B&G Foods Inc (BGS) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. We'd like to welcome you to the B&G Foods, Incorporated First Quarter Earnings Results Conference Call.

(OPERATOR INSTRUCTIONS)

I would now like to remind everyone that this 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.

Thank you, operator. Good afternoon, everyone. And welcome to the B&G Foods First Quarter of Fiscal 2007 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 our quarterly report on Form 10-Q that we filed today with the SEC.

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 financial measure, EBITDA. A reconciliation of EBITDA to the most directly comparable GAAP financial measure is provided in today's press release and is included in our 10-Q. As usual, we'll start the call today by having our CFO, Bob Cantwell, discuss financial results for the quarter. After Bob's remarks, I'll discuss factors that affected our quarterly results, some of our business highlights, and our current thoughts concerning the business. [You're on] Bob.

Thank you, Dave. Net sales increased $10.7 million or 11.6% to $103.7 million for the quarter ended March 31, 2007, compared to $93 million for the quarter ended April 1, 2006. Net sales for Cream of Wheat, which is included in our results of operations for only five of the 13 weeks of the first quarter, accounted for $6.5 million of the net sales increase. The remaining $4.2 million increase in net sales was related to increases in sales price and unit volume.

Gross profit increased $4.8 million for the first quarter of 2007, or 17.3% to $32.7 million from $27.9 million in the first quarter of 2006. Gross profit expressed as a percentage of net sales increased 1.5% to 31.5% for the first quarter of 2007, from 30% in the first quarter of 2006.

The increase in gross profit expressed as a percentage of net sales was primarily due to Cream Wheat's gross profit for the month of March, which improved our overall gross profit expressed as a percentage of sales for March by 1.8%. This increase was partially offset by higher costs of packaging, transportation and corn sweeteners.

Sales, marketing and distribution expenses increased $1 million or 9.8% to $11.5 million for the first quarter of 2007, compared to $10.5 million for the first quarter of 2006. These expenses expressed as a percentage of net sales, decreased to 11.1% in the first quarter, from 11.3% in the first quarter of 2006. The increase was due to increased consumer marketing and broker commissions.

General and administrative expenses increased $0.1 million or 8.4% to $1.8 million for the first quarter of 2007, compared to $1.7 million in the first quarter of 2006, due primarily to increased management incentive compensation. Operating income increased 19% to $18.7 million for the first quarter, from $15.7 million in the first quarter of 2006.

Net interest expense increased $1.3 million to $12.1 million for the first quarter, from $10.8 million in the first quarter of 2006. Our outstanding long-term debt increased $205 million on February 26, 2007 as a result of additional term loan borrowing used to finance our acquisition of the Cream of Wheat business.

Our EBITDA increased 21% to $21.1 million for the first quarter, compared to $17.5 million in the first quarter of 2006, notwithstanding that the positive impact of Cream of Wheat is included in our results of operations for only five of the 13 weeks of the first quarter. Capital expenditures for the first quarter of 2007 were $2.3 million.

Moving onto the balance sheet, we finished our first quarter of 2007 with $28 million of cash, compared to $29.6 million at the end of the 2006. We also finished the first quarter of 2007 with $635.8 million in long-term debt and $74.6 million in stockholder's equity.

Long-term debt increased by $205 million during the first quarter as a result of additional term loan borrowings used to finance the Cream of Wheat acquisition, and to pay related fees and expenses. We were able to attain such financing at favorable interest rates. Our inventory at the end of first quarter 2007 decreased 4.8 million to 87.6 million, compared to 92.4 million at the end of the first quarter 2006.

B&G Foods remains healthy from a cash point of view. We expect to make capital expenditures of approximately $11 million in both 2007 and 2008 in respect of our existing manufacturing operations and for relocating certain manufacturing equipment required in the Cream of Wheat acquisition, a project that will extend into fiscal 2008. Following the completion of the one-time capital expenditures relating to the Cream of Wheat acquisition, we expect our capital expenditures to return to historical levels.

Cash interest expense for fiscal 2007 is expected to be approximately $53 million. Finally, as reported last week in our 8-KA filing, our fiscal 2006 net sales and EBITDA pro forma for the Cream of Wheat acquisition were was $473.1 million and $104.7 million, respectively.

Beginning this year, we expect to spend $3.5 million per year more than Kraft spent in fiscal 2006, in trade spending and consumer marketing to promote the Cream of Wheat business. If we had included such trade spending and consumer marketing in our pro forma results for 2006, our pro forma EBITDA would have been $101.2 million.

