B&G Foods Inc (BGS) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the B&G Foods second quarter 2009 financial results conference call. 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 on how to queue up for questions at that time.

I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over to Mr. David Wenner, Chief Executive of B&G Foods. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to the B&G Foods second quarter fiscal 2009 conference call. You can access detailed financial information on the quarter in our earnings release issued today, 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 will also be making reference on today's call to the non-GAAP financial measures net income as adjusted, earnings per share as adjusted, and EBITDA. Reconciliations of these measures to the most directly comparable GAAP financial measure are provided in today's press release.

We'll start the call with our CFO, Bob Cantwell, discussing our financial results for the quarter, and then the amendment to our senior secured credit facility that we've proposed to our lenders. After Bob's remarks, I'll discuss the various factors that affected our quarterly results, selected business highlights, and our updated thoughts concerning the remainder of fiscal 2009. Bob?

Thank you, Dave. Net sales increased $3.7 million or 3.1% to $122.9 million for the second quarter of 2009, compared to $119.2 million for the second quarter of 2008. Excluding net sales of Maple Grove Farms Pure Maple Syrup products, net sales for the second quarter increased $4.3 million, or 4%.

This $4.3 million increase was attributable to sales price increases of $8.5 million, partially offset by a decrease in unit volume of $4.2 million. Net sales of Maple Grove Farms Pure Maple Syrup products decreased by $0.6 million, consisting of a unit volume decline of $1.4 million, partially offset by sales price increases of $0.8 million. Our 10-Q has additional disclosure on individual brand performance during the second quarter.

Gross profit increased $3.3 million or 9.9% to $36.9 million for the second quarter from $33.6 million for the second quarter of 2008. Gross profit expressed as a percentage of net sales increased 1.8 percentage points to 30% in the second quarter from 28.2% in the second quarter of 2008.

The increase in gross profit expressed as a percentage of net sales was primarily attributable to increased sales prices of $9.3 million, partially offset by increased costs for beans and packaging and an increased accrual for performance-based compensation.

Sales, marketing, and distribution expenses decreased $0.6 million or 4.6% to $10.9 million for the second quarter compared to $11.5 million for the second quarter of 2008. This decrease was primarily due to a decrease in consumer marketing and trade spending of $1.2 million and selling expense of $0.1 million, offset by an increase in warehousing expense of $0.4 million and an increased accrual for performance-based compensation of $0.4 million. Expressed as a percentage of net sales, sales, marketing, and distribution expenses decreased to 8.9% in the second quarter from 9.6% in the second quarter of 2008.

General and administrative expenses increased $0.6 million or 31.7% to $2.5 million for the second quarter compared to $1.9 million in the second quarter of 2008. This increase resulted primarily from an increased accrual for performance-based compensation of $0.8 million, partially offset by decreases in other expenses.

Operating income increased 17.4% to $21.8 million for the second quarter from $18.6 million in the second quarter of 2008. Net interest expense decreased $0.8 million to $12.1 million for the second quarter from $12.9 million in the second quarter of 2008. Of this decrease, $1.1 million consists of non-cash adjustments to net interest expense relating to our interest rate swap.

Excluding the impact of items affecting comparability relating to the interest rate swap, the Company's net income for the second quarter of 2009 was $5.4 million or $0.15 per share, a 52% increase as compared to net income for the second quarter of 2008 of $3.5 million or $0.10 per share. Including items affecting comparability, the Company experienced net income for the second quarter of 2009 of $6 million or $0.17 per share.

For the first two quarters of 2009, excluding the impact of items affecting comparability relating to the interest rate swap, the Company's net income was $12 million or $0.33 per share, a 51% increase as compared to net income for the first two quarters of 2008 of $7.9 million or $0.22 per share.

Our EBITDA increased 13.4% to $25.5 million for the second quarter compared to $22.4 million in the second quarter of 2008. EBITDA increased 15.3% to $52.8 million for the first two quarters of 2009 compared to $45.8 million for the first two quarters of 2008.

Moving on to the balance sheet, we finished the second quarter with $29.6 million of cash compared to $24.1 million at the end of the second quarter of 2008. Our inventory at the end of the second quarter increased $11.7 million to $111 million compared to $99.3 million at the end of the second quarter of 2008. The majority of this increase relates to the purchase of additional maple syrup this year due to the normalized crop.

