B&G Foods Inc (BGS) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the B&G Foods, Inc. second quarter earnings results conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. David Wenner, Chief Executive Officer of B&G Foods. Please go ahead, sir.

Thank you, Operator. Good afternoon, everyone, and welcome to the B&G Foods second quarter 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 condition. 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 also will be making reference on today's call to 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 it is included in our 10-Q.

We'll start the call 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 going forward into the second half of fiscal 2007. Bob?

Thank you, Dave.

Net sales increased $12.9 million, or 12.3%, to $118.2 million for the quarter ended June 30, 2007 compared to $105.3 million for the quarter ended July 1, 2006. Excluding the impact of the Cream of Wheat acquisition and the termination of a temporary co-packing agreement, net sales increased $1.6 million, or 1.5%, relating to increases in sales price and unit volume. The Cream of Wheat acquisition accounted for $12.4 million of the net sales increase, offset by a decrease in net sales of $1.1 million relating to the termination of the temporary co-packing arrangement.

Gross profit increased $8.9 million for the second quarter of 2007, or 31.4%, to $37.3 million from $28.4 million in the second quarter of 2006. Gross profit expressed as a percentage of net sales increased 4.6% to 31.6% for the second quarter of 2007 from 27% in the second quarter of 2006. The increase in gross profit expressed as a percentage of net sales was primarily due to the positive effect of the Cream of Wheat acquisition, which improved our overall gross profit expressed as a percentage of net sales by 4.1%.

Sales, marketing and distribution expenses increased $1 million, or 8.4%, to $12.6 million for the second quarter of 2007 compared to $11.6 million for the second quarter of 2006. The increase was primarily due to an increase in brokerage and salesmen commissions of $0.9 million relating to increased sales volume from the Cream of Wheat acquisition and internal sales growth. These expenses, expressed as a percentage of net sales, decreased to 10.6% in the second quarter from 11% in the second quarter of 2006.

General and administrative expenses decreased $0.2 million, or 10%, to $1.6 million for the second quarter of 2007 compared to $1.8 million in the second quarter of 2006, resulting primarily from an increase in incentive compensation of $0.5 million and other miscellaneous expenses of $0.1 million, offset by an insurance reimbursement of $0.8 million relating to a previously reported prior year employee theft.

Operating income increased 46.7% to $21.5 million for the second quarter from $14.7 million in the second quarter of 2006. Net interest expense increased $4.6 million, or 42.1%, to $15.5 million for the second quarter from $10.9 million in the second quarter of 2006.

Interest expense for the second quarter of 2007 included a write-off of deferred financing costs of $1.8 million relating to our prepayment of $100 million of our term loan borrowings with a portion of the proceeds of our public offering of Class A common stock in May 2007.

Our average debt outstanding was approximately $172 million higher for the second quarter of 2007 as compared to the second quarter of 2006. Our EBITDA increased 48.4% to $25 million for the second quarter compared to $16.8 million in the second quarter of 2006.

Earnings per share of our Class A common stock increased to $0.17 for the second quarter of 2007 from $0.14 in the second quarter of 2006. During the second quarter of 2007 earnings per share of Class A common stock were impacted by a substantial increase in weighted average shares of Class A common stock outstanding to 26.1 million shares for the second quarter of 2007 from 20 million shares for the second quarter of 2006 as a result of the Class A offering. The total number of shares of Class A common stock outstanding as of June 30, 2007 was 36,778,988 shares. Capital expenditures for the second quarter of 2007 were $4.2 million and $6.5 million year-to-date.

Moving on to the balance sheet, we finished the second quarter 2007 with $37.4 million of cash compared to $29.6 million at the end of 2006 and $21.5 million at the end of the second quarter of 2006. We also finished the second quarter of 2007 with $535.8 million in long term debt and $183.4 million in stockholders' equity. Our inventory at the end of the second quarter of 2007 decreased $0.4 million to $90.3 million compared to $90.7 million at the end of the second quarter of 2006.

B&G Foods remains healthy from a cash point of view. We expect to make capital expenditures of approximately $12 million to $13 million in both 2007 and 2008 in respect to our existing manufacturing operations and for relocating certain manufacturing equipment acquired in the Cream of Wheat acquisition. Following the completion of the one-time capital expenditures to be incurred during 2007 and 2008 relating to the Cream of Wheat acquisition, we expect our capital expenditures to return to historical levels.

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

Thanks, Bob.

