B&G Foods Inc (BGS) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the B&G Foods Incorporated Third Quarter Earnings Results Conference Call. (OPERATOR INSTRUCTIONS).

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

Thank you. Good afternoon, everyone, and welcome to the B&G Foods Third 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 bgfoods.com and in our quarterly report on Form 10-Q that we filed with the SEC today.

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'll also be making reference on today's call to non-GAAP measures, such as 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.

We will 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 final quarter of fiscal 2007. Bob?

Thank you, Dave. Net sales increased $15.1 million or 14.9% to $117 million for the quarter ended September 29, 2007, compared to $101.9 million for the quarter ended September 30, 2006. The Cream of Wheat acquisition accounted for $15.4 million of the net sales increase, offset by a decrease in net sales of $1.1 million, relating to the termination of a temporary co-packing arrangement. The remaining $0.8 million increase in net sales related to increases in sales price and unit volume.

Gross profit increased $8.9 million for the third quarter of 2007 or 30.4% to $38.3 million from $29.4 million in the third quarter of 2006. Gross profit expressed as a percentage of net sales increased 3.9% to 32.7% for the third quarter of 2007 from 28.8% in the third 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, partially offset by increased cost of packaging and certain other ingredients.

Sales, marketing and distribution expenses increased $1.6 million or 14.4% to $13.1 million for the third quarter of 2007, compared to $11.5 million for the third quarter of 2006. The increase was primarily due to an increase in brokerage and salesmen compensation of $1.1 million, relating to increased sales volume from the Cream of Wheat acquisition and internal sales growth and an increase in consumer marketing of $0.5 million. These expenses expressed as a percentage of net sales decreased to 11.2% in the third quarter from 11.3% in the third quarter of 2006.

General and administrative expenses increased $1.8 million or 111.8% to $3.4 million for the third quarter of 2007, compared to $1.6 million in the third quarter of 2006. This increase is primarily due to $1.4 million accrual relating to a special bonus award to be paid in March 2008 to certain executive officers and members of our senior management. In addition, general and administrative expenses increased $0.4 million as a result of increased incentive compensation accrual relating to our 2007 annual bonus plan. Operating income increased 21.3% to $20.2 million for the third quarter 2007 from $16.6 million in the third quarter of 2006.

Net interest expense increased $1.4 million or 12.4% to $12.4 million for the third quarter of 2007 from $11 million in the third quarter of 2006. Our average debt outstanding was approximately $105 million higher for the third quarter of 2007 as compared to the third quarter of 2006. Our EBITDA increased 29% to $24 million for the third quarter of 2007 compared to $18.6 million in the third quarter of 2006.

Earnings per share of Class A common stocks was $0.13 for the third quarter of 2007. Earnings per share of Class A common stock was negatively impacted by $0.02 per share due to a $1.4 million accrual or $0.9 million net of tax for the special bonus. During the fourth quarter of 2007, we expect to accrue an additional expense of $0.5 million or $0.3 million net of tax for the special bonus awards, which is expected to negatively impact earnings per share of Class A common stocks for the fourth quarter by $0.01 per share.

Capital expenditures for the third quarter of 2007 were $4.4 million and $10.9 million year-to-date. We expect capital expenditures to be approximately $2.1 million for the fourth quarter and $13 million for the full year 2007. Following the completion of the one-time capital expenditures in 2007 and 2008 relating to the Cream of Wheat acquisition, we expect our capital expenditures to return to historical levels.

Moving on to the balance sheet, B&G remains healthy from a cash point of view. We finished the third quarter of 2007 with $34.6 million of cash versus $20.9 million of cash at the end of the third quarter of 2006. We also finished the third quarter of 2007 with $535.8 million in long-term debt and $178.1 million in stockholders' equity. Our inventory at the end of the third quarter 2007 increased $1.5 million to $95.4 million, compared to $93.9 million at the end of the third quarter of 2006.

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

Thanks, Bob. As you can see from Bob's remarks, our Company had a very good third quarter in spite of growing challenges on the cost side of the business. Our net sales of $117 million were ahead of the prior year by nearly 15%. This performance took our year-to-date net sales number to $339 million, a 13% increase.

The key to these accomplishments, of course, has been the success of the Cream of Wheat acquisition. The Cream of Wheat brand's net sales were up almost 6% in the third quarter versus Kraft's prior year net sales. Pro forma net sales on Cream of Wheat year-to-date are up 3%, so the sales trend line is positive. Our efforts at expanding distribution of Cream of Wheat and then selling more effectively against that distribution are succeeding. We have added nearly 6,500 points of new distribution since acquiring the brand. Our September FSI drop and subsequent price promotion have given us the credibility to get that additional distribution, and we plan another FSI drop in price promotion in December. The response to the September event by our consumers was also positive. In some accounts, we saw double-digit increases in net sales.