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

Thank you, Bob. We're obviously very pleased with the results of this quarter, which in many ways bear out the success of our strategy with the business. Our net sales increase of 11.6% as compared to the first quarter of 2006, builds on the 8.4% growth in net sales that we saw for all of 2006, and is a healthy mixture of organic and acquisition growth.

Our EBITDA increase of 21% to $21.1 million for the quarter was, of course, very welcome. As Bob said, our balance sheet is very healthy and we paid our 10th consecutive quarterly dividend on April 30th. The outstanding sales growth we saw in the first quarter came from a combination of organic and acquisition growth.

The Cream of Wheat business, which we acquired effective February 25th from Kraft Foods, contributed $6.5 million of the $10.7 million increase in net sales, or 61% of the increase. The remaining $4.2 million increase was the result of volume increases in the base business and price increases. A number of the brands that drove that growth, including Maple Grove Farms, Las Palmas, Grandmas Molasses and Ortega.

Net sales for the Maple Grove Farms brand grew by $3.6 million or 30%. We're seeing very good sales of pure maple syrup products and sugar-free syrups, especially the new butter flavored sugar-free syrup. Maple Grove's pancake mixes and sugar-free and organic salad dressings also did well this past quarter.

Maple Grove Farms themes of high quality with its maple syrup and pancake mixes, and health appeal with sugar-free products are appealing to consumers, and we're seeing very positive responses. Building on the health scene, we've recently launched a gluten-free pancake mix, which is now going into distribution.

Our Hispanic food brands, Ortega and Las Palmas, continued their growth trends in the first quarter. Net sales for Las Palmas grew by over 14%, a combination of growth from new distribution and some benefit from an early Easter holiday. Ortega growth was due to new products. We've recently introduced a Two-cheese Grande Pizza kit, a Green Taco Sauce, a Salsa Verde product, and three of our best performing salsas in a new 24-ounce size.

We will continue to aggressively launch new products in the Ortega line, which we believe has above average growth potential. Net sales for Grandma's Molasses grew by 58% for the quarter, due partly to the early Easter holiday, but also due to a favorable comparison to first quarter of 2006, when as part of the transition of that brand, we stopped sales to diverters.

The only negative of consequence in our 18-brand portfolio was the Emeril brand, which experienced a disappointing $1.3 million, or 23% decline in net sales. Net sales for the brand had increased by 12% in the fourth quarter of 2006, making us believe it had turned the corner. But those hopes were obviously premature.

While consumer trends remain fairly good on the Emeril brand, we saw a continued decline in sales to mass merchants, and weak sales to three of our major distributors. Each of these distributors faced business challenges in the quarter, which had an inventory effect on the brand.

We continue to focus on recovery with this brand with a number of actions. We have restructured promotional activity to scan programs with retailers rather than promotions executed through distributors. We have created distribution incentives with our distributors, intended to maintain in-store distribution of successful items.

And we continue to launch new products -- most recently, two high-temperature tolerate cooking sprays in original and creamy butter flavors. A continued success of important parts of the Emeril line, including cooking stocks where sales have doubled compared to last year at this time, make us believe that this line can recover with time, focus and new products.

We expect continued organic growth in our base business, in part, because of new products launched across a variety of our brands. The B&M brand has launched a line of No Sugar Added Baked Beans, and Grandma's -- two Grandma's corn syrup products to follow the Grandma's baking ingredient theme.

The Trappey has added a unique jalapeno pepper in a pouch product intended for convenience stores, a red pepper and vinegar product and a jarred hot and sweet jalapeno pepper product. Both of these last two products are already being sold in Wal-Mart Supercenters. Additionally, a new line of Polaner Organic fruit spreads is going into distribution in the New York area as a test of the appeal of an organic product line under that brand.

The first month of B&G's ownership of the Cream of Wheat business has already had a noticeable, positive effect on our business, adding 7% growth to first quarter net sales and over 15% growth to first quarter EBITDA. The transition of the brand from Kraft Foods to B&G Foods went exceptionally well and was completed on April 1st with B&G assuming complete responsibility for all sales, distribution and G&A functions.

We assumed the co-pack manufacturing agreement for the Stove Top items and that transition went seamlessly. Kraft will continue to manufacture the instant Cream of Wheat items for us under a 12-month co-pack agreement.

