B&G Foods Inc (BGS) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the B&G Foods Inc. second-quarter 2005 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded and I would now like to turn the conference over to Mr. David Wenner, Chief Financial Officer (sic) of B&G Foods. Please go ahead, sir.

Thank you, Jean. Welcome, everyone to the B&G Foods second- 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 Website at www.BGfoods.com and in our quarterly report on Form 10-Q filed today with the SEC.

Before we begin our formal remarks, I need to remind everyone that part of the 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 conditions. We also will be making reference on today's call to certain non-GAAP terms like EBITDA and adjusted EBITDA. Our reconciliation to GAAP terms is provided in today's press release and in our quarterly report on Form 10-Q.

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

Thank you, Dave. For the second quarter, net sales increased 0.4 million, or .4%, to 94.1 million from 93.7 million in the second quarter of 2004. Sales increased .5 million related to price increases and product mix improvements. This was slightly offset by a decrease in unit volume of 0.1 million. Sales increases were as follows. Ortega increased 1.5 million or 8.8%. Polaner increased 0.5 million or 6.6%. Sassoon grew by 0.5 million or 67.2% and Emeril products increased 0.4 million or 5%. Lower net sales were seen in B&M Baked Beans, which decreased 1.1 million or 12.2%, Underwood, which decreased 0.5 million or 9.5%, Maple Grove Farms, which decreased 0.4 million or 2.9% and Joan of Arc products, which decreased 0.3 million or 22.1%. Net sales for all other brands decreased in the aggregate by 0.2 million or 0.6%.

Moving on to gross profit. Excluding our restructuring charge, our gross profit during the second quarter decreased 2.6 million, or 8.8% to 26.9 million compared to 29.5 million in the second quarter of last year. Gross profit, expressed as a percentage of net sales, decreased 2.8% to 28.6% in the quarter from 31.4% in the second quarter of fiscal 2004. Higher transportation costs primarily relating to fuel surcharges decreased gross profit margin by 1%, while higher cost of meat decreased gross profit margin by 0.5%.

Increased slotting costs decreased gross profit margins by 0.5% and higher cost of beans, maple syrup and cans, which were partially offset by a shift in the mix of products sold, decreased gross profit margins by the remaining 0.8%. Effective July 1, 2005, we closed our New Iberia, Louisiana manufacturing facility as we had previously announced. We recorded as cost of goods sold, a restructuring charge associated with the plant closing relating to employee and other compensation of 0.4 million and a non-cash write-down of inventory land building equipment of approximately 2.8 million. During the second quarter, we expensed 3.1 million of these costs. We had previously expensed 0.1 million of the 0.4 million employee compensation and other costs during the first quarter of 2005.

Turning to the quarter's operating expenses. Sales, marketing and distribution expenses decreased 0.6 million, or 4.9%, to 10.8 million for the second quarter of 2005 from 11.4 million in the second quarter of last year. These expenses as a percentage of net sales decreased 11.5% from 12.1% a year ago. This reduction is primarily due to a reduction of media advertising of 1.1 million offset by an increase in brokerage and salesman commissions of 0.4 million. All other expenses decreased 0.1 million.

General and administrative expenses and management fees increased 1.1 million, or 107.2%, to 2 million for the second quarter of fiscal 2005 from 0.9 million in the second quarter of 2004. The increase was primarily due to incremental costs associated with Sarbanes-Oxley of 0.3 million and public company costs of 0.3 million.

In the first quarter, the Company's operating income decreased 6.2 million, or 36%, to 11 million from 17.2 million. Operating income expressed as a percentage of net sales decreased to 11.5% from 18.3% a year ago. Net interest expense increased 2.6 million, or 33.8%, to 10.4 million for the 13-week period ended July 2, 2005 from 7.8 million in the 13-week period ended July 3, 2004. The average debt outstanding increased approximately 37.8 million in the second quarter of fiscal 2005 verse the second quarter of fiscal 2004. The effective interest rate for the outstanding debt during the second quarter of 2005 under a post initial public operating capital structure was higher than the effective interest rate for outstanding debt during the second quarter of 2004.

Regarding EBITDA, I would like to take note that 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 12.7 million in the second quarter of 2005 compared to 18.8 million in the second quarter of last year. Excluding the nonrecurring charges relating to the Louisiana plant closing, our EBITDA was 15.8 million this quarter.

Capital expenditures in the second quarter of fiscal 2005 were 1.9 million. Most of our capital expenditures were for purchases of manufacturing computer equipment and the move from our Louisiana facility to our Maryland facility. We continue to foresee modest capital expenditure requirements going forward.

