B&G Foods Inc (BGS) 2008 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the B&G Foods, Inc. Second Quarter 2008 Financial Results Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded and would now like to turn the conference over to David Wenner, Chief Executive Officer of B&G Foods. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to the B&G Foods Second Quarter Fiscal 2008 Conference Call. You can access detailed financial information on the quarter in our earnings release issued today and available on our website at bgfoods.com and in our quarterly report on Form 10-Q that we have 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 the 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 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. Bob?

Thank you, Dave. Net sales increased $1 million or 0.8% to $119.2 million for the second quarter of 2008 compared to $118.2 million for the second quarter of 2007. Net sales of our lines of Maple Grove Farms, Ortega and B&M increased $2.3 million, $1.5 million and $1.1 million. These increases were partially offset by a reduction in net sales of Cream of Wheat, Ac'cent, Polaner and B&G of $1.8 million, $0.6 million, $0.6 million and $0.5 million.

Gross profit decreased $3.7 million for the second quarter of 2008 or 10.1% to $33.6 million from $37.3 million in the second quarter of 2007. Gross profit expressed as a percentage of net sales decreased 3.4% to 28.2% for the second quarter of 2008 from 31.6% in the second quarter of 2007. This decrease in gross profit expressed as a percentage of net sales was primarily due to increased spending on trade promotions and increased costs for wheat, maple syrup, corn, packaging, transportation and sweeteners.

Sales, marketing and distribution expenses decreased $1.1 million or 8.8% to $11.5 million for the second quarter of 2008 compared to $12.6 million for the second quarter of 2007. This decrease was primarily due to a decrease in consumer marketing of $0.7 million and a decrease in selling expenses of $0.6 million offset by an increase in warehousing expense of $0.2 million. These expenses, expressed as a percentage of net sales, decreased to 9.6% in the second quarter of 2008 from 10.6% in the second quarter of 2007.

General administrative expenses increased $0.3 million or 17.8% to $1.9 million for the second quarter of 2008 compared to $1.6 million in the second quarter of 2007. Excluding the impact of $800,000 insurance reimbursement received in the second quarter of 2007, general administrative expenses decreased $0.5 million in the second quarter of 2008 as compared to the second quarter of 2007. This decrease primarily was the result of a decrease in professional fees of $0.3 million and compensation expense of $0.3 million.

Operating income decreased 13.7% to $18.6 million for the second quarter of 2008 from $21.5 million in the second quarter of 2007. Net interest expense decreased $2.6 million or 16.9% to $12.9 million for the second quarter of 2008 from $15.5 million in the second quarter of 2007. Interest expense for the second quarter of 2007 included a write off of deferred financing cost of $1.8 million relating to our prepayment of $100 million of 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 $66.7 million lower for the second quarter of 2008, as compared to the second quarter of 2007. Our EBITDA decreased 10% to $22.4 million for the second quarter of 2008 compared to $25 million in the second quarter in 2007. Earnings per share of Class A common stock was $0.10 for the second quarter of 2008.

Capital expenditures for the second quarter of 2007 were $2.6 million and are $9 million year-to-date. During the second half of 2008, we expect to incur an additional $2 million in capital expenditures for a total of $11 million. This compares to capital expenditures spending of $7.8 million in the second half of 2007 for a full year total of $14.2 million in 2007.

Moving on to the balance sheet, we finished the second quarter of 2008 with $24.1 million of cash compared to $36.6 million at the end of 2007. During the second quarter of 2008, we used an additional $8 million of cash to secure the purchase of maple syrup. During 2007, this money was spent during the third and fourth quarters. We also finished the second quarter of 2008 with $535.8 million in long-term debt and $167.7 million in stockholder's equity. I will now turn the call back over to Dave for his remarks.

Thank you, Bob. This quarter was one of the most challenging we've seen in the past ten years and it's reflected in our results. The results center around two basic issues, costs and price. Expected and unexpected cost increases hit us hard during the second quarter, while we saw only a very modest benefit from price increases.

In fact, gross sales which reflect the theoretical impact of price increases were up nicely, but higher trade spending, reflecting the fact that we did not see those increases in aggregate, netted sales down to a modest 1% increase, all of which was due to volume. This is not to say that we did not see price benefits. In fact, pricing was higher in about half of our brands. But this net gain was negated by several factors.

