B&G Foods Inc (BGS) 2006 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 2006 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. Instruction will be provided at that time for you to queue for questions. I would like to remind everyone that today's conference is being recorded and would now like to turn the conference over to David Wenner, Chief Executive Officer of B&G Foods. Please go ahead, sir.

Thank you very much. Welcome, everyone, to the B&G Foods second quarter 2006 conference call. Everyone on the call today can access detailed financial information on the quarter in our earnings press release issued today and available on our website at www.bgfoods.com, and in the our quarterly report on Form 10-Q that we filed today with the SEC.

A quick note. The press release was sent out immediately after the market closed, but there was a technical problem with Business Wire in getting it out. So I apologize if you have seen the press release you have just seen it the last 10 or 15 minutes, but it is out there now.

Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed 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. The Company undertakes no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise.

We will 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 it is included in our quarterly report on Form 10-Q.

As usual, I would like to start the call by asking our CFO, Bob Cantwell, to discuss financial results for the quarter. After Bob's remarks, I will discuss factors that influenced the past quarter, some of our business highlights and our current thoughts concerning the business going forward in the third quarter. Bob?

Thank you, Dave. Net sales increased $11.2 million or 11.9% to $105.3 million for the quarter ended July 1, 2006, compared to $94.1 million for the quarter ended July 2, 2005. Net sales for the Ortega Food Service dispensing pouch business and dipping cup acquisition accounted for $3.4 million of the net sales increase. The Grandma's Molasses acquisition accounted for $1.4 million of the net sales increase. And a temporary co-packing arrangement that is expected to remain in place for another three to six months accounted for $1.2 million of the net sales increase. The remaining $5.2 million increase in our net sales was related to increases in sales price and unit volume.

Net sales of our Ortega excluding the dispensing pouch and dipping cup business, Maple Grove Farms, Las Palmas, B&M, Joan of Arc, and Underwood products increased $7.9 million in total, offset by decreases in net sales over our Emeril's and B&G pickle and pepper products of $2.9 million. Net sales of all other brands increased in the aggregate by $0.2 million.

Gross profit increased $4.7 million for the second quarter fiscal of 2006 or 19.6% to $28.4 million from $23.7 million in the second quarter of last year. Pro forma gross profit, which excludes our fiscal 2005 restructuring charge, increased $1.5 million or 5.7% to $28.4 million for the second quarter compared to $26.9 million in the second quarter last year. Pro forma gross profit expressed as a percentage of net sales decreased 1.6% to 27% for the second quarter from 28.6% for the second quarter of last year. The decrease in pro forma gross profit was primarily due to higher cost of packaging materials, transportation, maple syrup and corn sweeteners, and a shift in the mix of products sold during the second quarter, partially offset by sales price increases.

Sales, marketing, and distribution expenses increased $0.8 million or 7.3% to $11.6 million for the second quarter of fiscal 2006, compared to $10.8 million for the second quarter of last year. This increase was primarily related to an increase in brokerage and salesmen commissions due to an increased sales volume. These expenses expressed as a percentage of net sales decreased to 11% in the second quarter from 11.5% in the second quarter of last year.

General and administrative expenses decreased $0.2 million or 9.4% to $1.8 million for the second quarter of fiscal 2006, compared to $2 million in the second quarter of last year. The decrease was primarily due to a reduction in professional fees.

Operating income increased 33.7% to $14.7 million for the second quarter from $11 million in the second quarter of last year. Operating income for the second quarter of last year was negatively impacted by $3.1 million restructuring charge relating to the new Iberia shutdown.

Interest expense increased $0.5 million to $10.9 million for the second quarter from $10.4 million in the second quarter of last year. Our average debt outstanding was $25 million higher in the second quarter of fiscal 2006 as compared to the second quarter of last year.