Moving onto the balance sheet. We finished the quarter with 22.4 million of cash compared to 28.5 million at the end of fiscal 2004. We also finished the quarter with 405.8 million in long-term debt and over 87 million in shareholders equity.

A few cash flow items. Expected cash taxes in 2005 are zero. We continue to forecast planned capital expending between 6.5 and 7 million. 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 August 1st, we will make a cash payment of 42.65 per EIS unit to holders of record as of June 30, 2005. This reflects a cash dividend of 21.02 for class A share of common stock and an interest payment of 21.45 per senior subordinated note. I will now turn the call back over to Dave for his remarks.

Thank you, Bob. Second quarter was a very challenging quarter for our business and our results certainly reflect that. If we could put the write-down associated with the New Iberia facility shutdown aside for a moment, the quarter boils down to two issues, escalating costs and limited ability to pass those costs through to our customers.

On the cost side, second quarter was the most difficult quarterly comparison to 2004 that we should see this year. Our costs began ramping up primarily in the second half of the year last year and of course they were in full effect in this past quarter. In addition, several cost factors worsened in the second quarter making it a top quarter. When you break costs down year-to-year, the increases are in four areas; cost of goods sold, trade spending, delivery and G&A. Our first-half results reflect about $6 million in cost increases in these four areas offset to some degree by price increases and cost savings.

Cost of goods accounted for approximately 3 million of the $6 million cost increase driven by increases in cost in Underwood, B&M, Maple Grove and Ortega. B&M experienced the largest increase of these four because of higher bean and packaging costs. We have seen additional increases in both this year making the situation worse than it was at the time of our last earnings call.

Underwood continues to see higher meat costs versus prior year in all three key meats; ham, chicken and beef. Even though ham has come down considerably from its high, it is just beginning to reach last year's same time cost. Higher can costs are a negative factor in Underwood as well.

Maple Grove costs have increased because of maple syrup prices in currency exchange rates. So far, our financial results reflect higher costs from the 2004 syrup crop, but 2005 crops will soon come into play. To some extent those costs are still fluid. The syrup crop was typical in size this year but very high in quality. That means that there's going to be cost pressure on lower grades, which way well move the average syrup cost higher. Adding to that is the stubborn strength of the Canadian dollar. Exchange rates remain about 3% worse than last year, even as the U.S. dollar strengthens against most major currencies.

Ortega is also seeing cost increases in some of its lines, in particular, refried beans. Again, affected by high commodity costs and packaging costs. Many of our other brands have seen very modest cost increases or no increases at all and we've actually reduced costs in several lines. To me, this reinforces the value of our broad portfolio. Even though our results have suffered because of cost increases, our material cost increases to this point have been isolated to four of the 16 brands helping us do better than some other companies in the food sector.

Trade spending was the second factor and has increased so far this year, a good amount of that a function of the way we account for price increases we didn't realize. Beyond that, however, the cost of executing promotional activity with our supermarket customers continues to increase, typically with no change in the activity itself and no better consumer sales. Our Pay-For-Performance initiative prevented this cost increase from being even worse but the creep in trade spending is something we can not allow to continue.

As a result, I have instructed our sales force to reevaluate all announced promotional activity on several of our brands. We made due promotions on those brands but that activity will be zero based and promotions will be funded as justified by gauging consumer lift versus expense. Activity in other brands will be curtailed judiciously to achieve the same goal; efficient promotions that sell more of our products to consumers.

Distribution costs have been a growing problem for everybody, in particular, for us in the last quarter and will continue to be an issue for the foreseeable future unless we see a decrease in oil prices. This past quarter distribution costs hit us very hard as fuel surcharges jumped to record levels. Comparing year-to-year, fuel surcharges are triple what they were last year at this time. That is currently costing us approximately $200,000 per month in added cost. The distribution increase of approximately $900,000 in the second quarter had two elements; the first, about 600,000, the result of higher fuel costs. Adding to that was an unusually high level of inventory transfers within our distribution system as we changed the Joan of Arc co-packer and consolidated warehousing in New England.

If oil prices stay at this level for the rest of the year, we estimate that distribution costs will be at least another $600,000 greater in the second half than they were in the second half of 2004. There is also an increased facility cost because of higher energy, but to date, we have offset most of that cost with other savings.