Excluding Cream of Wheat and the cessation of a temporary co-packing agreement, our base business net sales increased approximately 0.007% in the third quarter, due to pricing and unit volume. Unit volume was up overall for the quarter, but product sales mix lowered the average price of those units. Our Maple Grove Farm business had an excellent quarter, increasing over 13% on strong maple syrup and sugar-free syrup sales. This line is up 17% year-to-date and our syrups and pancake mixes, in particular, continue to perform very well. The interesting fact here is that maple syrup is the commodity that has seen the most cost increases in the past few years. We've raised price accordingly and despite that, unit sales continue to increase.

B&M also had a solid quarter with a 9% increase in net sales, supported by new radio advertising and our new no sugar added products. Ortega also grew by almost 2%. Retail products in the Ortega line grew over 7%, but the brand's overall growth was depressed by heavy price competition on Food Service cheese pouches. The retail growth of the Ortega line illustrates the effect of new products in the line. We have launched several new products this year into grocery and mass merchant distribution. Other brands have grown notably on a year-to-date basis, including Joan of Arc, Las Palmas and Grandma's Molasses.

Part of the difference in brand performance between the quarter and year-to-date and the reason for the declines in B&G and Underwood in the third quarter specifically, is that we're changing promotional price points on more brands as cost pressures continue. As we do this, we're seeing an adverse affect, which we believe is temporary, on the sales of those brands. Brands affected are usually highly promotional and include B&G, Underwood, Joan of Arc and Las Palmas. The B&G brand is probably the most affected as it has seen double-digit cost increases in virtually every important cost component, including glass, produce, vinegar and corn syrup. As we've raised promotional prices to compensate, we have seen volume dislocations, especially in the third quarter.

As many of you know, the Emeril brand has been a concern for the past few quarters. It improved somewhat in the second quarter and showed signs of stabilizing in the third quarter. Sales were down only $100,000 in the quarter versus Q3 2006, partly because we've lapped most of the mass merchant distribution loss in previous periods and partly because the line is performing well in traditional grocery outlets.

Some parts of the line are doing very well. Net sales of Emeril cooking stocks, for instance, are up over 50% this year. Seasonings and pasta sauces are improving and new product lines such as mustards and cooking sprays are growing. The repackaged pasta sauce line, now formulated without high fructose corn syrup, is being very well received in a number of channels. Early reaction to a new seasoning for hamburgers, the Emeril [Bamberger] seasoning, is also very positive. All of this makes us cautiously optimistic that the line will return to a growth mode in the fourth quarter.

Third quarter gross profit improved over 30% to $38.3 million and improved as a percentage of net sales by 3.9% to 32.7% of net sales, Cream of Wheat was a significant factor here and accounted for most of the increase in dollars and as a percent of sales. Cost increases in the base business were offset by price increases and continued improvement in trade spending. Our trade spending for the quarter and year-to-date continues to trend downwards as a percent of gross sales. We will maintain emphasis on the pay-for-performance initiative on trade spending in the future, but returns are beginning to diminish as we find fewer and smaller opportunities. Having said that, we believe we've already lowered our trade spending to a rate well below industry average.

Lower distribution costs as a percent of sales also helped improve gross profit. Our distribution costs were down 0.5% of net sales in the third quarter and are down 0.003% of net sales year-to-date. Here again, Cream of Wheat has contributed by diluting fixed costs within our distribution systems and improving the loading on shipments to customers. This has allowed us to reduce distribution costs as a percent of sales, even as fuel surcharges match historical highs, running at a rate 40% higher than they were this time last year.

As I mentioned earlier, costs are an ongoing issue. 2007 cost increase are tracking slightly higher than we predicted earlier in the year, but still below the 2006 rate of increase. We have been able to offset these increases with cost savings, price increases and, as I mentioned earlier, higher promotional pricing. The cost challenge is not going away in the foreseeable future. In fact, it appears to be worsening.

In our last call, I predicted that our 2008 cost increases would be at the same level as 2007. Since that call, oil has gone over $90 a barrel and the dollar has continued to decline, actually dropping below parity with the Canadian dollar. These and other factors have worsened our cost projections for 2008 to the point where we are currently expecting increases 50% higher than 2007. These increases are coming in certain commodities such as wheat and in derived products such as corn syrup and vinegar. We are also seeing increases in packaging components such as glass, steel cans and corrugated.

