B&G Foods Inc (BGS) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the B&G Foods Inc. first quarter 2005 earnings conference call.

[Operator Instructions]

I would now like to turn the conference over to David Wenner, president and CEO of B&G Foods.

Thank you, Laurie. Welcome, everyone, to the B&G Foods first quarter 2005 conference call. Everyone on the call today can access detailed financial information on the quarter in our press release, which is available on our web site at www.bgfoods.com.

Before we begin 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, undue 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 condition. We'll also be making reference on today's call to certain non-GAAP terms like EBITDA and adjusted EBITDA. A reconciliation to GAAP terms is provided in today's press release and on our quarterly report on Form 10-Q.

I'd like to start the call by asking Bob Cantwell, our CFO, to discuss the financial results for the quarter. After Bob's remarks, I'll discuss factors that influenced the quarter and certain business highlights, as well as some of the dynamics we see going forward. Bob?

Thank you, Dave.

Net sales decreased 0.6 million, or 0.6%, to 90.1 million for the 13-week period ended April 2nd, 2005 from 90.7 million for the 13-week period ended April 3rd, 2004. Sales decreased 2.4 million relating to unit volume, which was offset by price increases and mix improvements of 1.8 million. Sales increases were driven by higher -- by Maple Grove Farms increasing 2.8 million, or 25.6%; Las Palmas grew 1.3 million, or 25.2%; Polaner increased 0.9 million, or 9.6%; B&M bean products increased 0.6 million, or 14.6%. Lower unit volume was seen in our Ortega brand, which decreased 2.9 million, or 12.9%; Sa-Son, which decreased 0.9 million, or 64.2%; Emeril, which decreased 0.8 million, or 12.8%; Underwood, which decreased 0.7 million, or 12.4%; and B&G pickles and pepper products decreased 0.4 million, or 4.5%. All other brands decreased in the aggregate by 0.5 million, or 2.1%.

Gross profit decreased 2.2 million, or 7.4%, to 26.8 million in the first quarter compared to 29 million for the first quarter of last year. Gross profit expressed as a percentage of net sales decreased 2.2% to 29.8% in the quarter from 32% in the first quarter of 2004. the shift in the mix of products sold accounted for q1% of the gross profit margin decline, higher cost of meat, beans, maple syrup and cans accounted for the additional 1.2% decline in gross profit margin.

Turning to this year's operating expenses, sales, marketing and distribution expenses decreased 0.8 million, or 7.4%, to 10.1 million for the first quarter of 2005 from 10.9 million in the first quarter of last year. These expenses as a percentage of net sales decreased to 11.2% from 12% a year ago. This reduction is primarily due to reduction in brokerage and salesman commissions of 0.6 million and all other expenses decreased 0.2 million.

General and administrative expenses and management fees decreased 0.2 million, or 10.5%, to 1.5 million for the first quarter of 2005 from 1.7 million in the first quarter of 2004. The decrease was primarily due to the elimination of the management fees previously paid to BRS, slightly offset by 0.1 million of employee other compensation related to the previously announced plant closing in Louisiana. In the first quarter, the company's operating income decreased $1.2 million, or 7.2%, to $15.3 million from $16.5 million a year ago. Operating income expressed as a percentage of net sales decreased to 17% from 18.2% a year ago. Interest expense increased $2.6 million, or 33.6%, to $10.4 million for the 13-week period ended April 2nd, 2005 from $7.8 million in the 13-week period ended April 3rd, 2004.

The average debt outstanding increased approximately 37.2 million in the first quarter of fiscal 2005 versus the first quarter of fiscal of 2004. The effective interest rate for outstanding debt during the first quarter of 2005 under our post-initial public offering capital structure was higher than the effective interest rate for outstanding debt during the first quarter of 2004.

Regarding EBITDA, I'd like to note this is a non-GAAP financial measure that we have reconciled to net cash provided by operating activities in our press release. Our EBITDA decreased to $17million in the first quarter of 2005, compared to $18.1 million in the first quarter of fiscal 2004. Capital expenditures in the first quarter of fiscal 2005 were $1.5 million. Most of our capital expenditures were for purchases of manufacturing computer equipment. We continue to foresee modest capital expenditure requirements in the future.