The three major factors were first, a higher proportion of brand sales done on promotion, second, increased sales of high trade spend brands such as B&M, B&G and Oretega, and third, price rollbacks in specific brands with some key customers. The Emeril brand is a perfect example of the last factor. Overall pricing in the brand is down so far this year as we try to determine what retail price is the best for the Emeril's pasta sauce line. A temporary price reduction was done at one customer that doubled unit sales.

We then pulled back the reduction to an intermediate level and maintained sales at a level 80% higher than the original base. Similar experiments are ongoing with other customers, and while the price is down as a result, unit volume on pasta sauces is up 34% so far this year. With the exception of this activity, we have eliminated the price reductions that were done in the first half.

We have also raised promotional price points on most brands for the last four months of the year, and another round of price increases becomes effective August 8th, in some cases on items that we have not increased before and in other cases further increases on items where price had already been taken.

We estimate that the net effect of these increases in the second half of the year will be over $10 million and should largely offset the cost increases that are in place or that we anticipate for the second half. In addition, we are planning a further round of pricing that will take effect no later than January 5, 2009.

With the exception of maple syrup and an unexpected temporary increase on wheat, our cost outlook has not changed dramatically. Maple syrup aside, we are running at an $18 million to $20 million rate of increase for the year when all known and anticipated cost increases are included. Higher wheat costs are included in this number. In the case of wheat, we did not anticipate the sudden spike in wheat prices that occurred in the second quarter, and ended up buying very expensive wheat.

This situation has since improved and we are looking at much better, although still historically high, prices through the first quarter of 2009. Maple syrup, on the other hand, was a very dramatic effect in the second quarter. Maple syrup was our single largest purchase. Had 2008 been a normal year, we would have spent as much as $30 million on syrup. As was mentioned on our last call, the 2008 crop was a poor one. Since then, it's become clear that the crop was not just poor but a failure, coming in at approximately 50% of normal.

As a result, the price of maple syrup surged past the nominal price set by regulation in Quebec and ended approximately 45% higher than last year. We estimate that we may be able to obtain half of our normal needs this year and have implemented a number of actions to compensate for the reduced availability and higher cost. An immediate price increase was taken in May from 40% to 60%, depending on the price -- customer's pricing format.

All promotions and discounts were cancelled and customers placed on allocation. About 80 items in the line were discontinued to focus supply on the most important and profitable items. Finally, if a customer was unable to implement the immediate price increase, shipments to that customer were suspended until the price increase was in place.

As a result of these actions, unit sales have declined while dollar sales have not. Retail unit sales are down 30% so far in July. Frankly, that's not enough, given the limited supply, and we are reviewing options to reduce sales further. It is still uncertain what the final effect on sales will be, but there was a negative cost effect of roughly $1 million on EBITDA on the second quarter as we rushed to implement price increases.

Moving on to the other brands in our portfolio, we had mixed results for the second quarter with about half the brands up and half down in net sales. Cream of Wheat had a soft quarter with net sales down 14.5% for the quarter. Much of that decline was due to a first quarter promotion that moved volume into the quarter and from higher promotional spending that netted down second quarter sales. Trade spending in the first half is up $1.3 million, a combination of our new trade promotion activity and Kraft programs that were not reflected in their comparable brand P&L.

We expected this higher trade spending, but had counted on new product sales to offset it in our plans. What we are finding is that the new products are gaining distribution more slowly than we anticipated due to slow retail execution. Only about two-thirds of the retailers who have accepted our new products have ordered them through the second quarter. We expect this distribution to fill out over July and August so that the products are on shelf for the fall season and our September FSI and promotional events.

We remain very confident on this brand. Comparing the first four months of our ownership in the first half of 2007 to the same four months in 2008, the brands' net sales are up 4.5%. Where we have fully implemented our plan to recover distribution on the baseline products and placed new products, we have seen double digit growth. Sales at one key mass merchant who placed the new products in relatively limited distribution are up 27% so far this year.

Meanwhile, the capital project to move production of the instant products to our Wisconsin facility has been completed and the production line is in operation. Several brands, such as the B&G brand and Trappey, were down due to softness in the food service channel of distribution. We are seeing certain customers in the food service channel affected by the weak economy, while others seem to be benefiting. Mid-scale restaurants seem to fare the worst so far in this economy.