The good news is that we are better able to predict these moves and act accordingly. We have active cost reduction projects that we expect will offset approximately one-third of the increases, and we are announcing further price increases on a number of our brands. We will also closely review promotional activity for 2008 and adjust it for higher anticipated costs. The goal, of course, is to at least offset cost increases and hopefully continue to improve our margins in 2008, but the situation remains very fluid at this point.

Sales and marketing expenses in the Company increased by $1.6 million for the quarter, due to higher sales volume and planned increases in our marketing spending. Consumer marketing spending on our base business is up over $1 million so far this year. We have added such things as radio advertising on the B&M and Ac'cent brands in support of those brands in key markets. We are also doing increased marketing around our brands connected with breakfast. These would include Polaner fruit spreads, Maple Grove Farms syrups and pancake mixes, Vermont Maid syrup and of course, Cream of Wheat. While it's always difficult to pin down the exact contribution specific consumer marketing efforts make to sales, it is noteworthy that these brands are enjoying above average growth rates in our portfolio.

Bob mentioned that G&A costs are up $1.8 million this quarter, $1.4 million of which is an accrual for special bonus awards to be paid in 2008. These special bonus awards are being given in lieu of long-term incentives for 2007, assuming we hit certain performance goals. Largely as a result of the Cream of Wheat acquisition and the stock offering completed earlier this year, our Compensation Committee is in the process of putting in place a new long-term compensation plan for 2008 and beyond. It should be noted that the three quarters of the accrual for 2007 special bonus awards were taken in the third quarter, a catch up to year-to-date if you will. The remaining one quarter is expected to be taken in the fourth quarter. Had the accrual been taken evenly throughout the year, the third quarter accrual would have been approximately $475,000 instead of the $1.4 million.

Net income was up nearly 41% for the third quarter and EBITDA was up 29% to $24 million. This EBITDA number is generally in line with our expectations, given the acquisition of the Cream of Wheat brand. EBITDA so far this year is up 32.5% to $70.1 million, again, generally on track with our expectations. These increases show the potential of the Cream of Wheat brand to positively affect our future EBITDA performance if we are able to continue to grow that brand.

Our balance sheet remains healthy with almost $35 million in cash, up from $20.9 million a year ago. Inventories are up several million dollars, but that includes the added inventory of the Cream of Wheat acquisition and an inventory build as we get ready to move Cream of Wheat manufacturing to our Wisconsin facility. Without those factors, inventories would be down slightly and we see the ability for a modest increase in inventories in 2008, further improving our cash position.

We have increased our cash position by 67% in the last 12 months, despite significantly increased capital spending to complete the Underwood manufacturing relocation and to begin the Cream of Wheat manufacturing relocation. As we've said in previous calls, this increased level of capital spending will continue through 2008 and then is expected to return to a more historical level in 2009. Cash is of course essential to our ability to pay our quarterly dividend. We will pay our twelfth consecutive dividend in a few days, and our cash balance ending the third quarter represents more than a full year of dividend payments.

All in all, it was a very good quarter for our business and so far, a strong year. The business has its challenges in today's cost environment, but we're proud that we've been able to keep our base business stable in the face of those challenges, while taking advantage of the opportunities the Cream of Wheat acquisition has presented to us. This consistency is one of the strengths of our diversified portfolio of 18 brands. As we look forward to 2008 as a company, we see ourselves with solid brands and strong new product effort. Cream of Wheat alone has a minimum of three new products planned and more resources than in recent years with which to market and sell those products. The challenges are certainly there, but we believe we are prepared to meet them.

At this point, I'd like to open up the call to questions. Anthony?

Thank you. (OPERATOR INSTRUCTIONS).

And for our first question, we'll go to Reza Vahabzadeh with Lehman Brothers.

Good afternoon.

Good afternoon.

Good afternoon, Reza.

I'm sorry I missed the one comment that you made, Dave and Bob, was the $1.4 million, was that cash or was that a stock compensation?

That would be a cash award.

To be paid in March, 2008.

I see, so it is cash but it's actually not going to be paid for a couple of quarters.

Yes.

Okay. And then, on the input cost front, the rate of increase this year, what's your more recent estimate for total cost increase?

It's about two-thirds of what it was last year, last year was roughly $12 million.

Okay. But you were talking about two thirds on a higher base, including Cream of Wheat, right?

Yes.