Second quarter was a very solid quarter for our Company and bore out the success of many of our strategies for the year. Our net sales increase of 12.3% had elements of both acquisition and organic growth in it.

Cream of Wheat net sales were $12.4 million and tracked ahead of our expectations. Excluding the termination of a temporary co-pack arrangement, our organic sales growth was $1.6 million, or 1.5%. This was lower than our expectations. I'll go into the factors affecting that number in a moment.

Year-to-date net sales through two quarters were up 12%, or $23.7 million, with Cream of Wheat accounting for $18.8 million of the increase. Again, excluding the co-pack arrangement, organic sales were up 3.2% year-to-date, which is much more representative of where we'd like to be.

Our margins improved throughout the P&L, which is what we expected. Gross profit for the second quarter went up -- went from 27% of net sales to 31.6%. Year-to-date gross profit is up 3.1% of net sales to 31.5%. Excluding amortization expenses relating to customer relationship intangibles, our operating expenses declined 0.7% of net sales for the second quarter reflecting dilution of our fixed cost base by the Cream of Wheat acquisition. And year-to-date operating expenses declined 0.5% of net sales to 12.4%. As would be expected from this, our EBITDA margin expanded from 16% of net sales to 21.1% for the second quarter and actual EBITDA increased by 48.4% to $25 million. Year-to-date EBITDA rose 34.4% to $46.1 million.

We believe that these are very good numbers and to a large degree reflect successful execution on the Cream of Wheat acquisition. As I mentioned, Cream of Wheat sales are tracking ahead of our expectations. Year-to-date net sales were up nearly 2% versus Kraft's prior year sales when we modeled a decline of as much as 6% in our acquisition assumptions.

This is very encouraging as we head into August, when we should see the effect of regained distribution and the initial sales in anticipation of September coupon drops and price promotions. So far there have been no surprises on the acquisition and it's performing at or above expectations in all regards.

We continue to have Kraft manufacture the Instant Cream of Wheat products for us under the transitional co-packer agreement, but we are moving quickly to install manufacturing in our Stoughton, Wisconsin plant. The assembly line for the variety pack has already been installed in Stoughton and is producing product. The expansion of the plant for producing the instant products is well underway and on schedule.

Organic growth slowed in the second quarter and the 1.5% that we saw was due to improved pricing and volume growth. There were several factors at work in the second quarter, including the timing of the Easter holiday and the effect of changing promotional pricing on volume.

Two brands, B&G and Joan of Arc, were affected by the early Easter holiday, which moved sales from the second quarter into the first quarter. In the case of Joan of Arc, net sales are up year-to-date, reflecting this shift. B&G, on the other hand, was down for the quarter and down year-to-date as well, though to a lesser degree. Both B&G and B&M were affected by higher pricing on seasonal promotions going into the key Memorial Day and July 4th holidays.

Both brands have seen significant cost pressure in the last few years, requiring us to raise promotional pricing. As we've done so, we have seen -- we've seen volume losses in certain instances, as retailers and consumers get used to the new level of pricing. This is not unlike the effect we saw last year with Polaner promotions. In that case we suffered through the adjustment and eventually saw improved performance. We expect a similar experience with the B&G and B&M brands going forward.

Sales trends on the Emeril brand, probably the most problematic in our portfolio, improved in the second quarter. The brand's net sales are down $1.8 million year-to-date but were down only $400,000 in the second quarter. We're lapping our sales experience in the mass merchants where we lost distribution and the residual losses there are being offset by success in product lines such as cooking stocks and the new cooking sprays.

We're working hard to drive further improvement in the second half of the year. Plans include such activities as a re-launch of the pasta sauces with new packaging and an improved ingredient statement and a major marketing effort partnering with Google in the fall.

A number of brands performed very well in the second quarter. Maple Grove Farms continued to be a strong growth brand with net sales increasing 9.9% in the quarter and 19% year-to-date. Excellent sales of maple syrup and sugar-free syrups and strong sales of dressings, organic products and the new gluten-free pancake mixes all drove brand growth.

Our Hispanic brands, Ortega and Las Palmas, also continued to be growth brands. Year-to-date net sales of these two brands were up $1 million, or 2%. Polaner continues to grow as well, increasing net sales by 11.1% for the quarter and 3.2% year-to-date. As I said earlier, this is an example of a brand that changed promotional pricing last year and suffered for it, only to return to a growth mode at a more profitable level this year.