We are still seeing heavy price competition in our Regina brand and are responding as necessary to defend that brand's position. Other brands continue to do quite well. Our Hispanic-oriented brands, Las Palmas and Ortega, have had excellent years so far. Las Palmas' net sales were up 10% this year on expanded distribution and share gains. Ortega is up 5% this year and continues to expand distribution with existing and new products. Sales seem strong throughout the Ortega product line but dinner kits are doing exceptionally well paced by several new products.

Our two molasses brands are doing very well, showing over 8% growth this year. We are also seeing consumers buy more of our promotion driven brands. B&M baked beans have benefited from this trend. Sales were up nearly 13% in the second quarter. The B&G brands' retail products have had a strong quarter as well, reinforcing our impression that consumers are eating at home more and prefer branded products when they offer value.

We've been working hard for several years to find products that would appeal to the Dollar Store class of trade, given the volume of stores this class represents, and we may finally have found the answer. As we enter the third quarter, we have sold Las Palmas, Ac'cent and Underwood products into this channel, which should increase the sales in each of those important brands. Distribution of our new Underwood barbecue chicken and turkey products continues to expand in the traditional supermarket channels as well.

Our operating expenses are well under control in the quarter and were favorable versus last year by $800,000 between sales, marketing, distribution and G&A expenses. We have reduced costs and sales by consolidating several customer service functions and reducing selling expenses in a number of areas. Marketing expenses, while down for the quarter, are up for the first half due to coupon and advertising events that were executed earlier this year than last. We expect second half marketing expenses to be approximately $1 million lower than past year.

G&A expenses are down due to lower incentive compensation accruals, reflecting the fact that our results are not what we had hoped for in the quarter or year to date. Our cost reduction activities are gaining momentum and are reflected in these results to some extent and we still expect to save $2 million to $4 million this year. We have already reduced head count throughout the Company by 2% and hope to use less seasonal and part-time labor in our facilities as the year progresses.

As Bob referenced, our cash position is down versus year end and last year, but for very specific reasons that are temporary. Inventory is up due to maple syrup purchases. Our inventory should decline as the year goes on and we expect to end the year with inventory lower than prior year.

Our finished goods unit volume in inventory was down over 13% at the end of the second quarter versus June 2007, indicating the progress we have made in reducing finished goods inventory. Capital spending in the second half of 2008 is expected to be over $5 million less than the second half of 2007. Between these two factors, we remain comfortable that cash will return to more normal levels in the second half of this year.

On that note, our Board of Directors announced our 15th consecutive dividend last Wednesday payable on October 30, 2008 to stockholders of record as of September 30th. We currently see no reason to expect that our dividend policy will change. As I said at the beginning of these remarks, this was a very challenging quarter for our business. We are usually much more stable, but we were hit with extraordinary cost increases, including several issues we believe are one time events.

Specifically, the wheat cost spike and the maple syrup shortage. Each of those impacted our results by over $1 million and came so quickly that we could not compensate for them completely. Barring similar cost surprises and assuming our price increases generate the expected revenues, we still believe that we can match 2007's EBITDA for the full year to fiscal 2008. And at this point, I'd like to open up the call for questions. Operator?

Thank you. The question and answer session will be conducted electronically.

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And we'll go first with [Brant Jowen] with RBC Capital Markets.

It's actually Ed Aaron here. Good afternoon, guys.

How are you doing?

Come on in, Ed.

Hey, a couple of questions for you. So on the Cream of Wheat, this is the first time you've talked about any response to your promotions as being less than very positive and I'm just kind of wondering if it's caused you to rethink anything strategy-wise in terms of the promotion of that brand going forward?

Well actually the promotions from a retailer point of view were almost too positive, that it moved volume into the first quarter and out of the second quarter. We had a very, very good March based on a promotion we did in March, and we saw a lot of customers buy in on that promotion. So a very strong March depressed second quarter sales and that's why I used the four month comparison of the four months where we owned it in 2007 versus the four months in 2008 and showed you that we were up 4.5% over that same four months.