Cash interest expense for 2009 is projected to be $49.8 million. We expect to make capital expenditures of approximately $11 million in the aggregate during 2009, $5.6 million of which has already been made during the first half of the year.

In the second quarter, the Company used $1.4 million of cash to re-purchase and retire 189,900 shares of class A common stock. We finished the second quarter of 2009 with $535.8 million in long-term debt and $144.5 million of stockholders' equity. Our ongoing dividend rate is $0.68 per share, or $24.4 million per year in the aggregate.

Lastly, I would like to discuss an amendment to our senior secured credit facility that we have proposed to our lenders. The primary purpose of the proposed amendment is to give the Company more de-leveraging flexibility by opening up the company's ability to retire the Company's 12% senior subordinated notes through 2016 prior to their maturity.

Among other things, the proposed amendment would permit B&G Foods to do one or more of the following -- repurchase or redeem senior subordinated notes for cash, subject to restricted payments tests in the Company's senior notes indenture; repurchase senior subordinated notes in exchange for class A common stock; and refinance senior subordinated notes with senior unsecured indebtedness, provided that our consolidated leverage is less than or equal to 4.5 to 1 after giving effect to the refinancing.

In addition, the proposed amendment would substitute Credit Suisse for Lehman Commercial Paper, Inc. as administrative agent under the credit facility and extend the maturity date of our existing undrawn $25 million revolving credit facility from January 2011 to February 2013 so that it will have the same maturity date as our existing $130 million term loan facility.

The proposed amendment requires the consent of a majority of the lenders under the credit facility and with respect to the extension of the revolving credit facility all of the revolving credit lenders.

We cannot assure you that the proposed amendment will be consummated on the terms contemplated or at all. Under the senior subordinated notes indenture, we may not redeem the senior subordinated notes prior to October 30th, 2009. However, if the amendment is consummated we may from time to time, before or after October 30th, 2009, seek to retire senior subordinated notes through cash repurchases of EISes or separate senior subordinated notes and/or exchanges of EISes or separate subordinated senior notes for class A common stock in open-market purchases, privately negotiated transactions, or otherwise. Any such repurchases or exchanges and the timing and amount thereof will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

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

Thank you, Bob. As you could see from the financial results, the second quarter of 2009 continued our trend of strong improvement over prior year. In general, our results are following the track we laid out nine months ago, and we currently see no reason that our expectations for the next six months will change.

The year-over-year improvement in the quarter again represents improved pricing and reduced trade promotion spending -- higher net pricing, if you will -- that more than offset year-over-year costs.

As Bob mentioned, our net sales increase of $3.7 million came from a $9.3 million improvement in net pricing, with a mix of approximately 40% of that from lower trade spending and 60% from price increases put in place within the last 12 months.

Price gains were consistent with those seen in the first quarter. We expect to continue to see gains at this rate until September, when we will begin to lap prior year pricing.

In general, meanwhile, we have not seen pressure to reduce prices in any categories. The improvement in trade spending continued to come from the elimination of unproductive promotional programs usually associated with major holidays. In the case of the second quarter, this coincided with the July 4th holiday. Eliminating these programs does not come without some pain. In the case of the second quarter we saw a decrease in sales volume to retailers of $6.7 million over a two-week period near the end of the quarter. While it's too soon to know the consumer impact this will have in the third quarter, based on our experience from the fourth quarter of 2008 and first quarter of 2009, we anticipate that there will be little or no negative effect on consumer sales.

In the second quarter, we lowered trade spending by 3.2% of sales through this effort, and by 2.1% of sales in the first six months of 2009. In effect, we have structurally changed our level of trade spending by a meaningful amount.

Second quarter sales volume was also negatively affected by maple syrup, even though the crop was a very good one. The maple syrup is usually completed by late April, but there was a lag in refilling pipelines and recovering accounts lost due to sales allocations in the past 12 months. Those pipelines are not anticipated to recover completely until August, at which time we expect our sales of maple syrup to switch from being a negative to a positive factor.

Price pressure has been minimal so far because cost did not drop as much as anticipated. The rush to refill pipelines throughout the industry kept prices higher than they would have been in a more normal situation. Our maple syrup volume losses of $1.4 million, combined with $300,000 less in sales in private label pickles and peppers, were a one-time drag on the sales line which we do not expect to repeat in the third quarter.