I would like to take a moment to discuss EBITDA and adjusted EBITDA, non-GAAP financial measures that we have reconciled to net cash provided by operating activities in today's press release. Our EBITDA increase was $16.8 million for the second quarter, compared to $12.7 million in the second quarter of last year. Adjusted EBITDA for the second quarter of last year, which excludes fiscal 2005 restructuring costs, was $15.8 million. Capital expenditures for the second quarter of fiscal 2006 were $2.4 million. We continue to foresee modest capital expenditure requirements for the foreseeable future.

Moving onto the balance sheet, we finished the second quarter of fiscal 2006 with $21.5 million of cash, compared to $25.4 million at the end of fiscal 2005. We also finished the quarter with $430.8 million in long-term debt and $80.1 million in stockholder's equity. Our inventory at the end of the second quarter was $90.7 million. While this represents an increase from the inventory of $85.5 million at the end of fiscal 2005, we are pleased to bring inventories down $1.7 million from the end of the first quarter when inventories stood at $92.4 million.

As we detailed in our conference call for the first quarter, the increase is primarily attributable to our recent acquisitions, higher maple syrup purchases, and higher case production. Taken separately, we remain confident that these factors will not have a negative affect on our gross margins or otherwise impact our P&L and we will continue to work on reducing our inventories to be more in line with historical levels.

The business remains healthy from a cash point of view. Plant capital spending is expected to remain consistent with fiscal 2005. Annual cash interest expense for fiscal 2006 is approximately $41 million. On July 31, we made a cash payment of $0.4265 per EIS to holders of record as of June 30, 2006. As previously announced, this reflects a cash dividend of $0.212 per share of Class A common stock and an interest payment of $0.2145 per $7.15 principle amount of senior subordinated notes.

I also want to mention that on July 9, we closed the sale of our new Iberia facility and we'll record a gain of approximately $500,000 in our third quarter.

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

Thanks, Bob. We are very pleased with the second-quarter performance, which we believe reflects the successful execution of our strategies in a tough cost environment. Net sales increase of nearly 12% and adjusted EBITDA increase of more than 6% in the quarter we think are very good and while we continue to be impacted by high costs in several areas, we are managing through these hurdles and believe that our financial performance is testimony to the effectiveness of our strategies.

From a sales viewpoint, the second quarter was very successful. The net sales increase of 11.9% over second quarter of fiscal 2005 was made up of a nearly equal mix of acquisition and organic growth. Between them, the Grandma's Molasses and Ortega Cheese Sauce acquisitions accounted for $4.8 million of the net sales increase. These brands are performing very well for us and are tracking ahead of sales with their prior owners.

In addition to those sales, we did have $1.2 million increase in net sales from a temporary co-packing arrangement with the manufacturer affected by Katrina. This arrangement will most likely run for another six months.

The other half of the net sales growth came from our base business, with approximately one-third of that from price increases. We continue to take pricing wherever possible to keep the momentum up here and to offset future cost increases.

Net sales for 13 of or 17 brands increased in the second quarter, while only one declined meaningfully. Looking at the growth brands, the Ortega brand was up over $2 million in net sales or about 11% due to new products and new distribution. Our new dinner kits and cheese snack products are growing nicely and we have added distribution in mass merchants such as Wal-Mart and Target and in supermarkets as well.

The Maple Grove Farms line is up $2 million, reflecting higher sales of pure maple syrup products and new distribution of two sugar free syrups into Wal-Mart. Las Palmas net sales grew $1.7 million. You may recall that this brand had a soft first quarter because of the late Easter holiday. That moved sales into the second quarter. Beyond that, the productline of Mexican foods we designed for dollar stores under the Las Palmas label began shipping several products into new distribution.

B&M had over $1 million increase in net sales which we credit to more competitive promotional pricing during key holidays and radio advertising, which we started in major B&M markets. All in all, the second quarter was a very solid sales quarter throughout the portfolio. The only brand that had a meaningful decline in net sales was the Emeril brand. This brand had tough comparisons to sales to mass merchants in the second quarter of last year that this did not repeat this year. Compounding that were issues within a major specialty distributor, their issues, not brand issues, that caused net sales through that distributor suffer.