Moving on to the balance sheet, we finished the quarter with $23 million in cash compared to $28.5 million at the end of fiscal 2004. This reflects the payment of a semiannual bond interest payment on our senior notes of approximately $9 million on March 31st of 2005. We have $405.8 million in long-term debt, and $90 million in shareholders equity. On some cash flow measures, expected cash taxes in 2005 continue to be 0. We continue to forecast planned capital spending of approximately 6.5 million.

Our annual cash interest expense for fiscal 2005 is approximately $39.1 million. As a reminder, all of our long-term debt has fixed interest rates. As previously announced, on May 2nd we will make a cash payment of $0.4265 per EIS to holders of record as of March 31st, 2005. This reflects a cash dividend of $0.212 per Class A share of common stock and an interest payment of $0.2145 per senior subordinated note.

I will now turn the call back over to Dave for his remarks. Dave?

Thanks, Bob.

As you all can see from the numbers, our top line stabilized in the first quarter versus the drop we saw in the fourth quarter, which we had explained primarily is the result of fewer selling weeks. There were a good number of moving parts within the sales number, however, and we did see the benefit of the price increases we had initiated at the beginning of the fourth quarter but typically against lower unit volume. That volume decline was the result of the pay-for-performance initiative we began in the first quarter, which almost coincidentally affected the brands where we increased pricing more than most of the other brands.

As a reminder, on our last call under our pay-for-performance initiative, we mentioned certain brands would be impacted as we pulled back on trade and promotional dollars that were not performing at retail. Underwood, for example, saw a 12% decline in net sales for the quarter in spite of a price increase. That entire decline was from customers where we had pulled promotional moneys because of nonperformance, much of it towards the end of the quarter.

We saw the same effect on Accent to a lesser degree and significantly on Ortega. The other brands where we had increased price in Q4 tolerated the price increases well, but again, they were not part of the pay-for-performance focus so they were more consistent. We were pleased that prices were in effect for the quarter as we'd announced in the fourth quarter, even though that was later than we had originally expected when we announced those price increases.

The detail we've given you on brand sales also shows that there were sizable shifts in sales between brands. We're very encouraged by the positives and we believe that many of the negatives are temporary events. Ortega was the largest decline. As I said, it was affected by the promotional initiative. The brand also had a poor quarter on the West Coast, where we had several large customers miss execution of important promotions. We fixed that problem on Q2 promotions. In general, we believe that Ortega is healthy and should have a good year for the remainder of 2005.

The seven new products we've launched are being accepted broadly by our grocery customers and are going into the pipeline now. Several of the products are also going into Wal-Mart Super centers, and two are doing well in warehouse club distribution. We're being very aggressive on the base business and innovative with new products and we think that combination will pay off for the rest of the year with the Ortega brand.

Sa-son was another brand with a large drop in net sales in proportion to the size of the brand. This brand is all about large orders going into our distributor in Puerto Rico. Our price increase in the fourth quarter on that brand caused the distributor to buy in ahead of the increase, which, of course, affected Q1 orders. The business is healthy at retail and we expect orders to return to normal in Q2.

The Emeril brand is healthy at retail as well, but factory sales for the first quarter were going against large pipeline numbers at Wal-Mart in Q1 2004. Where the brand really has not succeeded so far is in rotations through warehouse clubs. We did several of those last year in the first quarter and we did not repeat them this year. The Essence item is a permanent item in clubs right now, but we need to find a way to have other Emeril items succeed in the club business and we're working on that. Our new Emeril salad dressings and seasonings are rolling out into grocery distribution, and Wal-Mart has taken the Garlic and Parmesan seasonings, and the Salad Topper seasoning into Super Centers. Our focus on the Emeril brand for the remainder of the year will be filling out distribution on the existing lines. We have significant opportunity to grow sales on this brand if we just do that.

There were a good number of encouraging positives in the quarter that we think will continue to contribute for the rest of the year. B&M was up nearly 15% for the quarter as a result of our everyday retail pricing strategy. We've also launched two new items in the lines that have been accepted at all significant B&M retailers and into limited Super Center distribution. Polaner was up nearly 10% in net sales for the quarter. AllFruit had a solid quarter, up slightly, while our sugar-free products continued to perform very well. Sugar-free sales were up over 60% versus last year and show no signs of slowing.

We've added a good number of new customers in the first quarter and are filling out existing distribution with three additional items, making a total of seven items offered now. Maple Grove grew 25%, some of which was pricing on our dressing lines, some of it was buy-ins on maple syrup price increases that we announced effective April 1st, but we're doing well at retail in that brand as well and we're now the leading national pure maple syrup brand again. So, there's a lot of success with Maple Grove.