Finally G&A spending increases have two causes. The first being the cost of being a public company and then the second, the compliance with Sarbanes-Oxley. The increase for public company costs net of previous fees now appears to be close to $1 million primarily because of higher D&O insurance and some other fees. Sarbanes-Oxley compliance work will cost us approximately $1 million this year as well. That number should go down substantially after 2005 unless the regulatory agency surprises us with new requirements.

Unfortunately, more cost increases are on the way. We have been experiencing higher costs on our co-packed Joan of Arc lines since the latter part of the second quarter. We switched co-packers to reduce this increase. We will see increases on Las Palmas and some of the Ortega products as soon as our co-pack contracts allow those increases. In both cases, we have announced price increases intended to offset those cost increases but we have not seen the benefit yet of the pricing on those lines. So the net effect is unknown at this time. As I mentioned earlier, the subtleties of the maple syrup crop may cause those prices to increase as well.

We are working hard on cost reductions to offset those increases but it is not possible to recover our earnings just through cost reduction. That is why we have raised prices and are attacking promotional spending. The cost saving opportunities we have include the New Iberia shutdown, which we anticipate will reduce costs by as much as $0.5 million in the second half and the warehouse consolidation I referenced, which we expect will save us approximately $100,000 annually. We have been focusing on improving efficiencies at all of our manufacturing facilities for the past 12 to 18 months and that effort is reaping rewards. We expect a 1 to $2 million benefit this year as efficiencies lower our labor and overhead costs.

In addition, we still hope that the new crops in the Fall will lower the B&G brands produce costs and bean costs on a number of brands, which would benefit a few of our product lines. We have streamlined our broker relationships and reduced brokerage via that effort and we expect that to save us between .5 million and $1 million for the entire year this year. More efficient buys on marketing programs and marketing information should also save us expenses there.

Moving onto price. Increased revenues from price increases and reduced promotional spending are the key elements of stabilizing our results and returning to more normal levels of profitability. In the latter part of 2004 and first half of 2005, we announced price increases that, if realized in full, would yield another $10 million in revenue. We expected to see about 70% of that given promotional spending and other factors. As of June, we're seeing about 40%, or $4 million, in annualized benefit. Retail products were approximately 8 million of the original $10 million in price increases and account for all of the gains we're seeing so far. Food service increases were the other 2 million. So far, we're not realizing any of that revenue. Resistance to price increases in food service has been significant. We have actually lost sales where we have pushed hard on price increases and competition is apparently not moving with us.

The slow progress in pricing has led us to believe that more of our revenue gain must come from promotional spending than previously planned. That is why I announced that we would go to zero based promotional spending on a number of the brands. This takes Pay-For-Performance initiative to the next level in terms of challenging ourselves on the efficiency of our promotional spending. The change will be on select brands, as I said before, that we believe are not particularly responsive to promotions and to select lines within brands that, in general, are promotion sensitive. A good example of the latter would be the 18 ounce glass product within the B&M line. We almost certainly promote that too often and too deeply. The consumer who buys that product is buying it more because they want that specific product and less because it is on sale.

There is a lot of moving pieces here, which illustrates how dynamic the business has become in the last six months. A good case study of what is happening is the Underwood brand because it has seen significant cost increases, has had two price increases and it was the first brand picked for the Pay-For-Performance initiative. Cost of Underwood products is up $900,000 in the first half of 2005 while we have seen about $600,000 in benefit from pricing versus a perfect pricing result of 1.2 million and a planned 1 million. Underwood sales are down 1.2 million because of the Pay-For-Performance initiative but when we look at the sales we have lost because of the initiative, more than 1.3 million of the sales we have walked away from were inefficient sales.

Meanwhile, consumer turn, according to IRI, is off a few percentage points while our sales to non-IRI customers are up 16%. Wal-Mart alone is 26% of Underwood sales and has double-digit gains this year. That tells me that the consumer business is healthy and that factory sales will recover. But in the short-term, we must endure the pain of those lost sales and the shortfall on the cost price to dynamic. In the case of Underwood, that is a substantial short-term EBITDA impact and we have seen it in the first half of this year. Hopefully that helps all of you understand the dynamics of the business a little better. Let me take a few minutes to go through more typical commentary and then we will take your questions.

The first quarter was solid on the sales side, up slightly, which was a good result given our Pay-For-Performance initiative. I was especially pleased to see the brands that we had targeted for growth; Ortega, Polaner and Emeril, all achieved that objective in the quarter. Ortega net sales were up almost 9% for the second quarter, much of that due to new products. Our new hard and soft taco kit and two new cheese products; a salsa and cheese bowl and cheese cups, are being very well excepted in the trade and have contributed over $3 million in sales in the first half.