B&G Foods' generally strong net sales performance was especially gratifying because we have continued our pay per performance initiative on trade spending and made substantial progress in the second quarter. Trade spending for the second quarter was down 1.4% of gross sales and is now down 1.2% of gross sales for the first half of fiscal 2006. In past quarters, we saw a modest volume decline from that effort but the impact was much less in the second quarter.

The Joan of Arc brand is a good example of this. Volume in the brand has been affected by promotional changes and two price increases in the past year, but the brand had a strong second quarter and appears to have recovered from these disruptions. The Polaner brand is another example. Growth in this brand in the second quarter was modest even thought our sugar free products grew very well because we've lowered promotional activity on regular preserves.

All of this tells us that the tough decisions we have made on trade spending were the right ones and we continue to attack inefficient trade spending. The good news on net sales and trade spending helped to offset the continuing higher costs within our industry. Our second-quarter pro forma gross profit, and I'm going to talk numbers that exclude the write-off we took in the second quarter of last year, our second-quarter pro forma gross profit was up $1.5 million, almost 6%, but decreased 1.6% of net sales. Sales mix, higher net sales of Maple Grove, B&M, and Joan of Arc for example, was a minor factor. But cost was the predominant factor.

On a year-to-year basis, we continue to see higher cost of sweeteners, specifically corn syrup and sugar, packaging, other commodities, and co-packer costs. Maple syrup costs are estimated to have increased nearly 8% on this year's crop mostly because of exchange rates. We are seeking further price increases to offset these and other anticipated cost increases, but even where costs have stabilized, such as in bean pricing, they are still up on a year-to-year basis and present an ongoing challenge to us.

The high price of oil is also keeping the pressure on our shipping and energy costs. Fuel surcharges for the second quarter were about 50% higher than the second quarter of fiscal 2005. We have offset some of that increase with better efficiencies on our shipments, more products on trucks, and more efficient customer pickup incentives. But here again there has been a steady cost increase. In the third quarter, we expect that we will lap the high fuel surcharges caused by Katrina, but surcharges today are still higher than they were in the late fourth quarter of fiscal 2005.

Our other operating expenses were well under control in the second quarter. Sales and marketing expenses increased due to higher volume but decreased as a percent of sales. We realized the cost savings projected from the transfer of our store door sales function to a New York metropolitan area broker, and that helped to reduce this expense as a percent of net sales.

G&A costs were also lower due to lower professional fees. All of this meant that our EBITDA for the second quarter of fiscal 2006 was up $1 million or 6.4% versus our adjusted EBITDA for the second quarter of fiscal 2005. Comparing to the second quarter 2005 adjusted EBITDA sets aside that $3.1 million charge we took in the quarter and is more representative of the improvement in the ongoing business. EBITDA margin dropped 0.8% of net sales, reflecting the dynamic between improvements in trade spending and in pricing versus increased cost of manufacturing. Net income for the second quarter of fiscal 2005 was $2.3 million, an increase of $2 million from the second quarter of last year.

Turning to our balance sheet, and Bob addressed this somewhat but I'm going to take it a little different direction, you may recall we were not satisfied with inventory ad positions at the end of the first quarter. We made a great deal of progress on that issue in the second quarter and are especially pleased with our progress in reducing finished goods inventory.

On a year-to-year basis, inventories were up almost $15 million in the first quarter compared to first quarter fiscal 2005. In the second quarter, they returned to more normal levels due to a reduction in finished goods inventory of over $10 million, up only $2 million compared to the second quarter of fiscal 2005. This was accomplished without a negative effect on our plant overhead costs. Higher sales volume, new volume from Grandma's and cost reductions offset the effective inventory reductions in manufacturing. We believe that there are further opportunities for inventory reduction in the remainder of 2006.

On the acquisition front, we remain very pleased with our addition of Grandma's and the Ortega Food Service cheese business to our diverse portfolio of brands. Consistent with our acquisition strategy which remains an important part of our overall growth strategy, we continue to evaluate opportunities as we search for acquisitions that would fit our financial profile and complement our existing business.