We didn't see the response at the consumer level we might have hoped to see. We saw a weaker response than we hoped from consumers, so we're rethinking how we're going to do the September promotion and have actually recast it in light of that and it's still a work in progress in terms of what promotions work and don't work, but we're trying something new in September.

As far as the pull forward of sales in the margin, was that something that you had internally modeled for? In other words, realizing that you knew in April that you had good [market] for Cream of Wheat where you -- where you expecting a higher level of sales than actually came in for the second quarter for the brand?

We were, and as I said it was because we expected more pipeline fill on the new products, we thought that would backfill what we lost on the existing products into March. That did not happen as much as we would have hoped. As I said, we've had acceptance at a wide range of retailers, but there is fully a third of them that haven't ordered the product yet and in some cases people have actually deducted the (inaudible) monies and still haven't ordered the products. So we're all over people to get those products into the store here before we drop our September FSI and do the promotions in September.

Okay. And then could you just talk a little bit about the acquisition pipeline. It just seems like maybe it's a little bit more lively than it was six or nine months ago.

Well it is more lively than it was six, nine months ago. You know, we continue to look at several properties. I would say that what's interesting nowadays is the financing window tends to open and close depending on what week it is. It seems to be closing right now, but it was open three, four weeks ago, so you kind of have to pick your spot there, but I think we're confident that it will open back up again and, if there's an opportunity, we'll be able to do the financing.

Okay, I might have a couple of more questions, but I'll jump back into the queue.

Okay.

And we'll go next to [Risa Bahab Zadi].

Good afternoon.

Good afternoon, Risa.

Hi.

On the pricing assent that you've taken, and I think you mentioned in August, mid-August kind of a price increase followed by January 1, but do you think your pricing increase in August once fully realized can allow you to catch up with costs as you foresee it now and would that be in the fourth quarter or could that happen by the end of the third quarter?

Well we have actually two price increases in play this year because we still have the one that we announced in March to get a benefit from and we believe that we are getting a benefit from that now and will for the full second half of the year. Then we have the August 1 kicking in here in another week or so, and as we're double checking what we expect to happen based on how the first half went, you know we're confident that that one is going to have much more effect than the first one did and be much more immediate in terms of effect.

So between those two and some other scattered ones we're doing with Food Service and things like that, you know we're forecasting that we will see about a $10 million benefit out of pricing in the second half and we're working hard to make sure that happens.

I see. Okay. And as far as spending back the pricing increase back into trade, I assume there is going to be less than that in the second half than there was in the second quarter?

Some, as I said, there is really three factors. One was deliberate price reductions on some product lines, either as a competitive response or, in the case of the Emeril's line as an experiment to see what would happen at different price points. And again, as I said, everything but the Emeril's line pasta sauce experiment has stopped, so those are all positives relative to the first half. The second is that we did see a very good response from consumers on things that are typically promotion sensitive, B&M, B&G and Ortega frankly, so that mix shifted our trade spending up to some extent.

And then third, when I say more products sold on promotion, there seems to be a trend in the industry for some of the major retailers to try and go to an EDLP format rather than -- rather than high low promotions necessarily. And even when they do high low promotions, they are funding it off of EDLP formats with manufacturers and we frankly had several of those in place and did not realize what the dynamics of those would be in terms of the trade spending positives and negatives versus last year and it was a negative to us in the second quarter. We expect that to turn positive in the third quarter and some of those are ending and will be reset at a higher level in the third quarter.

Okay. And as far as competition -- has competition generally matched your price increases give or take?

Well in the vast majority of cases we're following competition so yes -- it's a self fulfilling prophecy that they have followed our -- in the case of Ortega would probably be the only place where we are leading pricing and we have not seen General Mills move yet. Having said that, we're really making Ortega gains not so much at the expense of Old El Paso as at the expense of Taco Bell, so despite the fact that they have not moved in price, OEP, I mean, we are still making headway.

I see. Okay. And then as far as the -- as far as the inventory numbers that you've mentioned, so by the end of the year just to be clear you're gonna see inventory levels come back to prior year levels?

Or below, yes.

Or below that. Thank you much.

You're welcome.

And we'll go next to Robert Moskow with Credit Suisse.