Polaner continues to do well with sugar free products. The brands' net sales increased nearly 7% in the quarter and sugar free net sales increased close to 70%. All Fruit held its own while the Polaner brands overall sales were softened by weak industrial sales. Emeril net sales increased by 5% and there, we have relaunched the Emeril salad dressing line with a line of vinaigrettes and intend to launch a line of Emeril cooking stocks in the fall.

On the negative side, B&M was down 12% after a very good first quarter. That is disappointing given the marketshare data we see, all of which shows us gaining share in every key market. The Spring weather in the Northeast was very poor, however, and that may have had some effect as well as the effect from our Pay-For-Performance initiative. Underwood continued to show the effect of Pay-For-Performance on sales in the second quarter, as I have already discussed. Joan of Arc had a very strong Easter, which helped first-quarter sales and sagged in the second quarter as a result but net sales are up year-to-date.

The same is true of Maple Grove, which slowed slightly in retail and food service sales in the second quarter. But Maple Grove's net sales are up over 10% year-to-date and it remains one of the consistent growth brands in our portfolio.

As Bob mentioned, the New Iberia, Louisiana facility shut on schedule on July 1st. We recorded a restructuring charge related to that shutdown of 3.2 million, including 400,000 for severance and other expenses related to the shutdown and $2.8 million non-cash charge to write-down the facility and the land. We have put the site up for sale and estimate it will take another $200,000 in charges for the shutdown in the second half of 2005.

The production lines are in place at our Hurlock, Maryland and Roseland, New Jersey facilities and are producing the Trap A (ph) rights and Brer Rabbit products formerly produced by New Iberia. As I discussed earlier, we currently estimate $1 million in annualized cost savings from the shutdown of New Iberia. We continue to explore M&A opportunities but we still see very high prices being paid for potential acquisitions. Typically, these properties are being bought by financial sponsors and all we can think is that there is a tremendous amount of money looking for a home because we don't see the same value that they apparently do.

When it comes to M&A, we will remain patient, looking at every opportunity but pursuing acquisitions only if prices we believe are reasonable. Right now, frankly, we're concentrating more on our day-to-day business than working on acquisitions.

As we look forward, costs will remain a major issue but to a lesser degree on a comparative basis than in the first half as we measure ourselves against last year's higher second-half costs. In terms of our expectations for the remainder of the year, we are right now at a LTM EBITDA run rate of $66.2 million, which includes first half EBITDA of 32.8 million. We estimate that we're still looking at approximately $2 million of higher cost in Q3 2005 versus Q3 2004; two-thirds of that cost of goods and the rest distribution, Sarbanes-Oxley and public company costs. Assuming our sales line remains solid, price increases should offset approximately $1 million of that cost increase. Cost reductions and further revenue gains from price and promotion are needed to offset the remainder if we are to match or exceed Q3 2004 results. We're working very hard every day to meet that challenge and to overcome what we see as a very unusual cost environment. With that, I would like to open the call up for questions. Operator. +++ q-and-a.

(OPERATOR INSTRUCTIONS). Reza Vahabzadeh with Lehman Brothers.

In terms of price increases by your competitors or for that matter price decreases, can you talk about any notable price increases or actually price reductions by your competitors in any categories?

I'm not aware of any price reductions of any significance. Price increases -- basically where we have increased price, other people have increased price except maybe for the Las Palmas line. I think we have led the price increase there. On all of our other major categories where we have increased price, we are bringing our prices up to higher existing prices with our competition or to new prices that they have increased to. We're basically following in every circumstance.

I couldn't make out from your comments what was the contribution from price during the quarter. Was it about 1 million or $2 million?

It was somewhere between 1 and 2 million and the problem with nailing that down is that we are measuring it at points in time in terms of what kind of pricing we are seeing and it really changes every month and changes in a positive direction, thank God. So I would say it's between 1 and 2 million.

Year-to-date for the first six months, it's a little over 2 million that we have experienced year-to-date. As Dave said, right now, we're looking at a run rate of 4 million on an annual basis.

Do you have any expectations that that would pick up at all in the third quarter?

It has been picking up. It has been picking up a little bit every month. We're really very rigorously going through literally item by item, customer by customer, to understand why we are not getting price increases, especially on the retail side. As I said, on food service side, there has been tremendous pushback.

In terms of cost comparisons, I'm assuming that on the Underwood ham cost and chicken cost that those cost comparisons should get much easier in the balance of the year.