Yes.

And where are you seeing the higher increases relative to first half of this year? Is that wheat and basically oil-based products or --?

Wheat not so much the first half of this year and not even oil-based products, a lot of it the first half of this year is commodities and things that are derived from commodities. Corn syrup, for instance, was up 25%, vinegar was up 50%. Some packaging, packaging is actually going to hit us harder next year, I think, than it did this year.

Okay. And so for the second half? Or are there different costs that are arising?

Well, the second half, you're seeing some accelerating costs in things like wheat. Yes, wheat is definitely kicking in in the second half of this year. And other produce that, as these crops come in, we are seeing increased cost in general from produce and commodities as there is lower supplies because more acreage went to corn.

And Rez, we're also seeing the Canadian dollar hitting us hard in the second half of the year.

Again.

And it's jumped up quite a bit in the last few months here on us.

Right.

And the reason it's hitting us more this year than it would normally even in an increase, would be that we weren't able to buy syrup early this year. There was a very small crop, so the syrup purchases are staggered later into the year this year than they would normally be.

Right. Are you thinking about removing some uncertainty and just kind of locking, hedging some of these costs?

At this point, you have to wonder if you're hedging at the worst possible point, especially with things like wheat when wheat is at an all-time high. You know, I've never been good at calling these things.

Okay. So you're just going to kind of --.

Well, a lot of places we don't have the ability to hedge because you know, we talk about these increases but, except for maple syrup, none of the commodities we buy are real large volumes where you can give yourself some dramatic insurance by hedging. But, maple syrup is probably the one commodity where, if we had done something with the Canadian dollar some time ago, we could have saved ourselves some substantial money. As I've said in many calls now though, as I read all the analyst reports, they say well no, the Canadian dollar is at its high and they continue to be consistently wrong.

And are you comfortable that you can still take 2% type pricing to offset the cost increases in one shape or another?

Yes, we've done it very successfully this year. We think we can continue to do that next year.

Got it. Thank you.

And for our next question, we'll go to Alton Stump with Longbow Research.

Thank you, good afternoon.

Hello.

Good afternoon.

I just had a quick follow up on something that you were mentioning in your introduction about, with the recent pick up in some of the external costs, it sounds like you may have pulled back a little bit on your promotion and that might have hurt sales in the quarter. Is that accurate?

Yes, that's accurate.

The next question would be, looking now into the fourth quarter, has anything changed to date? Or do you expect it to change, if not this quarter, at some point in first half of next year?

I don't know what you mean by expect it to change.

In other words, will your strategy change in terms of do you plan to get a bit more promotional to drive sales in the fourth quarter or first half of next year versus --?

It's going to brand by brand. In some cases, we won't have the ability to do that, B&G for instance, is being rocked by cost, as I said, in almost every component. So, getting more aggressive just isn't in the cards. Some other brands though, we definitely are probably going to get more aggressive. In some cases, we've pulled manufacturing in house which gives us an added benefit when we get aggressive and we will do that with some brands. But, it's very much mixed bag depending on the brand.

Okay. And then, I guess just one question on the Cream of Wheat business, which obviously did very well in the quarter and of course, you get the top line growth and contribution. Could you talk a little bit about profitability in that business, whether the cost savings are on plan, above plan or below?

Well, we never planned any cost savings in the business per se. Some of the synergies we're seeing in our overall cost, like in distribution, we sort of expected it to be a neutral event. It's a much more positive event than we expected, so that's great. We actually may have a cost savings moving manufacturing into our Wisconsin plant now because the Canadian dollar has gone up so high and buying these products out of Canada is more expensive at this point than we thought it would be. So, because costs went up unexpectedly, we're going to save money when we move it to the U.S. But we expected, from a cost point of view, that Cream of Wheat would be fairly neutral event and it's turning out to save us money in a few places.

Okay great, that's all I have. Thank you.

Thank you.

And for our next question, we'll go to Robert Moskow with Credit Suisse.

Good afternoon.

Good afternoon.

Good afternoon.

You guys said that EBITDA is tracking generally in line with your expectations for the year. Give me a sense of what you mean by that. Is it in line with your pro forma estimates for '07, is that what you kind of mean, if you'd had Cream of Wheat the whole time?

Yes, that's what we mean.

That's what we mean. It's in line with our pro forma estimates.

Okay. And secondly, are there any categories that you're in where you feel like the competition is getting more intense, maybe increasing promotion at the wrong time? Or do you feel like your competition is experiencing the same cost pressures that you're experiencing and therefore, everyone's trying to do the same kind of thing and pulling a little bit of the promotion out?