On the positive side we continue to see strength in our Ortega brand, which grew in net sales by 3.1% in the second quarter, matching its first quarter performance. Ortega, as with other brands such as Las Palmas, B&M, Joan of Arc, and Emeril, is benefiting from the trend towards cooking at home economically. In some cases these brands are growing overall despite softness on the food service side of the business. Ortega food service sales were down 13% for the quarter, for instance, but retail sales, the much larger part of the brand's sales, were up 19%. We expect this trend to continue for the remainder of 2009, although we are working to improve both sides of the business as much as possible.

The trend in private label sales in the second quarter was consistent with what we described in the first quarter, and our effect on sales again appeared to be minimal. As we've said before, many of our brands, such as Ortega, B&M, Underwood, Accent, Grandma's and Br'er Rabbit have little or no private label competition. Where we are seeing competition, the outcome varies by category. Joan of Arc, competing in a category where private label is fully half of the sales, was up 26% in units and dollars for the quarter, primarily because category sales are generally very strong, lifting all players.

Cream of Wheat continues to show share gains even as private label takes share in the hot cereal category. Here, our new products and expanded distribution have built share despite the positive private label trend. We reported a sales decline on Cream of Wheat for the first six months of the year, but this is primarily related to lower sales to retailers associated with reduced trade promotions.

Net sales growth prospects will improve in the third quarter as we roll out new products and recover maple syrup volume. As I mentioned earlier, maple syrup should turn from a year-over-year drag on sales to a positive. We are reinstating several products and recovering accounts that were lost when syrup was put on allocation.

In addition, we expect new distribution of the two Cream of Wheat instant whole grain products to contribute to net sales growth as the hot cereal season begins in September. They are joined by the new Spongebob Squarepants Cream of Wheat product that is also entering distribution for fall sales.

We have also very recently launched an improvement in our Polaner sugar-free preserves, adding fiber to all the flavors in that line. This is now a completely unique product line in the preserve category and is being very well received by our trade customers, expanding distribution of our sugar-free preserve line. These products now provide three grams of fiber per serving, 12% of the recommended daily allowance, and have enhanced their prior positioning as a healthy product line that is an alternative to preserves sweetened with high-fructose corn syrup.

Our new Ortega whole-grain taco shells round out the most recent new product introductions and are also being very well received as a product that is in tune with health-conscious consumers seeking flavorful food. These exciting new products encourage us about top-line growth going forward, but the consumer, of course, has the final vote.

As I mentioned earlier, we are still experiencing higher costs compared to prior year, although the trend is easing. While maple syrup and wheat costs came down in the quarter, our more seasonal crop costs, such as beans, cucumbers, and peppers, remain higher and will stay there until at least this fall. Some packaging costs have eased recently. Can manufacturers, for instance, recently announced a price decrease, but that decrease was only one-third of the increase that was implemented in January. Glass costs remain higher except for energy surcharges, which have eased. Fuel surcharges for shipping are significantly lower. Distribution costs in the second quarter were 0.5% of sales lower for the quarter.

The combination of higher sales, price increases, lower trade spending and lower distribution costs together increased gross profit by $3.3 million and 1.8% of sales for the quarter. We expect costs to continue to ease as the year goes forward, and barring unforeseen events, to be more or less neutral by year-end, net of our cost reduction efforts.

The gross profit improvement dropped almost entirely to EBITDA, which was up $3 million, 13.4%, for the quarter. Our efforts to reduce trade spending have also yielded a reduction in advertising money spent with customers. This savings in operating expenses helped to offset higher G&A expenses associated with accruals for incentive compensation and higher spending in warehousing.

The warehousing expense was connected with a new distribution center that we have opened in eastern Pennsylvania that will ultimately consolidate several existing distribution centers. At the moment, we are spending additional monies to bring this facility online, but by next year we anticipate the new warehouse will yield savings of over $1 million per year. The Maryland facility distribution center was already shut down, and others will be shut down within the next two years.

As Bob mentioned, our balance sheet remains solid. Cash improved over $5 million versus second quarter 2008, despite monies used to increase inventories of maple syrup and certain finished goods to protect ourselves against the then-anticipated bankruptcy of one of our co-packers.