Las Palmas, a brand that has done very well for us over the years, had another great quarter, up 25%. A good amount of that was due to the early Easter holiday, although we have had share gains as well and are very much the dominant share on the West Coast. Our April 1st round of price increases is by and large in place. I know of only one major customer holding out at this point, so we believe that we'll see the pricing throughout the second quarter on the brands we increased. All of that means we're encouraged about our top line for the rest of the year and expect growth despite the flat first quarter.

The other part of the equation, of course, is cost and that remains very challenging. But we're encouraged here in that almost half of the gross profit decline we saw in Q1 was due to sales mix, not cost. We traded sales in Ortega, Underwood and Accent, all high gross profit lines, for sales in Maple Grove and B&M and other brands which have typically lower margins than those three that declined in sales. That should not continue as the year goes on.

We do see higher costs from 2004 continuing to affect some of our lines, such as B&M and Maple Grove. We have not increased price on B&M and don't expect relief there. We have taken price on Maple Grove maple syrups and we should see some offset there. We are seeing some commodities, like ham and bean futures for instance, pull back in cost, but costs are typically higher than this time last year. So the relief is not there yet on the cost side.

In addition, we have recently seen cost increases on several of the lines we have co-packed. We anticipated those increases and we took price on those lines as of April 1st in anticipation of the cost increases, so we're covered there, I think. Packaging is still higher than it was this time last year as well. The maple syrup crop looks to be a normal crop, which means prices in Canada should remain the same. And on the currency side, the dollar has firmed lately, which makes us hopeful that we can keep syrup flat this year and perhaps even reduce them due to a reorganization of our buying structure in Canada.

Energy, of course, remains a problem as well. our distribution costs as a percent of sales were flat for the quarter. But hidden in that was a significant increase in the amount of product picked up by customers. This reflects growth in our business and theirs with customers like C&S Wholesale, who typically pick up orders. Since the pickup allowance is a discount off of sales, that cost is netted against sales instead of showing up as a distribution expense. But pound for pound of shipped product, we are seeing cost increases similar to what we saw in Q4 of 2004. After a brief sag in early Q1, fuel surcharges have returned to the Q4 levels and remained there throughout the quarter and into the second quarter.

One offset to these cost increases will be the consolidation work we've been doing with the Trappey's facility. That project is on schedule and budget for the July 1st shutdown date. We took some of the expense charge in Q1 and we'll take the balance in Q2. We don't expect that the cash portion of that charge related to the plant closing will be greater than the $600,000 estimate included in the 10-Q.

CapEx should also be inline with estimates and we expect our annual CapEx spending to remain in the $6.5 million range. Our Maryland facility, which is taking on the bulk of the Trappey's volume, has already produced Trappey's peppers and retail and industrial Trappey's hot sauce items. At this point, the facility in Louisiana is basically operating to run out materials in that location.

Bob noted also that the selling expense is down. That's a result of changes we've made to brokerage and sales incentives where we've pulled back compensation to our brokers to what we consider more normal levels. As far as M&A activity goes, we continue to look at potential acquisitions, but are finding prices too rich still. We dropped out of several options this year already. In each case, the asking price was not justified by the potential EBITDA we saw in the business. So we will continue to work at M&A because we believe it's an important part of our growth strategy, but we will be a patient buyer and we do not intend to overpay for our acquisitions.

Looking forward, we expect a firming in the business on both the top and bottom line. Price increases should help margins as we go forward and, as I said, our new product initiatives should help sales. We're going to have to watch the retail markets closely for the consumer effect of these price increases and our competitors activities around the price increases, but that dynamic should be manageable. We're watching that very closely.

We remain confident in matching last year's EBITDA number, barring any further cost pressure, which we don't see happening at this time given current conditions. The balance sheet remains solid with $23 million in cash at the end of Q1 and the business is very good. We look forward to paying our second annual dividend announced last month -- or second quarterly dividend, excuse me, announced last month, next week on May 2nd.

With that, I'll open the call up to questions. Operator?

Thank you.

[Operator Instructions]

We'll go first to Leonard Teitelbaum with Merrill Lynch.

When I take -- can you hear me?

Yes we can, Leonard.

Okay, good. When I take a look at the cash, I got to tell you something, I think you did better than I thought you were going to do. Congratulations. Are you satisfied with where your prices are now or, like other people in your -- in the industry, may need one more to get to where you feel comfortable?