Our first priority for the remainder of fiscal 2006 continues to be staying ahead of anticipated and unexpected cost increases by aggressive pricing while growing our top and bottom lines. We anticipate that the cost environment will continue to be challenging. Commodities like corn syrup for instance are already projecting large cost increases next year. The price of oil is one of the key underlying factors that remains an uncertainty, but we see more potential risk than benefit in that price.

We believe that our plans for the business will compensate for those events. Our diverse portfolio should continue to produce predictability in our results from our base business with recent acquisitions adding to those results. Our second quarter results are certainly very encouraging and are evidence to us that the strategy is working successfully.

With that, I would like to open up the call to questions. Operator?

(OPERATOR INSTRUCTIONS) Nitin Dahiya, Lehman Brothers.

Could you talk about pricing and volume trends? What kind of --

Well, our pricing, as I said, was about one-third of the approximately $6 million in sales increases that we saw from the base business. Where we have seen volume hits from pricing in the past and as I said, Joan of Arc is a great example of that between pricing and promotional changes, we're seeing less and less volume impact on pricing partly because I think people are used to it, partly because we're not taking as dramatic a price increases as broad a price increases as we have been in the past.

That's great. You mentioned that there was some timing in the last 12 months from the first quarter, but overall do you think there was any pull forward if you like of sales or any other timing issues of that?

If you mean at the end of the second quarter, no. It was all a shift of volume from late first quarter to second quarter as Easter moved from March to April.

Okay. And was that only Las Palmas, or other brands as well?

B&G saw a little bit of that, but really there is no other brands that are keying around Easter.

Okay, great. Just on costs and pricing going forward, are you seeing -- you talked about price pressure, but do you think your current pricing kind of takes care of them or do you need to take an additional pricing to maintain margin?

I think we're going have to keep on taking pricing as we see the opportunity to do it. I guess partly because I know there are further cost increases coming and while we may be ahead of the curve today, we need to continue to do that to stay ahead. Secondly, I just think it is a good insurance policy for cost increases that we don't see today that may very well show up.

Fair enough. Also any thoughts on acquisitions?

Well, as I said, we continue to pursue acquisitions. Certainly the last few that we did are working out very well and they are very typical of the kind of things we would like to do. Things that work from a synergy point of view are consistent with our sales and distribution systems, and things that have an appropriate price point which we have talked about before in the six times range.

And anything exciting? I have to ask.

Not that I can tell you about. Acquisitions come and go and we are always looking at something, not necessarily seriously.

Thank you very much.

(OPERATOR INSTRUCTIONS) Dirk Lever, RBC Capital Markets.

Congratulations on continuing with the battle. Maybe you could shed a little bit more light on the Emeril brand because I think it was last quarter we saw a little bit of slippage in that brand as well.

I think it was up slightly last quarter, but it is down markedly this quarter and a great deal of that is about Wal-Mart and Costco sales that the brand just did not stick in mass merchant channels. It did not have the velocity off-the-shelf. So what is a very good brand in supermarkets, specialty, and in a few cases such as pasta sauces and seasonings probably even appropriate for grocery warehouse business is not a mass merchant brand. It just doesn't have the velocity off-the-shelf that a Wal-Mart wants.

Does this mean you're going to be repositioning it then away from the high volume and more to the specialty?

Well, it always has been positioned in specialty through supermarkets and we continue to do that. Where we see opportunities with certain segments of it that we think sell well enough to go into a grocery warehouse, we're trying to take advantage of that. But specialty is always where the brand has been. It's where it started and it’s where it has been except for some opportunities in mass merchant. Those are the kind of things when you get the opportunity you take your shot.

Okay, thank you very much.

Art (indiscernible), Angelo, Gordon.

One thing I think you gave the CapEx number and I just missed it.

It's a little over $2 million for the quarter but we are at a run rate that we spent a little over about $6.6 million last year and we're looking at spending a very similar number for this year.

Okay, great. My other question was on the Grandma's Molasses purchase. Am I right to be thinking about most of the contribution from that acquisition as benefiting the fourth quarter or is it has being quite a seasonal holiday product?