Going forward, we have moved production of some of those products in-house and have found alternative sources for others. We have thus successfully avoided any interruption in supply and expect inventory levels for these products to return to more normal levels by year-end. In addition, our inventory of syrup has peaked for the year. We expect inventory to decline for the remainder of 2009.

We believe that the consistent, meaningful improvement in our financial results and slow but steady improvement in financial and debt markets may create an opportunity for us to de-lever and thus improve our capital structure. The proposed amendment to our credit facility that Bob discussed earlier and the universal shelf registration statement that we filed in July are aimed at expanding our options and positioning ourselves to be ready to take advantage quickly of opportunities should they present themselves.

I should stress, however, that in making any decision to adjust our capital structure we would carefully consider effects on free cash flow and earnings per share. The optimal solution would leave both unimpaired while improving our ability to grow our business organically and through acquisitions.

Any action will depend on market conditions and other factors. In the meantime, our priority is to continue to perform well. Our year-over-year improvement in the first two quarters of 2009 and our full-year guidance are clearly steps in that direction.

We remain confident that B&G Foods will reach an EBITDA of between $99 million and $102 million this year. Higher pricing, the introduction of exciting new products, the attainment of new points of distribution, and an improving cost outlook only reinforce that confidence.

At this point we'd like to open the call up to questions. Operator?

Thank you. (Operator Instructions). And our first question comes from Reza Vahabzadeh from Barclays Capital.

Good afternoon.

Afternoon, Reza.

Good afternoon.

Thanks for the wealth of information. Disclosure is always helpful.

Just starting on the inventory front, did you give a reason for the inventory rising here in the second quarter and then coming down? Is it the maple syrup crop or something else?

Well, we did talk about that. The majority of it's the maple syrup and the fact that the crop was very strong, so we bought a lot more this year than we did last year. That's the majority of the increase.

The rest of the increase is we had a co-packer who was packing virtually all of the Las Palmas products and the pepper portion of the Ortega products. We were very afraid that co-packer was going to file bankruptcy, as they eventually did, so we pulled inventory in very quickly so that it would not get involved in that bankruptcy and protected our source of supply, if you will.

That was about 40% of the increase, where the rest was the maple syrup. So the condition of -- it's disappointing that it went up as much as it did, but we thought it was prudent given the conditions that we were faced with.

Right. So I guess your comments regarding working -- regarding inventory for the year is that you're just going to be using it for the rest of the year.

Yes, we'll work that down for the rest of the year, yes.

Right. And so your cost expectations, your cost inflation expectations for maple syrup on a 12-month go-forward basis, is it -- I guess is there a chance for some kind of deflation or lower inflation in that cost?

No, it is what it is for the next nine months. We've bought, as I said, the great majority of our requirements, and when we look forward to next year, we have no idea what the cost will be because it's totally dependent on the crop and exchange rates. And I don't have my crystal ball out for the exchange rates either, so every year is a unique event.

Got it, okay. And then are there any product lines or brands that you were particularly pleased with or not thrilled with the performance, or that aside from Joan of Arc, that you were at least alarmed or concerned about as far competition is concerned?

Well, there's no brand that we're concerned about. Where we've seen soft, if you will, sales on several brands, it's related to this trade promotion pull-back and not consumer trends. And so we're not -- from a consumer point of view we're very happy with where the business is going. We are taking some hits with sales to our trade customers as we pull back these promotions, but they very quickly recover in the next period once we do that. So that says to me that the consumer pull is there.

As we said in the script, we're very, very happy with Ortega. Ortega continues to do double-digit growth and is just -- looks like it's just totally in line with what consumers want to buy these days and how they're eating these days.

Got it. And then when you were talking about the trade spending, you said that was down 320 basis points?

Correct.

Yes.

Okay. So the rest of the change in gross margin year-over-year, was that just pricing? And then how much were costs up?

Costs were up about 100 basis points, a little less than that. Cost of manufacturing.

Right.

You had pricing offsetting that, you had lower distribution costs offsetting that.

Okay, great. Thank you much.

Yes.

And our next question will come from Bryan Hunt from Wells Fargo Securities.

Thank you and good afternoon.

Afternoon.

Good afternoon.

You all mentioned in the last conference call you were going to launch about 30 new products this year. Could you talk about your relative successes so far on product launches and maybe what those 30 new products contributed to the top line in Q2?