No, we think...

...that you didn't think there were going to be unusual cost pressures until the end of the year, that's a pretty bold statement and I'm wondering if you could -- in your answer if you could comment on that as well.

Well, they tie together. We think we've seen the bulk of the cost increases we're going to see with the business with the commodities. Packaging is a little bit of a wild card still, but it hasn't gone up recently and I frankly don't see any significant driving force there to increase packaging costs. Energy, too, is a wild card. It's at the top of where it was all last year and isn't giving us a lot of relief. But we don't see a huge amount of increasing pressure from where we were in the fourth quarter of 2004. so having said that, the price increases we've put in place should be adequate.

Would we like to take more price increases? Yes, we would, but we're waiting to see whether there's sticker shock on the consumer side out there, one. And two, we don't know whether our competitors are going to allow us to take more price increases. We're still waiting for people to follow in one or two places.

Now, this switch, David, on a -- on your basically pay-for-performance not for promise paradigm that you've got, should that be firmly in place beginning this quarter or is there still some kinks to work out?

I think it's a thing that has to evolve over several quarters. You have to pull away from the promotional activity that's not getting you anything and you have to wait for the consumer turn to catch up with the inventory that's implied as you're pulling that inventory out of the system. So I would think it takes a couple of quarters to do that, but I don't think it'll be as severe in second quarter as it was in first.

Now these promotional allowances, are they direct to consumer or are they commissions -- additional commissions or are they promotion to the retailer.

They're retailer promotions where you start tying IRI to -- what you sell to the retailer on promotion to what they sell to the consumer on promotion and you look for the big disconnects and try and understand where inventory is moving around.

So you're not going to be switching what would have been promotional dollars into more consumer spending?

We would love to do that, but I don't think we're ready to say we're able to do that.

Okay. And just a couple of financial questions. Did you -- will you be paying anything on the B shares this quarter?

The B shares are an annual dividend. The first time the B shareholders are eligible are for the full year of fiscal 2005.

That'd be first quarter 2006 we would pay out...

I'm sorry, you were right. That was my error. I forgot that it was 2006. I had 2005, I'm sorry. Okay. And the final thing is I applaud your statement on looking for acquisitions. Do you think this is a time to start looking for them given some of the margin pressures that you've seen? I'm just trying to kind of get in your head a little bit here that...

Well, we're always looking for them in that if you don't keep the pipeline full, it takes an awful lot of time to start the pipeline from scratch. If we stop today and say, "Okay, we'll restart three months from now", it would be six months before we'd even be near anything. So, it doesn't hurt except for time and effort to be looking at stuff. You just have to be patient and, you know...

But is this -- ?

As the old deal makers, you hate to...

You don't want to get out of practice.

Well, no. You hate to walk away from things, but we also like to think we're sensible about it, so we walk away.

Yes, but you've got -- but how would you -- let's assume one came along. How would you finance it?

Totally depends on the size of the acquisition, Leonard. Obviously if it's a very small one we do have cash in the business that we could use. We might be able to use the revolver for a smaller acquisition. We're told we can access the high yield market in the right circumstances, but probably only to the tune of about $50 million. Beyond that we would have to go back to our underwriters and look for a secondary offering.

Aren't you running pretty close to your cash requirements now the way the EIS is written?

Well, we basically self-fund the EIS structure during the course of the fiscal year. Really, the cash we had at the beginning of the year is really excess to our needs over the course of a full year. And in addition, that cash actually keeps building at a $6 million plus number each year.

Yes, if you looked at the first quarter and took out -- the unique event for the cash at the end of the first quarter is the bond payment. So on a comparable basis, we're ahead of where we were at year-end given there's no bond payment in the fourth quarter. So we're building cash on the balance sheet in that context.

And moving on, we'll go next to Kumar Asultan (ph) with Piper Jaffray.

One question here. How sensitive is the gross margin ratio to volume? I'm wondering since the last part of the production is co-packed if that leads to lower fixed costs or how does that work?

Yes, it certainly does give you less exposure to volume impacts because half the cost structure is outside our facilities and we don't necessarily feel that lower volume in an overhead absorption situation. But there is some pressure, but we really think we've got ourselves formatted to tolerate the volume where it is and we think it's going to grow as the year goes on and that that should not be -- that should not be a consideration in the P&L.