You're absolutely correct. It does about half of its sales in the fourth quarter.

So should we then assume about half of the EBITDA in the fourth quarter as well or is that --?

That is very proportionate, yes.

Okay so then I would assume we should see a big increase year-over-year because of that acquisition hitting then.

As do we.

And finally on the acquisition front, you said you're looking at things but nothing particularly close at the moment.

I said we're looking at things all the time. That is all I said.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS) A follow-up from Nitin Dahiya, Lehman Brothers.

You mentioned Ortega was up $2 million. Did I get that right?

Yes.

And so was Maple Grove?

Yes.

On Emeril, you mentioned that one specialty dealer had some issues. Could you elaborate on that and if those issues are gone now?

Well, yes, the distributor -- and it is a major distributor nationally has been losing accounts and what happens there is you basically have an inventory effect where the inventories in that distributor go away, get liquidated at the retailer and all of that and the new distributor, who is also a distributor we're doing business with, really does not add as much inventory. It is very much like a grocery warehouse shutting down. You have an inventory loss while that happens. We don't see the trends at retail reflecting anywhere near what the business is doing on factory sales, so we feel that it is an inventory effect.

And you expected to last maybe a quarter or two more?

It's going to -- for you it is going to be muddied a little bit because you will continue to see the mass merchant effect on Emeril, but the distributor effect should lessen, yes.

Thank you very much.

Andrew Lazar, Lehman Brothers.

Just two things. First in looking at your base business from a volume perspective, it looks like you had a pretty significant acceleration in this quarter versus what we have seen certainly in the first quarter. I am just trying to get a sense of maybe a little more color on what drove that. Was it just less of a negative impact from some of the pricing versus last quarter's? Was it some of the things you mentioned around some of the new distribution for some of those products?

But I'm trying to get a sense again of how sustainable that level of base volume growth is going forward particularly because you'll face some tougher pricing comps I think in the back half of the year.

I think it's fairly sustainable and the reason I think it was soft in the first half of year was the impact one of pricing especially on brands like Joan of Arc. Joan of Arc went through a severe shock with several price increases in a relatively short amount of time and total restructuring of the promotional programs and I think consumers went through a little sticker shock. Just in the category in general, much less in Joan of Arc.

So you had some of that in some of our -- some of the pieces of business. You had a definite impact off of pay per performance. I would say somewhere between 2 to 3% of sales in the first quarter just because we are restructuring those programs and there is a volume impact while people don't do the buys that they might have done off of those promotional programs. But we saw that volume that we lost at the end of the first quarter come back very strong in April of this quarter. We had a very good April and I think we've started to lap ourselves in terms of the volume impact of pay per performance, while the benefit seems to be accelerating.

So I think that and the pricing lessening are probably half of the increase or a better way to put it is loss of sales that we don't see as much anymore. And then the rest of it is the organic sales really showing up in new products and things like that. We have some very strong new products out there that are performing very well and so I am pretty confident that we're going to see some nice organic growth out of the business going forward.

And then on with respect to some of the pricing and the lessening of the volume hit from it, is it fair to say that in some of your categories that even those that might have been or are typically thought of as very, very price competitive, that you are seeing the competitive environment also kind of take pricing? It seems like even in categories like core pickles and what not others have taken pricing and that is a category where you obviously know better than I but maybe where you haven't seen pricing for ten years or more?

Absolutely, and we don't typically lead on pricing. We follow. So we assume that we are decent managers and everybody else is seeing the cost increases that we are seeing and we have seen in most cases where we have seen these cost increases we have seen competition take price increases and we typically follow, not lead.

A great example of what happens is what we're doing now with two pound preserves in the New York area, where we use to promote several of the products at $0.99. We can't afford to do that anymore. Costs have taken us off of that key promotion price, so now we are actually up to a 2 for $3.00 promotion price. That has a very significant volume impact when you do that, when you first to do it any way. But frankly nobody else promotes at that price anymore either. So we saw the consumer go through that sticker shock, but now as we're into the second round of promotions like that, the consumer is coming back to those new promotional prices and there is less of an impact. And I think that is the phenomenon you see.