Well, the new products that we're launching this year are still going out into distribution, so the contribution to the top line really isn't going to come until the fall. And part of that is because a number of the products are related to hot cereal. We're looking to get those products in distribution so that when September rolls around, and the season starts on hot cereal, they'll be there. So we have two whole-grain instant products there, we have the Spongebob product there.

We have a good number of products that we've launched in the Ortega line, with actually several whole-grain tortillas, long-shelf-life tortillas, a whole-grain taco shell, and a number of other products in Ortega. So we're pushing forward there.

And Polaner, the sugar-free line, we've added fiber to that line, that's six products that we've put out as new products with fiber. Again, as I said in the script, totally unique for the preserve category. Fiber is like a magic word with trade and consumers in all the testing we've done, and we're getting very good acceptance there.

But an awful lot of these products are rolling out into distribution and I would say the top line, you're probably only talking between $1 million and $2 million contribution so far.

I may add fiber to my research. More people might read it.

Okay. Well, eat it, maybe.

You guys were pushing Las Palmas from regional to national footprint earlier this year. Could you talk about how many doors you're in now and how you view that success?

Well, it's not national per se. We are following pockets, if you will, so that Las Palmas now is in Chicago, it's in Denver, actually it's in some places in its expanded distribution in Wal-Mart. So it might -- I would say you've gained maybe a tenth of the US supermarket distribution more than you had a couple years ago.

Okay. And does the bankruptcy of that co-packer kind of restrain your ability to grow that business, and have you found another co-packer already?

We've actually moved one segment of the business in-house. We'll start manufacturing this fall. And the rest we've found several other sources, so no, there's no constraints on that business.

Okay. And it appears that, in listening to several retailer calls, that items that are on promotion, the velocity on those items is very good. Considering the direction you're moving with promotion and what you've stated, is there any way -- might you all reconsider promotional spending on some items as you move throughout the calendar, or are you very happy with the performance of product velocity so far year-to-date?

Well, we're more than willing to spend promotional money when it has an affect on sales that's positive and builds our business and builds the retailers' business. What we're pulling back is promotional monies that we have done studies on and said, you know, this is not selling more product to consumers or the expense that we're taking to sell product to consumers is very high for every incremental sale.

When we find more efficient ways to promote through the retailers, we're more than happy to do that. And that's going to vary tremendously by category. Some categories, such as baked beans, sell the majority of their sales on promotion. Other categories, such as seasonings, the promotions don't do much to increase sales. People buy seasonings when they need the seasonings; it's not an impulse buy. It's not a fast-turn product like a baked bean might be.

So we're just tuning up the promotions, if you will, to make them more efficient and where we see opportunities to promote and promote effectively and economically, we're more than happy to do that.

Okay. I'll get back in the queue, thank you.

Mm-hmm.

And our next question comes from Andrew Lazar from Barclays Capital.

Good afternoon.

Afternoon.

A couple things on volume, even excluding the maple syrup piece that you talked about. I guess last quarter you had thought that potentially the volume hit from some of the trade reduction efforts might ease going into the second quarter, and it looks like sequentially those volume reductions got a little bit worse. And I realize it's largely basically from some of the retailer reductions, not necessarily the consumer, so I'm trying to get a sense of maybe what change that you didn't necessarily envision last quarter, right as you went into the second quarter.

I think we just got more aggressive when you look at the -- on the trade promotions. When you look at the difference in the first quarter and second quarter and how much more promotional money we pulled back, it was significantly more in the second quarter than it was in the first quarter.

So for us to have a very -- actually not that big pull-back in the trade buy, I think we would consider that a successful event. It's almost one-for-one in dollars. Every trade promotion dollar we pulled back, we lost a retail or sale dollar.

So that's an extremely inefficient promotion spend, and that's what I would put it to, Andrew, is where we, as I said, you're down 320 basis points for the quarter, 210 for the year; that illustrates how much more we did in the second quarter than the first.

Yes. Yes, that's a big number, for sure. When you think about -- I know you're happy with sort of the consumer off-take and where this was sort of at the retailer level, but with a lot of different companies, getting some flexibility in the margin side from costs -- [call it info] costs that are sort of easing, you're seeing some spend back, some additional monies on promotions to drive volume. Even though you're happy with your take-away, are you seeing your market shares in your key categories hold up relative to where you've got sort of a competitive side?