They definitely do, especially ham. We have seen -- and as the year goes on, they get better and better given that -- well, assuming ham stays where it is right now. What has diluted the benefit of that is the can cost increases. Those have cranked up even as we're seeing the other commodities come down.

Are you concerned about any particular cost running kind of away from you, outside of fuel, which obviously not in your control?

No, not really. Every indication is that most of these costs, if not all of them, have peaked and we're starting to see little cracks in the armor here and there. Like I said, ham has come down at least 25% from its high point. We actually have seen some corrugated price decreases here very recently. Can, I'm seeing steel prices coming down. So of course we're calling the can companies up every day asking them when their prices are coming down. The only one that probably will creep up on us some more is maple syrup.

And that is because of the FX (ph) aspect of it or the absolute raw material cost?

It's two things. It is -- the exchange rate won't give us a break in terms of the Canadian dollar getting weaker. So any purchases we have going forward this year would -- given where the exchange rate is, would be unfavorable a little bit, about 3% where it is now. Like I said, the mix of the crop is such that there is a shortage at the lower end of the qualities, which we use to blend with the higher end to get the syrup we produce. Of course, the boys up in Canada are seeing an opportunity to raise the price on that part of the crop and trying to take advantage of that.

Lastly on the sales outlook, any particular categories that you are encouraged -- in product lines that you're encouraged or that you are concerned about?

I don't have a product line that I am terribly concerned about because even where I see business off a little bit, like B&M, and some of that is Pay-For-Performance and not selling to certain customers but some of it is, we think, some second-quarter weakness because of the weather. I see very good consumer data. Our consumer data, brand-for-brand, is very solid and even where we see very slight declines like Underwood, as I said, where IRI doesn't measure consumer, we are doing extremely well. So when I sum it all up, yes, I am losing a little bit of supermarket business on Underwood but it is all moving to Wal-Mart, which by the way has pretty much the same net prices as the supermarkets. So I am indifferent who sells it.

Then Ortega, Emeril, those other categories you are comfortable with?

Emeril, we had some first-quarter problems with some pipeline in Wal-Mart and some of the specialty retailers exiting some of the products as they grew in the supermarket. That sifted itself out and the second quarter was a very solid quarter for Emeril. The new products are performing well. The new dressings are performing well and getting into distribution and then we have more products coming later this year. Ortega, our new products, we are delighted with how some of the new products have done in Ortega. We have gained distribution in Wal-Mart. We have gained club distribution. Ortega looks very good for us too.

Eric Larson Piper Jaffray.

Two questions. First, have you actually started executing your lower promotional spending rates or is that mainly a second-half event and what have you seen on volume so far?

We have started it in some of the brands earlier this year and it really wasn't a lower spending rate as much as it was just looking at some business with some customers and saying, we're getting nothing for that for doing promotions with this customer, spending money with this customer. We are not going to give that customer this money and of course, they don't buy the volume they were buying as a result without an effect on consumer sales by the way. So it's kind of an inventory affect if you will. We are going to accelerate that on some brands that we don't think are sensitive to promotion and really challenge our sales force to say I have this promotion I want to do and here is what we expect in consumer turn out of this promotion rather than sales to the grocery trade and we are going to be judicious about that. It's really a balancing act of you don't want to destroy your top line even for a brief while but you do want to have more efficient spending.

That makes sense. And then Dave, again, repeat the run rate -- I think it was adjusted EBITDA of 66 million and some change, is that your expected run rate? Is that the run rate now for '05?

That is certainly what it is for the last 12 months and the first half of '05 was 32 8, which is obviously very close to that run rate. As I said, we have about $2 million in cost increases in the third quarter. We think we have it covered 1 million so far and we're working hard to find that other million, which says we will continue at that run rate if we can do that work well.

Finally, what is roughly the range of the price increases that you have tried to take at retail? Is it 2.5 to 6? What is roughly the prices that you have tried to capture?

3% to 5% depending on the brand.

Robert Moskow with CSFB.

I seem to recall from some of the due diligence that the minimum EBITDA to pay the dividend was 67.5 million. Is that correct?

No, I don't think so. There is no number like that.

We have a fixed charge coverage ratio in the indentures that is 1.6 times, which is basically cash interest to EBITDA. That's more of a 62.5 million. But we have ways within the indentures to still pay dividends beyond that. There are baskets beyond that.

Because you do have a lot of -- you're still not exactly burning cash here. The way I calculated second quarter was pretty much flat after subtracting the dividend. Correct?

That's correct and the third quarter will be the same way. The second and third quarter is when we use our working capital and we generate a lot of cash in the fourth quarter.