As I mentioned earlier, our margins improved dramatically in the second quarter, primarily due to Cream of Wheat, but we saw margin improvement even when we take Cream of Wheat out of our results, which means we're getting ahead of the cost increases we continue to see in the business. In prior calls we estimated that we would see costs increase at roughly half of the 2006 rate.

As the year progresses, we have seen cost increases just slightly ahead of that prediction, mostly due to higher than expected oil prices and an unexpected surge in the Canadian dollar. These increases have been offset by a combination of pricing, reduced trade promotions and cost reductions. We estimate that we've seen nearly $4 million in improved pricing, tracking very closely to the $8 million benefit that we predict for the year.

In addition, our pay per performance efforts have reduced trade spending on the base business by 0.7 of a percent of gross sales, a year-to-date gain of over $1.5 million. Cost reductions have contributed as well and should gain momentum in the second half of the year. The project to bring Underwood production in-house is essentially complete. Trial runs will begin in August. This project is expected to generate $1.5 million in annualized cost savings.

Despite the addition of Cream of Wheat and higher fuel surcharges, our distribution costs in the second quarter were down both in dollars and down 0.3% of sales, a savings of $1.4 million if annualized. All of these positives allowed us to improve gross profit on the base business by 0.5% of net sales in the second quarter.

Sales and marketing expenses increased by $1 million for the quarter and are up $2 million for the year. All of the second quarter increase and $1.3 million of the year-to-date increase is due to increased sales volume, primarily from Cream of Wheat. The remainder of the year-to-date increase is higher marketing spending on our brands. This spending was planned for the year and is tracking to that plan.

G&A spending was actually down $200,000 for the quarter due to an insurance refund, offset by slightly higher incentive compensation. Year-to-date G&A spending was up very slightly and remains at a low 1.5% of sales. Cream of Wheat is diluting this spending as a percent of sales, lowering it 0.2% of sales so far this year.

Bob went through our balance sheet, but I think it bears repeating that cash on the balance sheet rose by an almost $16 million versus this time last year and by nearly $8 million since the beginning of the year. Inventories were down slightly versus the second quarter of fiscal 2006, even though we added over $2 million of inventory for Cream of Wheat. As the Underwood project proceeds, we should be able to reduce inventories in the B&M and Underwood brands by approximately $5 million in the next 12 months, further improving that metric.

Coincidentally, we are making our eleventh consecutive quarterly dividend payment today, including dividends on the additional shares sold in our recent offering.

As I said at the beginning of my remarks, I believe that the second quarter results show a very solid business that has integrated an important acquisition quickly and effectively while producing consistent results in the base business. I believe that we are well positioned to continue this performance into the second half of the year in both the Cream of Wheat brand and the other 17 brands in our portfolio.

With that, I'd like to open the call up to questions. Alan?

Thank you. (OPERATOR INSTRUCTIONS)

And we'll take our first question from Ed Aaron of RBC Capital Markets.

Great, thanks. Good afternoon, guys. A couple of questions for you. On the interest expense line, could you just review the charges that you mentioned that you incurred there in the quarter?

We had a one-time write-off of $1.7 million due to the pay-down of -- write-off of deferred financing costs due to the pay-down of $100 million as part of the IPO.

Right. Is that consistent with where you thought that was going to come in --

Yes.

-- at the time of the deal? Okay. And then just curious to get your thoughts on the acquisition pipeline. There's been a little bit more talk out there just with Nelson Peltz getting involved at Kraft and there's been some comments out of Nestle about them looking to streamline their business a little bit. Are you seeing any changes in terms of the acquisition pipeline and more things coming your way there?

I think it's still a little lumpy but we expect some more things to come out and we expect to be busy looking at things here in the second half. The only caution I would throw out there is that the debt market has become problematic here lately and people may hesitate worrying about whether people can finance things or not.

Fair enough. And then you -- the price increases that you had in the quarter, you mentioned that that's pretty close to your plan. But I would have just, based on kind of where I thought the general pricing environment was looking in the quarter, I would have thought you would have taken maybe a little bit more price there. Is there just maybe less commodity pressure than I might have thought because 1.5% growth on an organic basis, that was a combination of both volume and price, couldn't have left much room for price increases?

Well, actually, it was probably more price than it was volume growth. We're seeing commodities pretty steady from where they started the year and really maybe trending down slightly, but not really affecting our results since most of our costs are locked in for the year. I mean corn's down a little bit from where it was, sugar's down a little bit from where it was, things like that. We really aren't seeing a lot of commodities going up per se.