Yes, we are, because we're not seeing -- in the categories we're competing in, we're not seeing people be super-aggressive with promotions. We're actually -- there's a number of categories where we're lagging what our competitors are doing. They're promoting at higher prices than we are, and we're trying to adjust to that higher level going forward.

These programs are set up minimum of six months ahead of time, so it's very hard to predict exactly where the pricing is going to fall between us and competition, and it's a bit of a guessing game. But we're on the right side of it, if you will, in that it's up to us to take our pricing up to where it is, not bring it down to where it is.

Right. And then how good a visibility do you have into retailer inventories of a lot of your key items? In other words they've taken down the inventory levels on a couple of your more promotionally oriented items. Are they at levels that are sort of below what you would deem where they need to be as an ongoing basis, or suggesting there'll be kind of a snap-back, or do they just now operate from here at this lower level of inventory ongoing?

I think they're at a normal turn level right now. I don't think there's going to be any -- I think where you would have seen them buy in on promotions and then not buy for three weeks or whatever, they're just buying turn business as we go forward on a regular basis.

Okay. So it's now the absence of more retailer draw-down and inventory draw-down going forward, hopefully.

Correct.

Okay. And the last thing would be if I think about sort of the way your top line shapes up in the back half of the year, in terms of year-over-year growth, what impact are we still likely to see from this more aggressive trade spending reduction, or is a lot of that impact do you think, given the retailer inventory reduction, sort of past due at this point?

And then you'll still have pricing or net pricing through I think September before you start lapping things, but then of course you've got some other things that start working for you, like the maple syrup piece turns to a positive.

Right.

I'm trying to get a sense of what do you think that -- how these things net out. Do you see the top line actually accelerate in the back half of the year -- ?

I think it will start going up some more. As you just went through there's a lot of moving parts, and one you didn't mention was that we have a 14-week quarter in the fourth quarter; this year it's 13-week quarter. So that's a detriment right there on the quarter. We don't think that's going to effect the EBITDA result given where we are in terms of cost and all of that, but we are swimming upstream in the fourth quarter with one less week of sales.

Third quarter we're going to pull back some Labor Day, September promotions and I think we'll see an effect there, but you have some positives you don't have in the others, like maple syrup and like new products starting to hit. So yes, I think you'll see a higher level of growth in the third quarter than we did in the second quarter. Fourth quarter, we're giving back 1/13 in terms of sales.

Got you. And I would say I would think the third quarter may be a bit more balanced in terms of contribution from volume and pricing, given some of these dynamics as well.

Yes.

Okay. All right, thanks, that's very helpful.

You're welcome.

And next we have a question from Edward Aaron from RBC Capital Markets.

Hi, guys, it's actually Brant Jaouen for Ed. Couple questions. I guess kind of dovetailing with the last question on the cadence of the quarters, it seems like the third quarter's going to be a pretty good quarter.

Well, we hope so, to match the numbers we did in the second quarter it implies a lot more improvement because I think we were in the 20s -- the 20-something range in EBITDA last year, so that's a larger improvement, if you will, on a year-over-year basis.

Right. So is Q3, is that going to be the best quarter of the year for you guys, then?

From an EBITDA point of view?

Yes.

No.

Okay.

But from a comparison to prior year, very possibly. Last year we had two major things that hit us -- the high maple syrup costs, which affected our -- with a co-packer affected our profitability substantially, and very high wheat costs. And we don't have that going into the third quarter of this year.

Yes.

And last year was our worst quarter year-over-year. Back in 2007 we were over $24 million in EBITDA and we kind of did just a little over $20 million last year in the third quarter. So we expect this third quarter to be very positive.

Got you. And when you look at where you're at with some of the grain commodities especially, how far out are you locked in or hedged on wheat in the next year?

I believe we're through the middle of next year on wheat.

Mm-hmm.

And what about some of the other key commodities?

We're halfway through 2010 with a lot of our commodities.

So do you expect, then, that the -- does that extend the benefit that you get from lower commodities because you're locking in lower prices as we go along? Do we end up with some benefit moving into next year on a lot of those commodities?

Yes, very possibly. Some of them are going to bleed down. As we've been locking in, wheat has continued to bleed down. So the farther out we go, the lower the price is to this point, and some of the others have done the same thing.

We expect some of these more annual crops like beans to drop this next crop in the fall, all things being equal. In the case we would see some additional reductions as we roll into 2010, yes.