Actually our inventories right now are a little higher than they were last year because the purchasing requirements on maple syrup change. So we bought more maple syrup earlier than we did last year.

Just so I'm getting the share count correct here. What I thought everyone did for last quarter was take an 18.2 million kind of a blended share count for first quarter. Are we at 20 million now?

20 million shares outstanding. There are 20 million units outstanding.

We have always been there. The initial issue was 20 million and it has always been 20 million.

Leonard Teitelbaum with Merrill Lynch.

I'm glad you got your title back. We were a little concerned out here to be honest with you.

But I don't consider Bob --

We saw Bob in your office measuring for drapes the other day. I thought we'd just pass that on. I have got just a couple of questions. Let's go back to Eric's question for a minute. Are we talking about 16 million over the last half of the year in terms of EBITDA? Did I hear -- I want to make sure -- you've got 32 8. You are projecting 66. Correct? So we should have about 34 million and I was hearing something like 16/17 or 17/16 split across the back half of the year. Does that sound about right?

Well if you're talking 16, 17 numbers, those are kind of quarterly numbers, not --.

I met by quarter. I beg your pardon. For the second half of the year, you're going to be somewhere around 30 to 31 or 31 to 32 and you're looking for a couple of mil, right? Did I misunderstand that?

No. I don't think you did. I think you heard that we have a $2 million cost lump coming at as and we need to cover that and we think we have 1 million of it covered and that is on a year-to-year comparison.

I'm sorry, it was breaking up. I'm actually out here in Pennsylvania; I think both cell phones are in use out here. Did you say 34 million over the back half of the year in EBITDA?

I didn't say anything about the back half. I talked a little bit about the third quarter.

Would you give me that number one more time? I misunderstood you.

I said on a year-to-year comparison for the third quarter, we know we have about $2 million more in cost with cost of goods, Sarbanes-Oxley, public company and distribution. We know we have about $1 million of benefit from price and we know we have to find that other 1 million to come flat with last year; we need to find that in price promotion or cost savings and that is our objective.

That's fine. I'll figure the rest out in a minute. One thing I am trying to get at, you had said you had done 1.9 million in CapEx so far this year. It would be minor going forward and then you said you are still going to stay with the about the $6 to $8 million. Is that correct?

The 1.9 million is for the second quarter. So we are right on pace to spend somewhere between 6.5 and $7 million that we have been saying now in the last number of calls.

Has been no change in that?

No change. We are managing to that number.

Now, when I take a look at the cash, obviously it was below what we were all looking for. I am interested in your comment that you think that, given your cost structure, you are going to see some easier -- well basically, not the large obviously increases year-over-year but it sounds to me like you're looking for some pretty flat costs in the second half. Is that the message you intended to convey here?

Well, except for distribution, yes. I think the cost -- well, no. I said the costs are up $2 million going into the third quarter. When we price out the inventory we have, what we know public company costs are going to be, what we know Sarbanes-Oxley costs are going to be and what distribution costs are today, third- quarter costs are up $2 million. What it will be in the fourth quarter -- fourth-quarter cost of things, all things being equal, cost of goods should ease some because costs of good ramped up for us all through last year. The cost of goods comparison should be easier for us. The Sarbanes-Oxley will be what it is. That was not happening last year in the fourth quarter. Distribution, if you give me a fuel number, if you give me an oil number, I'll gladly tell you what our distribution --.

If I knew that number I would be trading in it. I wouldn't be worried about it.

And public company costs are up a skosh in the fourth quarter, not a lot, because we were experienced in it in the fourth quarter.

That we have got. Let me get back to a cash question. I'm going to follow up off line. I want to make sure that we all walk away with a good comfort level. From a cash requirement point of view, between CapEx, interest and dividends, you certainly seem to have enough cash on hand to make this happen. You have got what, $4 million in the -- 4.2 million in dividends, you have paid the interest and we still have 22 million in cash, right? We have 22 million in cash to cover it?

We have 22 million at the end of this quarter. We will have a similar number at the end of next just like we would have historically. As you saw last year, right after the IPO, we generate cash in the fourth quarter. That's where B&G generates most of its cash. So cash stays very flat during the year and our generation happens in the fourth quarter. Just because we're not building inventory at that point and selling inventory off. It was really --.

And you should have your price increases in hand by then for sure.

As much as we're going to get out of the current ones, yes.

(OPERATOR INSTRUCTIONS). Mark Emrich (ph) with CIBC.