Last thing then also is as I look at your gross margin as we go through the remainder of the year, just given costs are still obviously an issue and I know you lap a little bit of the high freight or a little high fuel last year, but is it fair to say you'll still get sort of obviously a negative hit from a gross margin standpoint on a year-over-year basis in the back half, though perhaps not as severe as what we saw in the second quarter?

I think that is exactly how I would say it. I think our pricing will help, our trade program will help. We are lapping some of the cost increases we saw in the second quarter versus prior year. We are lapping. So you are not going to see the cost increases hit us quite as hard I hope in some of these categories. So I think this probably was as severe an impact on gross margin as we're going to see all year.

Great. Thanks very much.

(indiscernible)

Just a small clarification. Just a small clarification. I just want to make sure that I understand the numbers. You mentioned $6 million of the growth year-over-year is due to pricing, right?

No. No, $6 million of it is on the base business. About one-third of that is due to pricing.

Okay.

There's almost $12 million of sales growth here. About half of it is due to Grandma's and the Ortega acquisition and the special co-packing arrangement we have. The other half is internal growth beyond -- base business growth, if you will, about one-third of which is pricing.

So $4 million of year-over-year increase in the base business in volume?

Correct.

Okay, and the rest of it, the other half is basically acquisitions?

Of the other six, 4.8 is the two acquisitions we did in December and January and 1.2 is this co-packaging arrangement we have.

Sure. That's all. Thanks.

Pearl Chang, Seneca Capital.

A couple of quick follow-up questions. One was just with inventory -- it was great to see that come down sequentially. If I remember correctly, I think part of the increase in first quarter was because you purchased maple syrup and that added to the inventory. I assume that as you sell the syrup that that contributes to the inventory decline?

Actually you picked the one thing that did not go down a lot. We actually continued to buy maple syrup quicker than we did last year. Just because of the phenomenon of the crop and the pricing structure up in Canada this year. We did the vast majority of our purchases by the end of the second quarter, where those purchases stretched out into September of last year. So that is a piece of inventory that actually went up and we were down even in spite of that.

Okay, that's great. So over the remainder of 2006 obviously you will be working that down, right?

Yes, we will.

So can I ask if you have a target for how much you could reduce inventory over the course of the year?

It is an internal target. I would rather -- I think is still another I would guess another $4 million to $5 million on a year-to-year basis, but that changes as the market changes on some things. So we definitely have a target that we want to reduce inventory.

As that puts us back at the same number that we closed last year with.

Okay, great. Just a follow-up question, just on the acquisition side. Could you comment maybe more broadly just in terms of what you are seeing in terms of the level of activity and what multiples are? I think they had been trending really high for awhile and what you are seeing there?

We're frankly not seeing the volume of opportunity that we would otherwise like to see. It is kind of thin and what's out there is large things. Apparently some of them have been done very quickly at fairly high prices, so we don't participate in those kinds of things. So there's not a huge amount of activity. There is some and the multiples, a lot of them still have to be determined. That is the process is still ongoing.

As I said, we are very disciplined about the multiple we will pay, so if the process goes beyond that range, then we are just not in the process anymore. The other thing I would mention is that there's a lot of talk about some of these big companies start spinning off some of their smaller businesses etc., but we haven't seen that happen yet.

Okay. Can I ask you if you're looking at anything right now?

We're always looking at something. That's a pretty safe thing to say, but we execute very, very few of the things we look at.

Okay, great. Thank you so much.

That would conclude today's question-and-answer session. At this time I'd like to turn the conference back to the speakers for any additional statements or closing comments.

Thank you all for joining us on the call. As I said, we feel that this is a very, very good quarter and a lot of our priorities and strategies that we have expressed in previous calls have been executed. I think we have shown the value of the diversity of our brands and we have also shown that our strategy of reducing trade while still continuing to show topline and bottomline growth is working. And I think that just will continue as the year goes on. Thank you very much.

Thank you for your participation in today's conference call. You may disconnect at this time.