Okay. And last question, you guys mentioned that Ortega was up I think you said 3%. It sounds like the retail numbers are -- and I know the IRI data looks awesome. I guess when are we going to -- what's the disconnect there?

I'm sorry --

The disconnect between factory sales, and IRI?

Well, I guess I'm just curious -- it sounded like you said that factory sales were up 3% for Ortega.

No, no, no, the factory sales were up 13% for the brand.

Oh, 13%, I'm sorry, okay. Well, that was my mistake. Thanks, guys.

Okay.

And our next question comes from Andrew Klineberg from Glickenhaus.

Good afternoon.

Afternoon.

My question regards the credit agreement, and I would just like some clarification. Without an amendment, would you be able to purchase the subordinated notes after October 30th, and whether you can or you can't, if you do get the agreement, would your lenders require you to make some kind of payment to do so?

Well, the first answer is unless we have an amendment we do not have the ability to purchase the 12% subordinated notes.

Period.

Yes. We can always refinance them into another subordinated note, but that's all we'd be able to do.

Okay. And are you anticipating having to make a payment or will you just let your senior lenders see the light of why it would be better to purchase the subordinated notes?

What we're hoping is we look at -- kind of looking at our capital structure as if we have the ability to use some of our cash and/or equity issuances to take out some of the 12% notes, it's credit-enhancing and we're hoping that the lenders all look at it the same way. And we'll know where this amendment process is going in kind of the next week or so.

Okay. And I'm not a food analyst, per se, but I've seen just various mentions. I know Proctor & Gamble, I don't know if it's food products that they're looking to divest, but I have seen some mentions of companies looking to divest. What are you seeing right now in the M&A space?

We're not seeing anything specific right now from any of the large companies. There are a couple small properties out there that are of minimal interest to us, but the large companies seem to be musing about things, but they're not doing anything definitive yet.

Okay. Thank you.

Yes.

And next we have a follow-up from Reza from Barclays Capital.

Yes, just to round out your comments on the cost side of the equation, as far as the underlying cost inflation for the second half of '09, is it fair to think that you're facing moderating cost inflation versus first half of '09 and certainly versus 2008?

Yes, and I made the statement that sometime in the second half we think it'll go to a neutral position. But it has been moderating as the year goes on, and it will continue to do so.

Got it. Okay, that's it. Thank you much.

Thanks, Reza.

Yes.

(Operator Instructions).

And our next question comes from Nick Edney from ADAR Investment Management.

Hi, guys. My question is about the announcement on the potential changes in the capital structure. Now in the past, wasn't there more of a restriction from the senior notes that would stop me from buying back anything in the subordinated notes? That seems to maybe not be the case now, is that correct?

No, that is the case, and that is really the amendment -- the major piece of the amendment we're looking to get, is to allow us to either buy back some 12% notes, issue equity, and/or refinancing some of those notes into a senior piece of paper.

Okay, so I guess I misunderstood then. So the changes that you're -- the amendments you're trying to get are not only for the bank loans and the revolvers but also for the senior notes, as well?

Hold on just a second, please.

I'm sorry, I'm sorry.

I think it's the bank we're trying to amend, not the senior notes.

Yes, we're trying to amend the -- I'm sorry, it's the bank credit agreement we're looking to amend. We have the ability in the senior indenture to do that. The bank credit agreement stops us, and that's what we're trying to amend to allow us to deal with the 12%.

Okay, so basically the senior note, that sort of amendment kicks you up to a (inaudible) the credit agreements, and as long as the credit agreements allow you to buy back the subordinated notes, then the senior notes are fine with that.

That's correct. We have the ability, based on certain baskets in the senior note indentures, to deal with buy-backs.

Okay, fair enough. Okay, great. For some reason I just thought that wasn't possible before. Okay, great. Thanks very much.

You're welcome.

And at this time we have no further questions in the queue.

All right, thank you, Operator. Thank you, everyone, for joining us on the call. As I said early on we're very pleased with the performance of the quarter. We expect to continue this track for the rest of the year and we're very confident -- it's about our guidance of somewhere between $99 and $102 million for 2009, which obviously is a very nice improvement on 2008.

So again, thank you for listening in and we'll be speaking to you in a few months.

That concludes today's conference. Thank you for your participation.