Again, it's a mixed bag depending on the category. We don't see anybody getting super aggressive in any of our categories, and we certainly feel that everybody's in the same boat as we are in. You know, somebody may have done a better job of hedging a particular commodity than we did, somebody may have a multiyear contract on packaging that we might not have, but they're delaying the inevitable if you will, and we don't see anybody being aggressive off of those kinds of things. There are one or two places where we are sitting and wondering why competition hasn't raised prices, but those aren't an overwhelming number either. But, there are a couple places where we're kind of baffled that people haven't taken prices up. And since we're not the leader in those areas, we would be waiting to follow them.

Right. And then, in Cream of Wheat, it sounds like your initial marketing efforts are working, that's great. Is there any risk that maybe if you're getting too much share or if you're growing too fast at Cream of Wheat that Quaker, the bigger player there, may decide to get equally aggressive and try to take that share away? Are you seeing anything with respect to Quaker yet? Or do you feel like you're playing your game and that's it?

First off, I don't think the games we're making are making an impact that Quaker can perceive. And I don't think we're taking business away from Quaker per se. Our goal has always been to take business away from the half of the category that Quaker doesn't control, and I think we're doing that in terms of taking some product placements away from other people and taking some of their business away. But, when I walk through stores, I don't see that we're taking any shelf space from Quaker, they're being very aggressive about acquiring shelf space, and they're working hard on the category. And I don't think we're hurting them, I think we're hurting, as I said, the other half of the category. I think Quaker's going to do what Quaker does no matter what we do.

Honestly, you know I'm actually kind of struggling to figure out why your stock has moved down the past few months. It sounds like you're right on track in terms of your operating plan, maybe it has something to do with the tighter credit environment and maybe the speculation out there is that would make life harder for you to make acquisitions. It seems to me that it might actually be the opposite and that it might make the bidding for assets a little bit easier. Is there anything you can tell us about if there are any more assets falling off the truck, so to speak, from the big players and what you're seeing in terms of competition for those assets?

Well, I think you're right in that competition is less in that the private equity guys are having a harder time financing anything. So we don't see, when we go to look at acquisitions, we don't see them in the game as much as they would have been in the past. So, that limits the competition. I would say the environment right now is a little slow, but there's an awful lot of people talking about putting things out for sale and we're certainly talking to a lot of people about what we could possibly do with them. But, it's not a real active environment right now.

As far as the stock goes, you know, we always sit and wonder why the stock price changes as much as it does when there's not any news and we're performing consistently. You know, my only comment would be that the whole sector has moved down and we've moved with it. Although when we look at our valuation versus the comps, we're getting a pretty good valuation versus our comps in the food business. But, those comps have all moved down, I think, partially on the fear of what cost will do to the food business.

And I agree. Thank you very much.

Okay, thank you.

And for our next question, we'll go to Ed Aaron with RBC Capital Markets.

Thanks, good afternoon guys.

Good afternoon.

Good afternoon.

Just a follow up to a previous question about the profitability of Cream of Wheat. Could you actually maybe give us an EBITDA number for Cream of Wheat for the quarter?

Well, I think on a pro forma basis, when we acquired the business, we talked an EBITDA margin of a little over 50% and we're tracking that. We've been tracking that since our acquisition on Cream of Wheat.

And then, as you look out into '08 and you kind of consider the potential benefits of the capacity you're bringing on line and the fact that you threw some marketing spending at the brand this year, how much potential is there for margin expansion in that business in your opinion?

Well, I don't think - today, we're looking at margin expansion because we see a lot of opportunities on the top line. So, any synergistic savings, any manufacturing savings, we're probably going to put back into marketing the brand.

And we are seeing cost increases on that brand, too.

Yes, we are seeing wheat going up. But, you know, we should be able to maintain those kinds of margins and hopefully, continue to grow the top line.

Okay. And then, Dave, you mentioned in your prepared remarks that part of the reason why your base business slowed down was because you took away some promotions or you let up on some promotions to try to preserve some margin. And I remember you saying that you did something similar with a couple of brands around Memorial Day. Could you maybe talk about the experience that you had shortly after you did that a few months ago and whether you think that that's going to be relevant this time around?

Well, that's exactly what we did and the B&G brand was the one we did around Memorial Day, we did it again around the Fourth of July and Labor Day. And as I said, you see some volume dislocations out of that. It's not good for the category in that you see the category move down as well as your business moving down as people start adjusting promotions in these promotion-sensitive businesses like pickles and peppers, like baked beans. Underwood does well on the right promotions and we move promotional prices up on things like that.