Okay. And then with the sales and marketing, the reduction in sales and marketing, it's 11.2% of sales now. Is that a level maybe -- is that the level going forward or do you even have more benefits that are coming up?

Well, we'll continue to see lower sales expense going forward because we basically took all the brokerage that was in excess of a certain rate and reduced it to that rate. So there's a year-to-year benefit there from a sales expense point of view. Some of the marketing expense will come back because there's a matter of timing of when you spent the marketing money. So our expenses may be higher going forward on a marketing side, but the sales side should continue to be a benefit.

Okay. And you are pretty much done with -- out of the brokerage system. That's complete?

We're not out of the brokerage system. we just took the brokerage to what we feel is typical rates.

Yes, yes, yes. That's what I meant, sorry.

Moving on, we'll go next to Steven Weiss (ph) with Mindflow Capital (ph).

David, I have a couple of questions for you. Regarding your competition, recently over the last couple of months, your competition has been improving and putting in strategic initiatives for technology to help them reduce their sourcing costs with their suppliers and establish better lines of communication and collaboration between themselves and their suppliers. I would like to see if you can provide some color as to what you guys are doing, some new strategic initiatives on your part to really reduce those sourcing costs, improve those lines of communication with suppliers and collaboration to help you really achieve top line growth?

I don't think -- I'm not quite sure who you're talking about there and exactly what systems you're talking about, but we're -- what we have done typically, half of our volume is bought through co-packers. We challenge ourselves all the time on whether that's the most efficient co-packer and is that the most efficient cost. We've changed several co-packers in the last year. We probably will change one or two brands this year because we're finding lower costs.

As far as materials and everything that we use, what we're trying to do is consolidate our buying with specific people. So what you saw effective January 1st this year is we've consolidated most of our glass purchasing with one supplier for an annualized savings of over $1 million. We're consolidating our packaging primarily with one supplier. That should save us money, too. So it's basically marrying yourself to specific suppliers to try and get volume discounts and get better services as we go forward. But it's a point-by-point initiative. It's not something that we've done in a major system sort of way.

Are you running any kind of cost modeling or supplier scorecarding analyses to make sure you're always getting the right supplier base mix?

That's much more sophisticated than we are at this point, I'm sorry.

Our next question today is from Reza Bahatsaday (ph) with Lehman Brothers.

The volume shortfall, Dave and Bob, was that in line with your expectations?

Yes, it was. We could have continued doing the promotional activity we did with some of these people and brought the volume in. It's kind of we meant to do that, yes.

Okay. And then was the volume shortfall or decline basically in the same brands that you expected at the beginning?

Yes, absolutely. Those were the brands we were targeting for this pay-for-performance initiative.

Okay. And then on the competitive front, which areas are you kind of ahead of the pack in terms of pricing initiatives and where are you waiting for the competition to catch up with you?

That's an interesting question. Maple Syrup is probably the most dynamic situation and it really is a customer-by-customer thing where we've seen our major competitors announce price increases comparable to what we have, but then put back promotional moneys or bill-backs or whatever you want to call it to basically keep their price where it was in the first place. And that's one of those things you feel your way through. I was just out on the West Coast and there was a customer out there where we had taken the price increase.

Our competitor had not. We were very significantly different in price on the shelf from our competitor. We'll fix that. we'll go back to that customer and put in place something that makes us competitive with that competitor because we don't have a choice. And frankly we don't know how they sustain this kind of thing over the long run, but we will respond to competition where we have to. Right now it's very spotty and scattered.

And then on the April 1st price increases, you really -- we have to wait and see what happens on shelf price and we track that very closely, key customer by key customer, item by item, to make sure our shelf price is moving up reasonably commensurate with the price increase we gave the retailer. And our competition's doing the same and where we're not competitive, we respond.

Okay. But I mean pricing increases, for instance in Underwood and B&M, are those pricing increases matched?

Are they what? I'm sorry.

Are they matched by the competition?

Well, first off ,yes. Underwood, all of the meat producers have taken price up. There's really not a comparable product out there, but the Hormel's and Armour's of the world have been very aggressive on prices so we don't see a problem there. B&M we have not increased price. We actually have-we brought our retail, everyday retail prices down to parity with Busch.

Now Busch announced a price increase last September and we have basically just seen their retail prices move in the last 30 days off of that price increase, which is pretty remarkable. And we will decide what we're going to do. But obviously our price strategy worked there in terms of moving volume. And frankly we haven't given up a lot of revenue because most people were buying things on promotion and not on the regular price anyway.