Probably the single biggest increase we've had this year is on maple syrup and that's not a commodity issue, it's a currency issue. That's on old story that you've heard for several years now. But commodities are fairly calm right now compared to what people might thing they're doing.

All right, thank you for the clarity.

And we'll go next to Reza Vahabzadeh with Lehman Brothers.

Good afternoon.

Good afternoon, Reza.

Hi. Good afternoon.

As far as the cost pressures that you touched on, you mentioned that they seem to be moderating a bit but you're for the most part locked in or hedged for the second half of the year?

Not hedged, but we do tend to have annual contracts on things like corn syrup and packaging, glass, things like that.

Okay. And I know it's only five months away in 2008, but initially would you say that the cost pressures from this point in time, they might moderate or would they accelerate in '08?

When you break it down by component, I don't think commodities are going to go up a lot. I think where you might look for relief, you're probably not going to get it. But an awful lot revolves around things like the corn crop this year and whether that causes any kind of a lowering of commodity costs. I think the packaging people are going to continue to be aggressive, especially if oil stays where it is and energy stays where it is. We've seen early indications that the packaging people are going to try and be aggressive on their costs.

Right. And you mentioned the gross margin moved up 410 basis points because of -- because of Cream of Wheat. The other portion of the gross margin improvement year-over-year, was that primarily price?

Well, that's price offsetting cost.

Okay. And how much was the cost inflation this quarter?

In dollars?

In percentages or dollars.

I've never translated it into a percent of sales. Probably about 1% of sales.

Okay. And for Emeril, what do you think needs to happen for that to turn around?

Well, first we have to lap distribution results that we don't have anymore.

Right.

I'm not going to replicate distribution in Wal-Mart. I think I can do some business with clubs that I haven't been able to repeat so far. We used to do significant rotations with warehouse clubs on pasta sauce. With the new packaging and the new ingredient statement where we're taking high fructose corn syrup out of the product and making a cleaner ingredient statement, there has been some interest expressed about doing some more rotations of things like pasta sauce in a club, so obviously that would help.

Beyond that we're shoring up the retail business where we have had some fairly consistent results and our new products are doing very well, the cooking stocks, cooking sprays. We just shared a new seasoning for hamburgers at the Fancy Food Show in July that had a very strong response. So I think as we lap the mass merchant distribution that we lost and we successfully execute at the regular stores, I think we'll do better.

Got it. Thank you.

And we'll go next to Pi Aquino with Credit Suisse.

Good afternoon.

Afternoon.

Good afternoon.

Just two quick questions. You talked about organic sales growth up 3.2% year-to-date. Are you still targeting 3% to 5% growth for the full year?

That's our ambition, yes.

Okay. And then as it relates to Ortega and Las Palmas, I remember first quarter that brand being up pretty strongly, I want to say mid double digits, in the first quarter and I think you said maybe 2% year-to-date. But I know that you also had some new products being introduced under that brand. Can you give us a little bit more color around what's going on there?

Well, we are expanding distribution specifically more on Ortega than on Las Palmas and we're starting to see orders against that distribution. So we would hope that it would drive second half's growth a little more strongly out of that distribution of new products.

All right, thank you.

(OPERATOR INSTRUCTIONS) And we'll go next to Stefan Mykytiuk with [Pike Place Capital].

Good afternoon.

Afternoon.

Question on the Cream of Wheat. You said you're a little ahead of your original plan in terms of sales and going into a seasonally stronger period. Can you build on the strength or is there some reason why you're going to come out closer to where you originally thought at the end of the year as opposed to ahead of the game like you are now?

I guess I'd be startled if we came out where we originally thought we would because we had modeled a decline in the business and we haven't seen it yet. And now we're going to go into a period where we're going to ship against new distribution in August and then follow that up with a price promotion coupon event in September. So given all of that, I'd really be surprised to have sales decline versus Kraft's experience.

Where it will end up remains to be seen. I mean this is new ground for us and we don't know what this will do in terms of moving the needle on the brands. That's what we're going to find out. But down would be an amazing event.

Okay, that sounds great. Thanks.

And it appears we have no further questions at this time. Mr. Wenner, I'd like to turn it back to you for any additional or closing remarks.

Okay, thank you very much. I appreciate everyone joining us on the call. As I said earlier on, we're pleased with these results. We're pleased with the ability of this business to continually generate reliable cash flow that allows us to pay our dividends and also invest in our business and we intend to keep doing that throughout the rest of 2007. Thank you.

And, ladies and gentlemen, that completes today's call. Thank you for your participation. You may now disconnect.