I just wanted to have you guys run down the payout analysis or payout ratio. I'm just using adjusted EBITDA 66.2 million and I have the subordinated -- separate subordinated note interest of about 2.7 million, CapEx at the midpoint of your run rate right now is about $6.75 million. What is total senior interest expense going forward and then what type of payout ratio are we looking at here in terms of cash available?

Total cash interest on an annual basis for this Company is 39.1. We have a senior debt outstanding is 240 million at 8%. 39.1 is pretty much a locked-in number. I mean we earn cash -- we earn interest on the cash on our balance sheet of a little less than 3% but net cash interest is right around the 39.1 million and that is going to stay pretty constant until --.

All fixed debt.

Right.

Right. So when you take out the cost for interest expense and no cash taxes, how much distributable cash do we have before dividends and how much dividends are we paying out?

It is in the Q. I mean you will see on a trailing twelve-month basis, the cash distributed before paying dividends is a little over $20 million and the stated dividends that we pay out -- that we are paying out for example for this quarter is the $0.2145 and that is what we are paying out each quarter per share.

So when I multiply that by four to get the annual number times the number of units, what does that look like?

$17 million on an annual basis.

Andrew Lazar, Lehman Brothers.

I'm just curious, we looked in this last quarter you just reported volume was, I guess, down a little bit or fairly flattish. As you start to realize more of your pricing in the second half, I'm curious what you have built in for, what volume will look like? In other words, is there a risk that as you start to realize more of the pricing, given that you'll have higher shelf prices and you're moving more aggressively on the pay for performance that volume ticks off more aggressively in the back half?

Well, we would love to see volume take off but we are being very conservative and looking for flat volume because we're trying to pull back, we're trying to pull back promotional activity with some customers and that implies that we will sell less to those customers on a onetime basis anyway.

Right. Actually I'm sorry. I said meaning volume will it tick off, meaning will it decelerate further.

I'm trying to be optimistic here.

You're budgeting for volume --.

We don't see volume -- we see volume as being very stable in the second half. We do have increases off of new products and things like that, and we should have sales increases off of price increases, and I think we will probably try and use those opportunities to be more aggressive on the promotion side.

And you did mention perhaps some inventory shifting so is there an opportunity perhaps that as you put through some of the pay for performance and such, and some price increases that certain retailers just kind of hold off on purchasing and wait until they have run down their inventories to a level when, as you have said, if consumer off take is still solid that they have to kind of reorder?

Absolutely.

Do you have a sense of when maybe you start to see some of the benefit of that coming back?

It's going to vary tremendously by brand and I wish I could give you an intelligent answer there but I don't know since we have never done this before.

Your sense is very clearly that take-away has remained certainly running ahead of shipments as indicated?

We watch IRI very closely partly to reassure ourselves that consumers aren't stopping buying our products just some of the retailers that we're not handing a lot of money.

Lastly, you mentioned the year generally following price increases in the areas where you have taken them, is it safe to say therefore that, in general, I know it's always kind of an open category but you're not really losing a whole lot of share in any particular area and it is more just getting these prices through and what that does to overall category demand by the retailer, I guess, if you will?

We're not losing share in general. I mean a great illustration of what you're talking about is late last year we decided to go to price parity against Bush on the shelf. We had been selling B&M at a premium. We went to a price parity position and Bush took a price increase in the interim. So we are actually about $0.10 a can less than Bush right now on the shelf, and we have seen some decent marketshare gains partly because of that. So we are not losing share anywhere. We're trying to be very competitive in terms of watching what the competition is doing and moving as they move and at least keeping our share the same.

Moshe Gadeen (ph) with RBC Dain Rauscher.

Dave, just based on the guidance that you've provided, if I look at 3Q '04, the EBITDA was 17.8. It looks like 3Q '05 is comfortably or close to 16.8 with hopefully an additional increase based on what other cost savings or price increases that you guys put into effect. On the comparative side, if I model 16.5, let's say 17, for the last two quarters, there could be a potential covenant (ph) compliance issue. Do you guys foresee that happening? Are you guys taking any steps to meet the demands prior to that or anything along those lines?

What covenant are you referring to?

If you maintain 17 out for the next two quarters, total leverage would probably be about 6.36 slightly north of the 6.35 requirement. Senior leverage also may be slightly bit in question. I'm trying to figure out what you guys are modeling or foreseeing.

We have not talked to the banks about changing -- you're talking about the revolver covenants that -- we actually don't use our revolver today. We have got a lot of cash on our balance sheet. If we see the need, we will be talking to the banks. Right now, we do not see the need to be doing that.