But everywhere else, we have been very measured in terms of watching competition pricing and making sure we're competitive on the shelf and not behind and not ahead, frankly.

Now, besides the inventory adjustment by some of your customers, I'm assuming that you are maintaining your shelf space and SKU assortment at your major customers?

We're actually trying to expand it with new products.

Okay, but your shelf space is essentially at least stable?

Pardon me?

Your shelf space is at least stable?

Absolutely.

Okay. Now, on Ortega you mentioned a West Coast issue. But in general, how do you anticipate Ortega portfolio to perform going forward? Are the comparisons difficult or are the new products likely to start to help the business?

Well, it's a little the base business and the new products. I think the base business is going to perform very well. We've expanded distribution of the base business in terms of regular grocery customers. It's in more grocery customers than it was last year. We've expanded that base business in Super Centers and points of distribution in Super Centers and we've placed products in clubs as well.

Now, the new products kick in on top of that and those new products are getting broadly into existing Ortega customers, they're getting into Super Center distribution and several of them are already in warehouse clubs and doing very, very well in warehouse clubs. So we expect, frankly, both. We expect the base business to be very healthy and we expect the new products to kick in and take it above where it was last year.

And what about Emeril? The comparisons are difficult, but what can you do to combat that and continue the growth of that business?

Emeril is all about execution on the grocery side where we have to get the distribution. We haven't been getting the distribution as broadly with our new product launches as we did in the past. The slotting requirements are starting to come in now where they weren't in the past, so we have to make investment decisions when we go to grow that business in grocery.

The first quarter really had, as I said, two problems. We had very significant pipeline fill going into Wal-Mart last year. Those products are still in Wal-Mart Super Centers and still performing well in Wal-Mart Super Centers; you just didn't get that pipeline bump in this quarter. And then the negative, if you will, for the quarter was the fact that we didn't get warehouse club rotations on pasta sauces and barbeque sauces that we got last year.

We have to find combinations that intrigue the warehouse clubs. They don't tend to repeat rotations nowadays. They want to know what the new and exciting thing is. And by the way, that new and exciting thing needs to sell a whole lot of product. So you can't go in there with something esoteric. You have to go in there with something mainstream and that's what we have to do to succeed in that channel.

But the base grocery business is solid. The base Super Center business is solid. We need to execute better on distribution in both of those areas and then we need to tackle that warehouse club initiative as well.

Bob, working capital for this year should it be a wash (inaudible)?

It should be very flat. We still are expecting some benefits in inventory reduction that should help improve it. But worse case, it should be flat year over year.

We'll go next to Duane Fennimore (ph) with First Capital Alliance.

I had a quick question. How do you gauge your ability to pass on cost increases to customers? I imagine to some degree there's a little bit of art and a little bit of science to that and I just wanted to get your view on that.

There's a lot of art and a little bit of science to it. I think the first measure is what do we think the consumers can stand in it and most of these increases are modest increases. You're talking a consumer's going to see $0.10 a unit increase on the shelf. So where Underwood costs $1.39 on a shelf, it's going to cost $1.49 on a shelf or something like that. so you have to understand that. We're not doing anything extreme here in terms of price increases. And by the way, that's the first price increase the consumer has seen in 10 years in a lot of these things.

Secondly, you have to judge, okay, are we alone in seeing these cost increases or is all of our competition seeing it, too, and is the general sentiment that, yes, we all need to increase price because in certain categories, if the competition doesn't follow, like I just illustrated on maple syrup, then you can have a problem. So as you go out there, you hope somebody follows if you're leading. And in a lot of cases, we don't lead, we follow.

So that's an easy gauge of whether your competition's going to move or not. And then, like we said, with something like B&M where we judged that our shelf price was not competitive, we actually went in the other direction. So pricing is very much of an art in terms of trying to figure out what the consumer and the competitor is going to do. And we like to think there's some science in it as well.

Okay. And one last question. Could you please describe for me in a little more detail the opportunities that we have for expanding distribution of the Emeril and Ortega brands in Super Centers and warehouse stores? That, to me, seems like a very significant opportunity and I was just wondering how you plan to execute on that.