You know, I just see that as cost pressure continues, everybody is going to have to do more of those things. And, so you have to be fairly prudent about it but, in some cases, there's going to be a volume dislocation as you do that and people go through sticker shock. And so, I see that pressure continuing as compared to pressure continues.

So, would you expect your fourth quarter with your base business to be more like your third quarter or more like the first half of the year?

I think the fourth quarter is going to look a lot like the third quarter.

Okay. And then, my last question is about the discretionary bonus expense that you [did some growth] for this quarter or next. Thinking out to next year, I know you haven't finalized the incentive compensation plan, but how should we think about that from a modeling perspective in '08? And when do you expect to be able to communicate to us what that plan is going to look like for next year?

I think certainly late this year, early next year at the worst, that plan will be published. I'd be surprised if the compensation in that plan, assuming performance parameters were hit, was much different than this plan. This plan or this award basically came about because there was an LTIP in place and what is being awarded was very similar to what the LTIP would have been had the Compensation Committee followed the parameters the LTIP had for the past few years.

They did not set the parameters for this year because there was a lot going on with Cream of Wheat and the stock offering and all of that. So, they withheld setting those parameters until the dust settled. But what the award is, is very consistent with what the LTIP called for in prior years. I think you're going to see a similar plan going forward, again, it's going to be performance based, so there may or may not be awards given on that. There were no awards given on the old LTIP in 2005 and 2006. And it won't be cash. It'll probably be around restricted stock or something like that. The reason this is cash is that we don't have the ability, short of going to the stockholders in a special vote, to get stockholder approval for an equity award right at this point in time.

But however it works out, will you expect it to be like, one payment in one given quarter or more evenly accrued for throughout the year than it was --?

Oh, it would be accrued for throughout the year depending on whether our performance was tracking to whether there was an award being earned or not. I mean, that's the way those things work. You know, I think it's going to be very typical in terms of vesting over a few years and things like that, it's not going to be something that's just bang, paid out the next year, either.

Understood. Thanks, guys.

Yes.

And for our next question, we'll go to Mark Churchill with Piper Jaffray.

Yes, most of my questions have been asked, but do you still think you can attain a 3% to 5% organic sales growth rate for the year?

Very unlikely right now, and it's simply because the cost environment has worsened from what we expected it to be and we're having to react, as we've said, with pricing and promotional changes.

Okay, thanks.

Yes.

And for our next question, we'll go to [Thomas Sheer] with Federated Investors.

Hi, congratulations on a good quarter.

Thank you.

Thank you.

I just wanted to know, if we back Cream of Wheat out of the gross profit margin, how was your gross profit margin compared to last year?

It was down about 1.5%. There's a little mix involved in that on some of the brands we sold, but of that 1.5% cost increases attributed was about 1.2% of the 1.5%.

All right, thank you very much.

And for our next question, we'll go to Michael Connelly with T. Rowe Price.

Sorry if this was asked already, but can you give a little color on the seasonality of the Cream of Wheat business? Is the fourth quarter any different than the third quarter in terms of sales dollars?

You know, the seasonality we think pretty much tracks with the hot cereal seasonality is in general, which would be for the eight months that aren't summer or late spring months. It starts around Labor Day and starts wrapping up a month before Memorial Day or so. And fourth quarter should be actually a little better than third quarter because you start later in the third quarter in terms of selling in.

But when you look at the history on Cream of Wheat, the seasonality isn't that dramatic, partly because I don't think Kraft drove seasonality. They didn't do FSIs and price promotions and things around the time when people buy hot cereal. So, they didn't take advantage of the fact that people are more interested in eating hot cereal during the colder months. So, we're actually probably going to create more seasonality in the business than there has been in the past.

Okay. Thank you.

Yes.

And for our next question, we'll go to Stefan Mykytiuk from Pike Place Capital.

Hey, good afternoon. Just kind of taking off on that last question, has the -- the weather's been quite warm, kind of -- certainly in the northeast, does that affect Cream of Wheat sales into the channel at all or just kind of affect the sell through?

This is my first time going through this in terms of selling Cream of Wheat at all and selling hot cereal at all. I would suspect it affects consumer take-away more than it affects selling to the channel.

Okay.

But we're learning as we go along here.

Okay. Yes. That's what I would think also. And then in terms of seasonality, a few questions ago, you said you thought Q4 would look similar to Q3, is that kind of in absolute dollar terms or is that just in terms of kind of the trends in the business and the pressures and the cost?