I thank you. Let me ask on the sales line, I guess -- you've actually given a pretty detailed explanation as to what happened and why it's kind of stagnating here and I appreciate all that. But is there any way to peel it out, like for sales to be essentially flat here -- like how much pricing did you really take and then how much did you then have to deal back? Is there a way to peel out like what list pricing was actually up so we can get a sense of how much trade spending there was?

Well trade spending was up several million dollars on a -- as a percent of sales. Bob, do you want to?

Yes, I mean --

The first -- go ahead.

Let's -- our pure price increase is a little mixed here -- is up between $4 million and $5 million. And because of certain brands, Emeril's being one that Dave mentioned, we basically dealt the majority of that back during the course of the quarter.

Okay.

From a pure list price and from a pure kind of go forward basis, we feel very comfortable that that list price will stick in the third and fourth quarter.

All right. And then on the commodity cost side, I'm of the mindset that the commodity costs are not just persisting but I think they can actually accelerate from here and that inflation could accelerate. I know it's hard to have a crystal ball for '09, but do you get a sense that the cost at least in the back half are actually accelerating beyond your current pace of inflation.

Not really. There will be increases from where we are today and the back half. But we foresee that -- it's really something we've seen coming down the road. For instance, beans going into B&M and Joan of Arc. We've known for some months now that those costs are going to go up 60% in September. Though I guess, we don't see them accelerating in the sense that we've know about this for quite some time.

Unless something happens in the corn market, we expect the corn syrup guys to hit us with another big increase January 1st. But not atypical of what they've done for the last couple three years, 25% or so, but you know, ultimately we're not sure. But beyond that, and this is an opinion and nothing more than that, I'm really seeing things tending to plateau past that level. I think there's not the pressure -- you've seen wheat start to level off, you've seen corn pull back some, you've seen actually oil pull back some.

I guess -- I guess I won't be surprised if things actually start calming down in the last quarter of the year and we don't see any more remarkable cost increases going forward. Having said that, we're still planning for a price increase in January and we're certainly hedging our bets that that extraordinary things can happen that will drive the price of oil back up again and we're going into another round of inflation. But all things being equal, unless something extraordinary happens, my impression and it's one person's opinion, is that costs might actually plateau four or five months down the road.

Okay. And then as far as the overall consumer is concerned, you know you're in a lot of different categories, maybe this is just kind of hard to talk about, but I'm trying to figure out if consumers are trading down within your portfolio also, but I guess it's kind of hard to tell because they -- if they shifted to B&M and B&G and Ortega it might have been because you had deals on in those categories and maybe that's the reason that they were attracted to them? Is that fair?

Well more sales of B&M doesn't mean consumers are trading down per se. What it means to me is they may be eating at home more and they're looking for inexpensive side dishes and baked beans, there's very little private label business there. It's a branded business and it's a branded business because you can buy a good serving size at a very reasonable price.

We're seeing the same thing with B&G retail products, increased sales at retail on those products. Ortega offers meal solutions at home and so we're not surprised that we're seeing increased sales there. We're basically executing the same promotions as last year and, in the case of B&G, higher promotional prices and seeing a better consumer response. So we think it's all about consumers trading down and that they're not eating out, they're eating at home more in that sense, but within the grocery store products, not necessarily trading down.

Okay. Thank you very much.

You're welcome.

And we'll go next to Bryan Hunt with Wachovia.

Thanks. David, I was wondering if you could talk about other than maple syrup where you've taken the biggest price increases and conversely maybe the smallest moves. It sounds like the routine is that you have so much competitive pressure here you are not doing much of anything.

Well where we've taken the biggest price increases -- I guess it would boil down to things like where you've seen broad cost increases. For instance, our B&G pickle and pepper line has seen very broad cost increases. Fully every major component of those products is 20%, 30% higher. So we've raised promotional prices considerably and have taken a retail price increase as well, the Polaner line preserves and things. Again, fruit has gone up a lot, corn syrup has gone up a lot, glass has gone up a lot.

So we've tended to follow Smuckers' latest price increases on that line and they are considerable. Yes, there are some things like Regina that it's very competitive and we really haven't taken a price increase. Even lines like B&M, the increases will be considerable going forward on B&M, but they are more oriented towards promotional activity than they are towards pricing. We're going to take a modest price increase here in the fall on B&M in terms of list price, but our promotional pricing probably will change dramatically and that's due again to the fact that beans are up 60%, cans are up somewhat, and the sweeteners that go into the product are up as well.