We are very encouraged by March net sales for Cream of Wheat, which at $6.5 million, were excellent. I would caution everyone, however, that the March results for Cream of Wheat do not reflect all the spending we plan to do on the brand, including slotting, promotional activity and advertising. Nevertheless, March was a very strong first month for our latest acquisition. And the B&G Foods team did a remarkable job transitioning the business in one month.

B&G Foods gross profit improved by 17.3% for the quarter and rose to 31.5% in net sales from 30% in the first quarter of 2006. Cream of Wheat accounted for most of the increase in gross profit. The base business gross profit increased to a lesser degree than sales because of product mix.

Cost increases for the first quarter were much as we expected them to be, tracking at a rate approximately half of the rate we saw in 2006. These cost increases have come in commodities such as corn syrup, and in packaging in the form of outright price increases or fuel surcharges. Our price increases have offset these cost increases for the most part with cost reductions also helping.

In that theme, we continued to make progress on trade promotion spending, reducing spending slightly on our base business, despite a sales mix skewed toward brands with higher trade spending. We continuing our pay per performance initiative in 2007 and expect to reduce trade spending further throughout the year.

Meanwhile, cost reduction momentum continues to grow within the company. We recently brought the production of Maple Grove Farm pancake mixes into our Vermont facility, which we expect will save several hundred thousand dollars this year and expand our ability to sell this product line.

The production of Underwood products will be moved from a co-packer to our Portland, Maine facility this year. Estimates are that this project will save well over $1 million annually when completed. Beyond these two examples, there are numerous projects in place aimed at, not only offsetting cost increases, but reducing costs overall.

Hanging over this, of course, are events beyond our control, such as the price of oil. But even here, where oil prices are higher than we would have hoped by this time, we are making progress. Our distribution costs were down one-tenth of a percent of net sales, despite stubbornly high fuel prices. And we expect the additional volume from Cream of Wheat to dilute those costs further.

Operating expenses, specifically sales and marketing expenses, increased by $1 million, some of which was due to higher sales volume. Marketing expense and spending increased by $900,000 compared to first quarter of last year, partly due to timing of expenses, and partly a planned increase in marketing support for our brands.

We intend to continue to increase consumer marketing on select brands as our performance permits, typically by redirecting the savings we see from trade promotions to consumer marketing. As I said on our last conference call, we believe that 2007 will be a strong year for B&G Foods. And the performance we saw in the first quarter certainly reinforces that belief.

Our base business was very solid, delivering higher sales and EBITDA, in spite of higher costs. Our employees did a tremendous job of integrating the Cream of Wheat acquisition in one month as planned. And that business is already performing above our expectations, and showing just how accretive it will be to our financial results.

A major element of our business strategy is to acquire smaller, high margin brands and focus on improving their performance so we can deliver superior results. I think our first quarter results testify to our ability to do just that and to do it very well.

That concludes my remarks. Operator, we're ready to take questions.

(OPERATOR INSTRUCTIONS)

First question coming from Reza Vahabzadeh with Lehman Brothers.

Hi, good afternoon.

Good afternoon.

Good afternoon.

In total, was the timing of Easter a meaning impact on sales for the whole company?

Not for the whole company, Reza. It has a modest effect on a couple of brands. Grandma's sells a little more around Easter. As I said, Las Palmas tends to sell a little more around Easter. But, most brands don't move very much.

Okay. And your comments, Dave, suggested that Cream of Wheat acquisition, so far, things have moved in line with your expectations?

Above our expectations.

Above your expectations. And that applies to both the integration, as well as the actual performance.

Well, the integration, we expected to complete in the 30 days and we did. I would commend Kraft for their cooperation. We have varying degrees of ability to get that done from the other side. I think our people are extremely well trained on transitioning things in 30 days. And it's a matter of how much cooperation we get. And Kraft did a great job.

But the performance of the business overall, we had modeled that we would not be able to turn around the results of that business for most of calendar 2007. So we're very encouraged by the sales numbers going into this.

Got it. Okay. And you touched on a couple of situations where the brands have performed pretty well and not so well. The one that sounded like was more challenging than you had suspected, would it be Emeril?

Yes, it was. And some of it -- you know we've had a continuing problem at mass merchant and we continue to have difficult comparisons to prior year sales at mass merchants as they, especially Wal-Mart, discontinues the product -- or has discontinued the products and we're just seeing the rollover effect.

But, now we're seeing the other aspect of the brand, where it goes through specialty distributors causing a problem, in that some of the specialty distributors are having their own challenges, and it's affecting the performance of the brand, purely because the distributors are not executing as well as they have in the past.