With respect to senior leverage, which would include your senior debt?

Right. The senior debt and total debt coverage in our revolver document keys to the same EBITDA calculation. So they are all interrelated.

I understand. So just bottom line, you don't see any bank meetings at this point in time? That's what I'm trying to get at.

We're not planning on doing that right now.

Any other questions, operator? Hello?

I apologize, sir. I am here. We will go next to Rodney Rayburn (ph) with Stark (ph) Investments.

Asked and answered. Thanks.

Just for general information, if we get cut off, it's because we're having a pretty good thunderstorm out here right now.

We will take a follow-up question from Robert Moscow with CSFB.

A couple of other food companies have talked about sticker shock, Kraft and Del Monte from higher pricing. You seem to be talking about it more in terms of not getting the trade promotion lifts or response from your customers. Are you seeing elasticity in the consumers on higher prices or are you seeing consumers pretty resistant to the higher pricing?

Underwood is a great example again because we took some pricing early on there and it did pass through and did get reflected on the shelf. And we saw a brief dip in consumer take away which has since recovered. We really haven't seen those kind of effects on anything else that we have -- we have taken very modest price increases and as I said, typically along with competition, and we really haven't seen any consumer sag out of it, except for the brief we saw with Underwood.

Al Alima (ph) with Seneca Capital.

I was just wondering conceptually since you issued the EIS, your costs are significantly higher than you had originally anticipated probably I would think given the rising fuel cost and the Sarbanes-Oxley expense. Meanwhile, as you point out that the M&A multiples are higher than you want to pay and that environment probably won't change in the foreseeable future, I mean at least for the next couple of years given the amount of cash, the steel sponsor and given the healthiness of the credit markets. So acquisitions are probably unlikely and even so, you could probably tap your revolver or the senior note market for financing. So you generate cash and you have cash in your balance sheet and meanwhile, your EIS trade is below issuance price of 15. Given your 1.6 times coverage kind of target that you need to cover with some exceptions, given the lack of alternatives for your cash and your balance sheet in terms of acquisitions, have you given thought to buying back the EIS?

That has been discussed. The Board hasn't discussed it but we have modeled things like that. But it hasn't gotten to the serious stage yet.

I guess what would take it to the serious stage?

That's a good question. I mean it really is a balancing act for, I guess, our consideration of -- there really aren't -- you said for a couple of years, we don't think there will be opportunities. I guess we're not at that stage yet in terms of acquisitions. So you want to keep your powder dry from that point of view. And really when you look at what is the benefit of buying the units back in terms of the taxes we would have to pay because we would not get -- when we avoid that interest, we don't avoid it entirely. We are going to pay -- eventually we're going to pay tax on that -- on the income we now have because we didn't pay that interest. You know you are really looking at a modest return on doing it somewhere in the order of 7% to 8% or something like that. So it needs to be -- it would have to be more compelling than it is right now and then the circumstances would have to be right.

And we do like the cash on our balance sheet right now. It gives us that added sense of protection. So it's something we are -- we will think about in the future and something that the Board will think about because we will have plenty of cash and the cash keeps growing. So it is something that obviously we should be thinking about.

(OPERATOR INSTRUCTIONS). Rodney Rayburn with Stark Investments.

Sorry, I jumped back in. I noticed on the cash-flow statement you had a pretty large increase in inventories, more specifically raw materials and packaging has basically doubled since January. Can you tell me what that is exactly?

That's correct. Basically, because of requirements in Canada this year and how you had to buy maple syrup, we bought our annual supply of maple syrup during the months of April, May and June. So we are done pretty much buying maple syrup now for the entire year. And that is really where the build comes from. It's all coming from maple syrup.

And in comparison to last year, the convention up there last year was that you had to buy your syrup before September 1st to avoid warehousing surcharges and things like that. This year it was July 1st primarily to put more cash in the hands of the federation that runs the thing so they could hand more cash to the producers in a quicker fashion. So we had to comply with that or face even higher costs.

So then we can expect that will be worked down in the second half?

Absolutely.

Yes.

Gentlemen, there appear to be no further questions. At this time, I would like to turn the call back over to you, Mr. Wenner, for any additional or closing remarks.

As I said, it was a challenging quarter but we really think it was the most challenging quarter we will face this year. We do see some softening on the cost side, although we have some challenges in the third quarter that we have to deal with. I assure you we will work very hard to meet those challenges and get back to what we consider a more normal course of business going forward. Thank you all for your time and we will speak to you again next quarter.

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.