly double-digit growth. We have, we think, significant opportunities there, especially as Wal-Mart expands regionally. To some extent, Wal-Mart is about selling where you're regionally strong and a lot of our brands are strong on the East or West Coast and specifically in the Northeast and the West Coast and Wal-Mart obviously has a very limited presence in those areas. So one of the reasons we're underrepresented, if you will, in Wal-Mart, since Wal-Mart represents I think about 12% of grocery sales, is because they're not strong where some of our brands are strong. The other reason, of course, is that we have other elements of our business, like food service, that Wal-Mart doesn't do. But we feel that we have opportunities to continue to grow very significantly with Wal-Mart, although we're not unhappy that they're not a dominant customer in the portfolio either.

OK. Thank you.

Our next question is coming from Dennis O'Rourke (ph) of Regiment Capital (ph).

Yes, hi, guys. I was just wondering if you could give me the sales increase or decrease for Ortega, either in dollar amount or percentage, like you gave for some of the other brands?

You don't have a clean comparison in the third quarter, so we wouldn't be able to do that because we acquired it as of August 21st of 2003.

And you don't have it on a pro forma basis?

We don't disclose pro forma that way.

It's also difficult because we talk net sales and Nestle sales were gross sales.

OK. The question related to the accounts payable, of the 30 million, what do you think are the accrued transaction costs that need to be paid?

There's about $4 million in there of that. And I think when you look at our payable balance, you have a mix between accrued expenses and payables. As you look at our balance sheet going forward, look at them on a combined basis. It gives you a much better reflection of our outstanding payables...

Yes.

...accrued expenses.

That makes sense. And then I just want to revisit the fourth quarter. So including the price increases and (inaudible) of the raw material cost increases, so is it fair to say that the fourth quarter this year is going to be flat with last year and up sequentially or is it going to be -- this is on the top line -- or is sales expected to be down year over year but up sequentially?

As I said, there's a week less activity this year than there was last year, so we think that's a pretty good mountain to climb. If we can hold our own, we'll be very happy.

Then how do you look at margins if you're gross profit margins were 70.6 this quarter? Last year they were close to 68.

I'm sorry?

I'm sorry; I was looking at cost control. If your gross profit margin was 29.5 this past quarter and they were 32 last year in the fourth quarter, how should we look at gross margins in the fourth quarter this year, assuming these price increases stay?

Well, we're hopeful that the price increases will lift that margin up. Certainly we're not going to see a lot of relief on the cost side versus where we were in the third quarter. So...

(inaudible)

Pardon me?

Should -- sequentially, should margins be up?

I'm hoping they will be, but I -- remains to be seen given the mix of sales and other things.

OK. Great, guys. Thank you.

Thank you. Our next question is coming from Leo Schmidt (ph) of Advent Capital Management (ph).

I was wondering if you could give me a little insight on your (inaudible) gross or EBITDA margin, but you were talking about your price increases and the previous question was asking I think along similar lines. Given you're getting price increases and given your cost increases that are beginning to moderate now, will your margins year over year be flat or will you still see pricing pressures or can't you see at this moment.

I think I said earlier that it's very dynamic. We have seen some things start backing down. We're seeing other things continue to move up, like steel, but not as aggressively as they may have earlier. But as I said before, the dollar versus the Canadian dollar is a wild card coming down the road at us in April and May. So it's extremely difficult to say where margins are going to go. And, for instance, if the Canadian dollar holds versus where it is on the dollar now, whether we'll be able to do other price increases to offset that, as I said, I think I have an advantage there versus my competitors. So you would think my competitors would be more pressed to increase price than I would, but I wish I could tell them what to do, but I can't. So it remains to be seen. I'm sorry, I really can't...

OK. I was just trying to get more clarity. And then just to break it down, I guess the price increases that you have been taking so far, they've been sticking. With commodity costs coming down, they're not being rescinded, you're not having to...

It's far too early for anybody to come to us and say, "Your commodity costs have dropped, please reduce your prices." There's a lag in that in any event, but they are sticking and we have seen absolutely no pressure to take our price increases back.

Great. Then one final question, can you give us some way to frame this -- the one last week, how should we take that out of the comparisons. If you can give some sort of dollar or percentage amount that we could say -- we could add or take away?

Well, as I said, I'm hoping we can continue to be stable even given that. But it's one divided by 14, it's a very simplistic...

Yes, but you -- it's fixed costs that you're going to deleverage on that, too, so you have all your rent and depreciation and your fixed costs that don't get spread out.

Yes, I think you'll find, though, that our margins are very consistent over time. I don't think you're going to see a significant shift.

All right. Thank you very much.

Thank you.

Thank you. Our next question is a follow up coming from Andrew Lazarre of Lehman Brothers.

Thanks. Just a quick follow up. In the quarter, is it possible to break out what piece of the top line came from just purely mix? Was that enhancing to the top line this quarter or not?

You mean the bottom line or the top line?

The top line because you've got your -- from product, let's say, that have a higher revenue per pound or...

Oh my goodness, no. That's very difficult. I'm sorry; we don't really look at it that way.

OK. And then...

And typically -- within a typical quarter for us, our sales don't mix that much that we would ever see that kind of effect on our numbers in any substantial way.

Right. So in terms of the brands that are your key ones, that you're putting a lot of your innovation behind obviously, and where you expect better than average growth in the portfolio, as you see that happen, I guess one question is so you're not likely to see much of a mix impact from that growing more quickly on the top line. With respect to margins, though, do those brands give you an enhanced mix also, then, from a profitability standpoint as they grow more quickly?

I would hope you'd give us credit to invest in the high margin business.

Well, I'm relatively new to stories (ph) you know, so I thought I'd ask the question.

I don't mean to be flip, but we certainly invest where we see the best potential for payback from a margin and a velocity point of view and so assuming we were successful at investing correctly in the right -- in the things in that context, it would enhance our margins.

Thank you.

Yep.

Thank you. Our next question is a follow up coming from Dennis O'Rourke of Regiment Capital.

Thanks. Just one more quick question. In the fourth quarter of last year, your sales and marketing expenses were, I think it's something like 13 million. Is there something -- were there additional promotional expenditures in that quarter last year or how do we look at it on a year over year basis?

That's a fourth quarter number you quoted?

Yes, I think -- hopefully my numbers are right, but...

Well, I think one of the comments is promotional spending with the trade is going to be netting down against sales wouldn't...

That would not show.

It would not show up in that line. What's showing up in our sales and marketing expenses is all our cost of our sales force and our brokers and our consumer marketing programs.

That number just seems about 3 million higher than the normal run rate.

That partly would have been because Ortega was new to the business.

Right.

So is it fair to say now that it's new and you've had cost savings associated with it, that -- basically what I'm trying to get at is do you expect to incur a 13 million number this quarter? It sounds like possibly not because of cost savings now that you've had Ortega for almost a full year.

I suspect it would be lower, yes. But we're not sitting here doing quick addition to figure that out.

OK.

But I think it would be lower, yes.

All right. Thank you.

Gentlemen, there are no further questions. I would like to turn the floor back to you for any closing comments.

OK. Thank you all very much for joining us on the call. As we've said, we're delighted to have done the IPO and we're looking forward to declaring the first dividend as of January and hopefully we'll have very good news for you after the fourth quarter as well. Thank you. Bye-bye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great evening. Thank you.