I see. And so, when do you think your initiatives will begin to address these issues?

It's a matter of how fast the distributors sort out some of their issues, for one thing. And I have no control over that. I'm encouraged by what I'm seeing so far this quarter, but I was encouraged by the fourth quarter, too. So, I think we have some very strong pieces of business there and we have some other pieces of business that are struggling a little bit. And that struggling is compounded by, as I said, three of our major distributors having an issue. I hope the second half will be better, though.

Okay. Sounds good. And then, lastly, Bob, I was wondering if you could comment on inventory levels, which were well below prior year, despite the addition of Cream of Wheat.

Yes, and that's the one piece I didn't mention. Cream of Wheat adds another $2 million of inventory to us. And we were still substantially below. I mean, we made a major effort through 2006 to reduce inventories. And we expect to continue that through 2007, year-over-year comparison.

Okay. And their difference is just better, tighter management of inventory, or -- ?

Absolutely. It's just really managing -- we carry a fairly large inventory because we have a number of seasonal brands. It's just better inventory management.

Got it. Thank you.

There's one question in our queue. Let's move on to Robert Moskow with Credit Suisse.

Good afternoon. Congratulations.

Thank you.

Thank you.

I'd like to know, for Cream of Wheat, do you have any projections as to how much you can grow this brand this year after making this investment?

Well, as I said, we really hadn't expected to grow the brand this year. We expected the downward trend in the brand to continue for the better part of this year. So, we're having to change our thought process here, to at least a neutral stance, if not a positive stance.

We really don't know how much we're going to be able to grow the brand until we execute the programs we have planned in September. What's going to happen between now and September is we're out talking to retailers and lining up new distribution or recovered distribution on the brand with retailers, in anticipation of a marketing campaign and an FSI drop and a promotion in September.

So to the extent that we can regain distribution and then execute on that program in September, we'll find out what exactly we can do in terms of moving the sales on the brand. But, it's kind of like unknown ground. We're very, very encouraged that we're starting out on a positive note, when we expected it to be a continued decline. That makes me very optimistic for the rest of the year. But, again, it's undetermined how optimistic I can get.

Yes, but, you have five weeks of sales. Did you get a sense that this was a lot higher than they did in those same five weeks a year ago? And if so, what do you think drove that improvement?

I would guess that Kraft starting paying attention to the brand about the time they were selling it. And it's not like they were doing any thing unusual in terms of spending, promotion or marketing wise. It was just -- I think their sales force focused a little bit on the brand and turned it around a little bit, because Kraft actually had a very good January and February.

So the whole first quarter for the brand was a very good quarter, but we can't say that they did anything extraordinary in terms of pumping up the tires, expect to pay attention to it. And really, it was our feeling all along that that's all the brand really needed was somebody paying attention to it.

Great. And do you have any projections for -- I don't know if you gave the sales in the quarter, both in terms of price and volume. And then also maybe you could comment on the year. Which of these do you think will be the bigger contributor to your organic growth this year?

Well, the gain in the first quarter of the base business was more unit sales than it was price -- probably about 60/40. And we would expect that to continue on that trend. The price increases we saw in the first quarter were brought, by and large the ones that we put in place effective January 1st. We have not done a lot of pricing since then. But I do expect that to continue through they year. And we do expect organic growth to continue through the year, probably about the same mix.

And in general, do you kind of think that your pricing is enough to partially offset, maybe more than 50% of the higher commodity costs that you're facing, or is it -- are you really trying to fully offset it?

We're closer to fully offsetting it than 50% partially offsetting it. But as I say that, the caution is always that these things can change very quickly nowadays, especially with the price of oil. But what we know today, we're pretty happy with where we are in terms of offsetting the costs.

Great. Well, congratulations, again. Thank you.

Thank you.

Thank you.

And gentlemen, we have no further questions in our queue. Mr. Wenner, I'll turn the conference back over to you.

Thank you, operator. As I said, we're very pleased with this quarter. It really reaffirms all the strategies we have around this business in terms of driving organic growth with some of our existing brands, controlling and offsetting costs, and then laying on top of a successful base business a very, very accretive acquisition in Cream of Wheat that is starting out much better than we thought it would and is very encouraging. So we're looking forward to the rest of 2007. And hopefully, we'll have the same kind of good news for you in our next conference call. Thank you.

That does conclude today's conference call. Thank you for your participation and have a good day.