Well, it is an opportunity but it's an opportunity that's not without a cost. And that's our dilemma, if you will, is we have to find where we can save money in other areas to afford the slotting moneys to expand Ortega as much as we would like to. And Polaner, frankly, and Emeril. But the opportunity -- to quantify the opportunity, a good example would be the Emeril barbeque sauces and mustards, both of which are excellent lines and do very well where we have distribution.

But the distribution nationally is maybe 20% or so and we feel that a specialty product like that can go into about 80% of the country. But now we have to invest money to get that additional distribution so we have to do that step by step. We can't just go out there and spend millions of dollars.

There's not the immediate payback and obviously we need to produce consistent financial results. So that's the big constraint in growing Ortega and in growing Polaner and in growing Emeril is how much distribution can we afford to do and how much time and what's the payback and that really is the only thing holding us back on those lines. Otherwise, we would be much more aggressive on driving distribution in those lines.

Ortega, the opportunity is significant. We have very little Ortega distribution throughout the southeast United States. And that's one of those things that's additive as we get grocery distribution and show that it's a successful line, which we are very confident it would be, now Wal-Mart Super Centers looks at your distribution in grocery stores in that area and says, "Okay, I need to have those products in Super Centers in this region" and you get a double benefit, if you will.

Okay.

But it's all a financial constraint right now. I could spend $10 million today on distribution if I could afford the -- if I could afford to change my EBITDA that much for one quarter.

And we'll go next to Mark Enberg (ph) with Multifinancial Security Corp.

Just curious, I'm fairly new with using the EIS. I'm an investment advisor rep dealing with a lot of retirees, always looking for income-oriented investments. Pretty familiar with B&G Foods, like your brands. What is the possibility of -- I understand with the EIS there's two components, the cash dividend and then the interest payment on the bond. Continuing the cash dividend, what was the original issue with the security that it was guaranteed for the-well whatever the first year. Will you continue to pay the cash dividend into the future or what's your feeling about that? like I said, I'm always looking for income-oriented investment for -- investments for my clients and just trying to get a little better handle on this.

The instrument is about paying a dividend and about paying the interest and basically is designed to be a yield instrument. In that context, we think continuing to pay the dividend is one of the ways we're going to maintain and grow shareholder value. But I have some lawyers somewhere on this phone that would jump through the phone if I promised you we could continue to pay that dividend absolutely positively. That's done at the discretion of the Board and there's really -- I would be irresponsible to promise you that's going to continue.

Sure, but it's quarter to quarter.

You recognize the importance of that in maintaining and growing shareholder value.

Yes, I like the security, I use it. I just realize that anything happened with that cash dividend portion it could really affect the share price and then...

Yes, but I think what you have to judge there is what is the health of the business and what is the ability of the business to continue to generate cash that would pay that dividend. And then you have to depend on the Board to make the right decision as far as shareholder value is concerned.

And this security has been out for how long, this -- ?

Since last October.

Last October. So we don't even have a year under...

No, this is the second dividend that's being paid on May 2nd.

Right. And just from what I had read, after the first year there's a possibility of, I don't know, suspending that cash dividend or -- ?

There is the possibility that the Board would say, "We're not going to pay the dividend." That doesn't seem likely. But again, I can't tell you what the Board is going to do.

Sure. Okay, just trying to get a feel for it. Really appreciate your time and I live here in Maryland. I'm very familiar with B&G Foods over here at Hurlock, Maryland with the plant and the pickle plant in Sharptown (ph). I've seen them all.

You certainly are familiar. Thanks for your interest.

We'll take our next question from Roy Efier (ph) with Trilogy Capital.

I have a question about the Emeril performance. What do you think is causing that particular line to underperform?

I'm going to take this a certain way when you say under perform. Really, we think the Emeril line could be more than it is. It's our ability to invest money behind the line from a marketing analysis slotting point of view; there's a limited amount of money we can put behind it. The other handicap in the line, I think, is we took that line through specialty distributors because of the lower expense of getting the distribution by doing that.

The penalty you pay by going through specialty distributors is there's another margin in the equation and the price points are higher. And, of course, when you look at a jar of pasta sauce on a shelf -- for instance, if we were to go direct into a grocery warehouse that price might be 2.99; through a specialty distributor it's 3.99. So the consumer has a higher price to pay, and the decision may or may not be different depending on that higher price.