Okay. Could you talk about maybe on which costs that you're hedged out for a significant period of time whether it's tin plate or glass, corn or peppers, anything along those lines?

Well in terms of packaging, we have annual -- annual or multi-year contracts but I have to tell you that the contracts -- any contract like that that you are signing now a days has energy inflators in it, so you're gonna, depending on what oil does to your packet you can't insulate yourself on packaging, at least we can't. You can't insulate yourself on packaging from the effect of oil or something like that. As far as commodities go, wheat has become a significant commodity for us relate to the size of our business and we're locked on a wheat prices through the first quarter of 2009.

We've locked in corn prices in a similar timeframe. So we're taking more positions than we ever have on commodities where we have exposures like that. And then there's other things like corn syrup that basically are annual pricing contracts and that's pretty common through the industry and so our corn syrup costs are locked through the end of the year, but then a new price comes into effect January 1st.

Looking at -- backing up to promotion -- what would you say your tonnage was up during the quarter, or your overall volume?

The volume was up comparable to the net sales, about 1%.

Okay. And then we've heard a lot about coupon redemption has accelerated in the current environment. Are you seeing that hit out as well and let's say if you did have a big step up in coupon redemption, what kind of risk is there to numbers?

We are not seeing a very large coupon redemption increase. It's very comparable to prior years. Last year, we spent $3.5 million on couponing. We might spend an extra $1 million this year because of Cream of Wheat. So we just don't see a huge risk on that.

All right. Thank you very much.

You're welcome.

And we'll go next to Andrew Lazar with Lehman Brothers.

Good afternoon.

Good afternoon, Andrew.

Good afternoon.

Just a couple of things. One, I'm still trying to get my arms a little bit -- I appreciate all the detail around sort of the trade spending and kind of the three different buckets that that fell into. I guess I'm still -- I'm just really surprised because you are one of the only if not the only company, frankly, that hasn't seen pretty dramatically accelerating top line growth largely because of pricing flowing through.

And I realize you went through a couple of different as to kind of why. But I guess I'm trying to get a sense which of those what sort of the biggest and was that something that you knew was going to happen? Like you had visibility to it and realized that was what you were trying to accomplish? Or was it something that you didn't necessarily see until it started coming in that way, and you internally in your plans had really expected a lot more pricing to come through?

Well we expected a couple million dollars of price benefit in the second quarter, and why it didn't happen, I think the everyday low pricing with some retailers kind of snuck up on us in terms of the effect and the reason I say that is, when we set those everyday low prices, we actually set them with a price increase in mind. In other words, the net collect from that customer on those prices was going to be higher than the net collect was last year. Then it gets down to timing, in terms of when did you spend your promotional money with that customer last year versus this year as to whether you're plus or minus that net collect at any point in time.

And the effect basically in the second quarter was -- was that we were minus the net collect the prior year. As promotional activity goes through the summer on some of those brands, like B&M, like B&G and others, we will gain ground on that net collect. But that part surprised us. The price rollbacks were done for defensive purposes in a lot of case and those are very ad hoc so we had not planned all of those and so to that extent they were unexpected.

And then finally the mix shift to more trade promotion brands obviously we had not predicted that as well. We have eliminated the price decreases. Now that we understand the EDLP we're confident that we gonna gain grown on that EDLP format. But yes, there were a couple of things there that we went through some learning curves, but the price decrease was not one of them.

Okay. And then, as I think about how the top line will start to shape up as we go into the third and fourth quarters, I'm trying to get a sense of how you think the top lines like Libby come through and then sort of how the components between pricing and volume will shape up because there's a lot of puts and takes here and I'm still not sure how that sort of plays through in the back half of the year.

And we're not sure to the extent that maple syrup will affect that top line. And that's a big bogey out there because it's all about how much supply can we continue to get on maple syrup and how much will this dramatic price increase that we've taken can effect volume. Frankly, when we raised prices as much as we did, we hoped the volume would go down comparable to the 40% to 60% price increase we took depending on customers because there's not enough maple syrup to supply the same amount of usage as we did last year.