The trends in the business, the pressures and the costs, I think Q4 is typically a little bigger quarter for us than Q3.

Okay. That's what I thought also. I just wanted to make sure I didn't misunderstand.

Okay. No, just general trends in the business and all that.

Alright. And then lastly, back to Cream of Wheat, what -- I don't know how to kind of ask the question the right way, but what stage are you -- you haven't owned Cream of Wheat that long and yet, you've made some nice progress here. What stage are you in terms of reaching the -- what you think the full potential is of Cream of Wheat? I mean, is it -- is it going to be in '08, is it '09 when you're going to get this to where you think it should have been with more kind of care from Kraft?

Oh, I - you know, we think we're a long way from where the potential in this business is. I -- last week, I was talking to somebody who had worked on the business a number of years ago when it was twice the size it is today.

So, we think we've got a long way to go and we're just starting.

Okay. And of the -- if you could get -- I'm not trying to put words in your mouth, so you're committing to doubling the size of Cream of Wheat, but if you -- if we just said you can double it, how much of that is channel increase versus new products and just promoting it and things like that? How do you grow it? What are the components of really increasing the size of the business?

Well, that's a good question. I think we've already, in a number of outlets, doubled the number of products in the stores. Now, whether those new products will sell as fast as the old products or not, that's I think going to be us -- how good a job we do in terms of promoting and marketing those products. But, there's no question there's distribution opportunities with the existing products and as I said, we have a bunch of new products queued up for launch next year, so it's a combination of higher distribution of the products we have now and pushing out new products and pushing them into new places. There's no club distribution, there's limited distribution at Wal-Mart, there's a lot of places we can go with new products and existing products.

Okay. Terrific. Thank you.

Yes.

And for our next question, we'll go to David Barnes of Nexus Advisory.

Good afternoon, gentlemen. I'm looking for a silver lining on this inflationary cloud. And I'm glad I'm not the only one being affected by it. Is -- are -- is there a potential diminution in value for portfolio products that you could be looking to add? In other words, you're using this inflationary problem that are -- got to be -- obviously they're affecting everybody. But can -- do you see any opportunity to use that as leverage for any portfolio additions in '08?

Well, it certainly has the potential to lower the value of properties as you're going to look at buy at them versus what they were doing last year or the year before. We passed on an acquisition a couple of years ago, maybe a year and a half or so ago, because we were very concerned that it had a lot of exposure to commodity costs and we saw a lot of commodity cost inflation coming and not much ability to move price. We look pretty smart today on passing on that one. So, it definitely can have an effect.

And from your perspective, in the follow-up to this, are these costs having, I would say, more severe impact on smaller players in this market that are newly segmented or regionalized?

It really -- it very much depends on what products you're in. I mean, we talk about this and I want to put it in context, this is not a massive thing for us. We're talking about something that's -- that it's worse, 3% of sales or so. But, yes, if you're -- if your business is selling just pancake syrup, for instance, which is 90% corn syrup based and packaging, you're going to see very large cost increases as a proportion of your business.

In our business, we have any number of brands that are not seeing increases of any consequence. That's part of why we can manage this situation as well as we can is that it's not hitting us everywhere and not hitting us as severely as it might in some months -- in some places. Just because we have such breadth of commodities and packaging and things like that.

So, it hits some things hard, it hits some things not at all in our case. Somebody who has a concentration in the wrong kind of products, boy, they'd better be able to raise price, because it can hit them pretty hard. And it doesn't matter whether you're big or small, it just matters what business you're in.

Great. Thank you.

Yes.

We're now going to take our next question from Andrew Lazar with Lehman Brothers.

Good afternoon.

Good afternoon, Andrew.

Good afternoon.

As you have raised prices, a couple of rounds, and then obviously have more planned, have there been certain categories or ones that are important to you where you have seen either retailers or other distribution arms that you go through, choose to kind of lower inventory for some period of time until they kind of are forced to sort of reload?

No, it's usually the opposite. When you're raising price, they usually want to buy in, in advance of a price increase.

Right. I guess, well, on that front, are you able to sort of monitor that fairly well so you have a sense of kind of what -- if anything pulls forward and therefore what to expect on the other side, a quarter or two out?

Yes, we haven't seen a lot of that. We really haven't.

Okay.

But that's typically what happens if you're taking broad price increases is people start buying in.