Now, the downside, of course, is when I show up with a jar of pasta sauce at the grocery warehouse and say, "I want to put this in your warehouse", it's not unlikely that they're going to say, "Well, that's great. Give me $100,000 and you can do that." So there's a bigger up front investment that B&G Foods has a limited ability to afford to do that and we have chosen not to do that so far. So really, the line probably could be more than it is, but it's a matter of how much money do we have to market the line and how much money do we have to buy distribution for the line.

And does that explain why the numbers are down quarter over quarter?

As I said, the first quarter, really we have very consistent retail performance on the line in terms of consumer takeaway. We had very large placement of the products into Wal-Mart Super Centers in the first quarter last year and what you have is a big pipeline buy-in, if you will, for them to fill all their stores and their warehouses...

Got you. So we're just lapping the first buildup of inventory.

correct.

Okay. A follow-up along the same lines. How does the Emeril contingency feel about the performance vis a vis the licensing agreement? Meaning, what do you have to do to make sure that you keep that license?

Well, the license has a very formal mechanism in the contract for us keeping it. And I guess how they feel about it, the answer would be that the hurdle for us to basically keep the license in perpetuity was $10 million in sales a year. Our factory sales on this line are just a little under $30 million a year. So the line is doing three times what we ultimately hoped it might do as a line of products and I think they're very pleased.

And that goes through what year?

It really evergreens as long as we stay above that 10 million threshold with a CPI adjustment, so it essentially stays 10 million.

Great. Any other sentiments on the B&G top line erosion?

Well, I think we went into it in pretty much detail -- oh, you mean B&G brand?

Yes, B&G the pickles.

Really, a lot of that's a continuing issue we have with some food service customers. I think you're going to see a very good second quarter on B&G. Some of the food service business has revived and we're going to be very aggressive at retail in the second quarter.

Have you seen competition at retail aggressive and did that somehow negatively impact the top line?

It didn't affect the top line because it's something that hasn't changed over the last few years. New York has been a battleground for quite some time as far as branded competition. Vlasic is spending a lot of money and Mt. Olive is spending a lot of money and we're holding our own against them.

So when you say holding your own, are you spending money to keep up with them or do you think that you're holding your own without spending a comparable amount?

We're holding our own without spending more than we usually do.

Got you. So that's throwing off just as much cash flow as it has been historically?

Well, that's another question and the answer to that would be from a revenue side it's fine. We've had cost issues in the last couple of years, so the cash throw-off isn't as much. We've talked about those on previous conference calls.

We'll go next to CS First Boston and Robert Moscow (ph).

Quick question. I didn't quite understand something. You said that price mix helped 1.8% on the sales line, but mix was a negative on the gross margin line by negative 1%. How does that happen exactly?

Well, you're selling higher priced units. You're selling less units, but higher priced units, if you will.

Yes, it wasn't 1.8%.

It was 1.8 million, I think.

Sales went down on us 2.4 million relating to unit volume. But we offset a lot of that with price increases on the units we sold and that offset was 1.8 million. A lot of the price increases take effect during the first quarter of 2005.

And then the gross profit is basically your mix shifted from high gross profit items to lower gross profit items.

Okay, so if the 1.8 million benefit from price mix, it was really mostly price that helped the top line?

A majority of that is price increases we've seen from the -- initial price increases we put in the latter part of 2004.

Got it, great. And Ortega you said is down 2.9 million. I apologize, but one more time, what is causing the decline year over year on Ortega?

Well, about half of it is, as we said, we've gone to a system where we're walking away from people we're spending promotional moneys with but not seeing the performance against the consumer that drives consumer sales. So, when you cut those promotional moneys off to those people, your sales are going to have a one-time hit, even though sales to the consumer ultimately shouldn't change because that money was never going to the consumer in the first place.

So about half of it was that. Promotional activity around key events and things is very, very important to the brand and we had some West Coast customers who missed several big promotions in the first quarter. Were given the money, were -- we were promised the performance. We did not see the performance. As I said, we've addressed that and second quarter is rolling forward with performance, but we really fell out of bed with those customers.

So that money you gave them in Q1 is now being utilized in Q2?

No, it's Q2 money is being used in Q2, but we are going back to those customers and saying, "You owe us that money back."

Gentlemen, there are no further questions at this time. I'll turn the call back over to you for any additional or concluding remarks.

Okay, thank you all very much for participating in the call and I hope we answered all your questions. And we're looking forward to having a successful second quarter and speaking to you at the end of that. thank you.

Once again, that does conclude today's conference. I'd like to thank everyone for joining us today.