So if it's perfectly even, if we raise price and the unit volume goes down as much as we raise price, then obviously the sales are unexpected. But we don't know what that effect is gonna shake out to be going forward. Putting that aside, we expect a modest increase out of pricing.

I would say we do not expect a lot of unit growth overall because we're exiting two significant private label pieces of business on the B&G side and that's done simply because they were not profitable and have used up a lot of working capital so we decided to move away from those. But we could see a -- that volume loss will probably leave us to where if we see a modest unit growth, maple syrup aside, we'll be pretty happy.

Okay. And then the last one would be, I realize there's all sorts of competitive issues that you need to be cognizant of in each of your individual categories. Do you think there's an argument to be made that in an environment like this that to the extent that you or anybody else are not taking even more aggressive sort of pricing actions, even if there's some volume off that in the near term, that you're kind of leaving money and margin on the table if you will?

Isn't this the time ultimately, even if the leading player in a certain category hasn't taken it, I know in other smaller cap names in certain categories, the number two player has led with pricing. Even in the same categories where they're competing with General Mills in many cases and have led and that's a scary thing to do as a number two or distant number two, but ultimately led to a better place.

That's an interesting question and I guess we're gonna learn the answer with Ortega unless General Mills takes a price increase pretty soon. We'll find out. As I said we're fortunate in that there's several players in that category and we're actually gaining ground at the expense of some of the others. I think everybody should be as aggressive as they can be in this situation.

As I watch everybody else's earnings, a lot of people's margins have degraded and frankly, when they are the category leaders, I don't understand why they're letting them go down as much as they are. They know everybody else wants to increase price, too. I don't know why you would depress it.

So we're conducting our little experiment here with Ortega and we are certainly trying to follow everywhere else as category leaders do take price. We think -- we think if we can get all the pricing we want to get we will -- we will hold our own as far as earnings and things and, frankly, I don't know what's enough, what's too much, that remains to be seen in this environment.

Thank you.

Yes.

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We'll go next to Risa Bahab Zadi.

Yes, just a follow up. You mentioned you have some coverage on your corn and wheat needs all the way through the first quarter of '09. Does that sound like you are hedging more of your costs needs to give you more visibility? And I'm just wondering what is your thought process on covering your costs and having more protection on?

I guess it's better the devil you know than the one that you don't know. Yes, we just -- we're looking for predictability in our costs so that we can lay in our plans of what we are going to do with our products and pricing and things like that based on predictability in the costs. So yes, we've taken more positions than we've ever taken before where we're able to, if price of those commodities goes down, we've left ourselves some room to benefit from that, but we wanted to make sure that we had a predictable future.

So would you anticipate continuously rolling forward some hedges as you move forward just to give you that visibility?

Yes, I think we're -- we're definitely as aspiring to be much more sophisticated going forward and looking to do that.

Got it. Good luck.

Thanks.

Okay there.

At this time, we have no further questions. I'd like to turn the call back over to Mr. David Wenner for any additional or closing comments.

Thank you, Operator. As I said at the beginning of the call this was a very challenging quarter for us and despite the challenges and some very extraordinary events with maple syrup and with wheat, we believe we've produced a fairly consistent quarter that -- and that we've positioned ourselves to overcome these extraordinary occurrences. I think the quarter speaks to the diversity of our portfolio in providing consistency.

When your single biggest commodity goes up about 50% in price and you can still deliver a relatively consistent performance on EBITDA, I think it says that the portfolio really does cushion us from shocks in the business and allows us time to recover and reposition ourselves to continue to provide consistent results. I know everybody watches the cash on our balance sheet in the context of the dividends.

Please be assured that there have been some extraordinary circumstances there as well. We had to buy as much maple syrup as we could as soon as we could to assure supply given the circumstances and our capital spending has absolutely been at an unusual level for the last 12 months.

I think our LTM capital spending is around $16 million. That's very extraordinary for our business. The high point we see in our business going forward is $11 million a year, so we truly have used more cash than we would normally expect to on capital spending, especially in the first half of this year. Those things will come back and provide a reasonable balance sheet position on cash going forward and, in that context, we believe our dividend is assured for the foreseeable future. With that, thank you very much for joining us on the call. We look forward to the next call.

This does conclude today's conference. We thank you for your participation and you may now disconnect.