Right, yes. That was the sort of the follow-on to it. Only because we've seen a [12] other companies, not in your business, use the price increases that have come through as a reason to sort of lower inventories for some period of time before they sort of have to own up to the higher price side of things. But, okay.

Really haven't seen that.

Okay. And then, the second thing would be there's a lot, as you said, things are fluid from a cost and pricing standpoint right now. So, I realize a lot will happen as we go into '08. But kind of as you stand here and as you're -- or, I'm not sure when you do your planning for sort of '08. But as you think out in '08, from where we are today and what you've got planned around pricing and such, how do you, I guess, at the end of the day, think about where you would hope to have sort of your EBITDA base be? Sort of your -- I think the pro forma number that you're going for this year, I guess based on what last year was, was 101 or something along those lines?

Yes.

Any -- I realize that would be preliminary, but any preliminary thoughts on, based on what you've got coming, what next year could look like? Or is it just too early?

It's too early. I mean, we're tracking right along that 101 pro forma and that's what we've said here. As dynamic as the situation is, I really would hesitate to say where next year's going to go. Obviously, if we do a great job with Cream of Wheat, that will take us a long way in overcoming any cost pressures. But it's too early to say.

Right. And Andrew, the 101 was before the special bonus.

Right. Right. That's right.

That's -- you need to look at taking that down almost $2 million.

Right. No, absolutely. That is built into our thinking.

Good point.

So the last thing would be, I guess as the core -- the base business gross margin, as you said, was down a bit for a couple of reasons, mix being one, but obviously cost is the biggest piece of it. So that suggests, I guess because cost has been going up so rapidly, there is a certain lag obviously to how quickly you can sort of recoup that through pricing. When -- do you have a sense of perhaps when we might be able to see the price that you're taking sort of catch up to where perhaps base business margins can be even flattish, such that the benefits you get from the Cream of Wheat side are additive to the overall?

If you'd asked me that in the last call, I would have told you we'd probably beginning to be seeing that at the beginning of next year. But, the costs that we know we're going to get next year are accelerating enough that I can't say that anymore. And that's the situation. Until the cost environment calms down, it's very hard to tell -- say when you're going to catch up.

Yes, right. All right. I assume at this point as you go to retailers and such with what you need from a pricing standpoint, we're long past the scenario where they're like that doesn't compute, can't really go there. I'm assuming kind of they're getting hundreds of these basically invoices put through their desk on the price side?

Absolutely.

Such that -- so there's an impact on volume, I realize, but we're past the sort of the retailer getting upset stage?

Yes, and as I said, it's not so much the list price increases that even affect the business. It's the dislocation from some of these --.

Promoted?

Promotional price points that are like magic price points, like $0.99 or 2 for $3 or something like that. When you move off of those price points, retailers tend not to support the next promotion as strongly and consumers don't get as excited and it takes awhile for everyone to get over the sticker shock.

Okay. Thanks very much.

Thank you.

And we'll now take a follow-up question from Reza Vahabzadeh with Lehman Brothers.

Yes, in terms of cost savings, what kind of cost savings are you sort of carrying through your P&L this year on an annualized basis and is that number going to be similar or better in 2008?

We're probably doing $2 to $3 million this year, that's going to be higher next year. We have some major projects kicking in. For instance, we'll be full bore on having moved Underwood into our Portland, Maine facility. That's going to be a nice cost savings, we certainly hope. And we actually have been able to negotiate some very good sourcing contracts on some materials, some packaging and things that are going to be cost savings as well. So, there's no question we're gaining momentum on our cost reduction efforts. Sometimes you feel like you're shoveling against the tide, but we're definitely making a lot of progress in terms of generating more cost savings.

Thank you.

And we'll take another follow-up question from Robert Moskow with Credit Suisse.

Well done. Thank you.

Yes. Okay.

And at this time, there are no more questions in the queue. I'd like to turn the conference over to you, Mr. Wenner, for any additional or closing remarks.

Okay. Thank you very much. I thank everybody for joining us on the call. Obviously, from your questions, there's a great deal of concern about the cost environment these days. And as I said, we need to put it in perspective. Our business is very diverse. We have cost issues in a number of product lines. We believe we have anticipated those cost issues to a great degree and that we can continue to produce very reliable, consistent results in this business and still take advantage of the upside in a number of brands, such as Cream of Wheat and Ortega and Maple Grove and other brands that are growing very nicely for us.

So, we believe that this company will continue to perform consistently into 2008 and be a steady performer that has a very good cash flow, very good margins and also is able to continue to pay a very good dividend. And thank you once again for joining us on the call.

That does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines.