B&G Foods Inc (BGS) 2009 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 2009 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 and instructions will be given at that time.

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

Thank you, operator.

Good afternoon, everyone, and welcome to the B&G Foods third quarter fiscal 2009 conference call. You can access detailed financial information on the quarter in our earnings release issued today, available on our Web site 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 measures adjusted net income, adjusted earnings per share, and EBITDA. Reconciliations of these measures to the most directly comparable GAAP financial measures are provided in today's press release.

We will start the call with our CFO, Bob Cantwell, discussing our financial results for the quarter. After Bob's remarks, I'll discuss the various factors that affected our quarterly results, selected business highlights, and our updated thoughts concerning the finish to fiscal 2009.

Bob?

Thank you, Dave.

Net sales increased $7.4 million or 6.3% to $123.9 million for the third quarter of 2009 compared to $116.5 million for the third quarter of 2008. This $7.4 million increase was attributable to sales price and unit volume increases of $6.2 million and $1.2 million, respectively. Our 10-Q has additional disclosure on individual brand performance during the third quarter.

Gross profit increased $5.5 million or 17.9% to $36.2 million for the third quarter from $30.7 million for the third quarter of 2008. Gross profit expressed as a percentage of net sales increased 2.8 percentage points to 29.2% in the third quarter from 26.4% in the third quarter of 2008. The increase in gross profit expressed as a percentage of net sales was primarily attributable to increased sales prices of $6.2 million, and reduced wheat and maple syrup costs, partially offset by increased costs for beans and packaging, and an increase in our accrual for performance-based compensation of $0.4 million.

Sales, marketing and distribution expenses decreased $0.1 million or 1.4% to $10.7 million for the third quarter compared to $10.8 million for the third quarter of 2008. This decrease was primarily due to a decrease in consumer marketing and trade spending of $0.7 million and selling expense of $0.5 million, offset by an increase in warehousing expense of $0.4 million and an increase in our accrual for performance-based compensation of $0.7 million. Expressed as a percentage of net sales, our sales, marketing and distribution expenses decreased to 8.6% in the third quarter from 9.3% in the third quarter of 2008.

General and administrative expenses increased $0.8 million or 42% to $2.9 million for the third quarter compared to $2.1 million in the third quarter of 2008. This increase resulted primarily from an increase in our accrual for performance-based compensation of $1.5 million, partially offset by a decrease in professional fees, reduced head count, and a decrease in other expenses.

Operating income increased 29.4% to $21 million for the third quarter from $16.2 million in the third quarter of 2008. Net interest expense increased $2 million to $13.6 million for the third quarter from $11.6 million in the third quarter of 2008. Noncash adjustments relating to our interest rate swap increased net interest expense by $1 million in the third quarter of 2009. Excluding the impact of noncash adjustments relating to our interest rate swap, net interest expense decreased by $0.5 million as compared to the third quarter of 2008.

Loss on extinguishment of debt for the third quarter includes $0.7 million of cost relating to our repurchase of senior subordinated notes during the third quarter, including $0.4 million for the payment of a repurchase premium, and a noncash charge of $0.3 million for the write-off of unamortized deferred financing cost associated with the notes' repurchase. During the third quarter of 2008, we did not extinguish any debt.

The Company's adjusted net income for the third quarter of 2009, which excludes impact of items affecting comparability relating to our interest rate swap and the loss on extinguishment of debt, was $5.2 million, or $0.14 per share, a 162% increase as compared to adjusted net income for the third quarter of 2008 of $2 million, or $0.05 per share.

The Company's reported net income for the third quarter of 2009 was $4.2 million, or $0.11 per share, as compared to reported net income of $2.9 million, or $0.08 per share, for the third quarter of 2008. For the first three quarters of 2009, the Company's adjusted net income was $17.2 million, or $0.47 per share, a 74% increase as compared to adjusted net income for the first three quarters of 2008 of $9.9 million, or $0.27 per share. The Company's reported net income was $16.1 million, or $0.44 per share for the first three quarters of 2009, as compared to net income of $10.8 million, or $0.29 per share for the first three quarters of 2008.

Our EBITDA increased 22.7% to $24.7 million for the third quarter compared to $20.1 million in the third quarter of 2008. EBITDA increased 17.6% to $77.5 million for the first three quarters of 2009 compared to $65.9 million for the first three quarters of 2008. Our EBITDA for the latest 12 months ended October 3rd, 2009, is now $101 million.

Moving onto the balance sheet, we finished the third quarter with $117.6 million of cash, including $86.6 million of net proceeds from our public offering of Class A common stock completed during the third quarter. We finished the third quarter of 2008 with $31.9 million of cash.

Net debt as of October 3rd, 2009, is $411.9 million. And our net leverage is now below 4.1 times EBITDA.

Our inventory at the end of the third quarter increased $7.9 million to $103.6 million compared to $95.7 million at the end of the third quarter of 2008. The majority of this increase relates to the purchase of additional maple syrup this year due to a normalized crop.

Cash interest for 2009 is projected to be $46.8 million. After giving effect to the previously announced partial redemption of our senior subordinated notes on November 2nd, our cash interest expense for 2010 is expected to decrease to $37.4 million. We expect to make capital expenditures of approximately $11 million in the aggregate during 2009, $7.9 million of which has already been made during the first three quarters of the year. Likewise, we expect to make capital expenditures of approximately $11 million during 2010.

In the third quarter, the Company used $6.6 million of cash to repurchase $6.3 million principal amount of our senior subordinated notes which resulted in the pre-tax charge of $0.7 million. We finished the third quarter of 2009 with $529.5 million in debt and $229.4 million of stockholders' equity.

Our current intended dividend rate remains at $0.68 per share per year, or $32.2 million per year in the aggregate based upon our shares outstanding at the end of the third quarter.

Lastly, I would like to discuss the partial redemption of our 12% senior subordinated notes due 2016 that we announced earlier this month. On November 2nd, 2009, we will redeem $90 million principal amount of senior subordinated notes at a cash redemption price of 106% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to but excluding the redemption date. Following the redemption, $69.5 million principal amount of senior subordinated notes will remain outstanding.

The partial redemption is expected to result in a pre-tax charge in the fourth quarter of $9.5 million which represents a cash charge of $5.4 million for the call premium and a noncash charge of $4.1 million for the write-off of unamortized deferred debt financing cost. Pursuant to the terms of the indenture governing the senior subordinated notes, the partial redemption of the senior subordinated notes will result in an automatic separation of all EISs into the component shares of Class A common stock and senior subordinated notes.

The automatic separation will occur on October 30th, 2009. As a result, the last day of trading of the EISs on the New York Stock Exchange was yesterday, October 26th. When the market opened today, those shares of Class A common stock that are currently represented by EISs began trading on the New York Stock Exchange under the symbol BGS together with all other outstanding shares of the Company's Class A common stock. The automatic separation of EISs and the partial redemption of the senior subordinated notes will not result in any change in the payments that holders of the component senior subordinated notes and shares of Class A common stock should expect to receive, except that after the redemption date, holders will no longer receive interest payments on the portion of senior subordinated notes that have been redeemed.

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

Thanks, Bob. Good afternoon again, everyone.

This was a very important quarter for our business in a number of ways.

First and foremost, we continued our trend of significant year-over-year improvement in operating results, the prime indicator of which is the almost 23% improvement in EBITDA as compared to third quarter of 2008. This improvement brought our last 12-month EBITDA to $101 million, well in line with our guidance for fiscal 2009.

Second, we altered the capitalization of our business in a very positive way, successfully completing an equity offering of 11.5 million shares of common stock.

Third, in October, we announced that we will use the net proceeds of the equity offering and some cash on hand to redeem approximately 55% of the principal amount of our 12% senior subordinated notes, our most expensive debt.

More on these last two events in a moment, but first, let me review the quarter's operating results.

Third quarter proceeded much as we expected in all aspects. Net sales grew 6.3%, with most of that coming from net pricing improvement, which itself was a combination of price increases and lower trade spending. Volume was up modestly as the negative effect of the poor 2008 maple syrup crop finally abated toward the end of the quarter. And while reduced trade spending had a negative volume impact, that impact was modest versus prior quarters, at less than 1% of the quarter sales.

What we did see in the quarter that was somewhat unexpected was an acceleration and accentuation of trends that we have seen earlier this year, retail sales growing very nicely, partly due to economic conditions, but food service sales suffering due to the economy.

In the third quarter, retail sales were up double digits on many brands. Ortega, for instance, was up 32% in retail net sales. Meanwhile, where we had seen slightly soft food service sales in the first half of the year, food service was down double digits in the third quarter. Here the Ortega brand was down almost 10%. The blending of these two channel sales meant that Ortega net sales still increased by 24% for the quarter.

As far as we can tell, our trends are tracking industry trends in food service. According to Technomic, a food service industry research firm and data source, restaurants are seeing declines roughly twice what they were in 2008. Technomic's estimate for the remainder of this year and for 2010 is that restaurants have not yet seen the bottom, but that 2010 will be less worse than 2009. The good news is that food service represented only 17% of our overall business in the third quarter and that the other 83%, mainly retail supermarket and mass merchant customers, continued to grow.

As I said a few moments ago, retail continues to look very strong which we believe is a continuation of the trend of people cooking and eating at home more than in the past. Ortega is very well positioned for this trend and its growth reflects that positioning. Beyond that, however, the brand is also benefiting from new products and expanded distribution.

In the third quarter we launched an Ortega Taco kit with Spongebob Squarepants packaging and gained distribution of the kit in Target. Our new reduced sodium taco seasoning, whole grain taco shells, and Grande Breakfast kit also helped grow the brand. We expect to continue distribution of those items and other items now in our new products pipeline in 2010 and expect Ortega to be a strong growth vehicle for the foreseeable future.

The cook at home trend also lifted brands such as Las Palmas, which was up 19% in retail net sales, Joan of Arc up 18%, and Grandma's Molasses up 36%. These were all expanded sales of existing items since there was little or no new product activity in these brands.

In general, our retail brands did very well with a few exceptions, in particular, B&G pickles and peppers, down 20% in retail net sales, and B&M Baked Beans, down 15%. In the case of both these brands, we believe that poor weather in the Northeast was a factor. B&M, for instance, had been up 13% in the first half of the year. B&G sales were also affected by the ongoing dissolution of our direct store delivery system in the New York area. We believe that this change in distribution channel for the brand has caused a temporary dislocation in sales as chains adjust to warehouse and/or wholesaler distribution, and that much of this is an inventory effect.

New products also helped grow the Cream of Wheat brand which was up 8% for the quarter. Growth was all on the instant side of the business, driven by the new Healthy Grain instant products and Sponge Bob Squarepants Instant Cereal. Some or all of these products have been shipped into 47 separate retailers so far. In the fourth quarter we will begin shipping a new three-pack variation of the Cream of Wheat Instant products to the dollar stores.

The new Polaner sugar-free with fiber product also hit the shelves in a meaningful way in the third quarter and has produced two benefits. Where our Polaner sugar-free products already had existing distribution, we have seen sales gains on the order of 20% even before advertising for this product hit the markets. The uniqueness of the product has also gained us distribution in several major retailers. We intend to advertise aggressively around this product line as it is totally in tune with consumer interest in healthier foods that deliver superior taste.

As evidenced by these successes in Ortega, Cream of Wheat, and Polaner, our new products efforts are vigorous and inventive. And we expect that these and future offerings will bolster 2010 net sales gains.

Costs remain fairly predictable in both our third quarter experience and future outlook. We experienced lower year-over-year costs in a number of commodities, and in particular, maple syrup and wheat, our two largest purchases. These two decreases, combined with higher net pricing, contributed significantly to the EBITDA gain for the quarter.

Other agricultural commodities were generally stable for the quarter, except for commodities such as beans that reset on a more or less annual basis. Those commodities remained higher versus prior year.

Packaging cost was generally higher as well. Even where we have seen a recent cost decrease as in steel cans, that decrease did not completely offset prior cost increases. Steel surcharges were approximately 50% lower than we experienced in third quarter 2008, and were also a notable factor in the EBITDA gains.

As we proceed into the fourth quarter, we expect a number of annual crops to decrease modestly in price. We have taken 9-to-12-month positions on most true commodities, such as wheat, corn, and sugar, and will generally see those costs creep downward over that timeframe. Given the recent increase in oil prices, we do not expect meaningful packaging cost decreases. And at the current cost of diesel, fuel surcharges will start to match prior year in the second half of the fourth quarter.

Given these circumstances and the expectation of diminished price gains in the fourth quarter and in 2010, we expect more modest gross margin improvement in the next 15 months than we have seen in the past 9.

Operating expenses in the third quarter follow the pattern of the first six months. Expenses increased modestly and were related to sales increases in the case of brokerage costs, and higher accruals for incentive compensation given the significant improvement in operating results.

We continued to spend more in warehousing as we exited existing facilities and consolidated into our new Northeast Distribution Center in Pennsylvania. It will be sometime in 2010 before this reverses and we see savings in warehousing. But we are already saving more in distribution costs than we have added in warehousing costs.

Our operating expenses remain well under control as is typical with our Company.

Moving on to our balance sheet, Bob has already discussed the changes to our cash position and the resulting improvement in leverage. Up nearly $8 million, inventories are not where we would like them to be, but we expect substantial improvement in the next three months.

Two major factors in the third-quarter increases were higher maple syrup inventories and early completion of the B&G seasonal pack. In the case of the B&G pack, this is a timing event since the pack was actually smaller than last year's, and this will reverse in the fourth quarter. Maple syrup inventories should also decline in the fourth quarter, but we may choose to purchase additional syrup if favorable pricing opportunities present themselves.

In any event, we are very pleased with what we have accomplished in terms of the balance sheet and the capitalization of the Company.

I would now like to go beyond the basic business and expand on our recent activities aimed at improving the capital structure of our Company. As most of you know, in September we successfully completed a public offering of our Class A common stock, symbol BGS on the New York Stock Exchange. As Bob mentioned earlier, we will use the net proceeds of that offering together with cash on hand to redeem $90 million principal amount on our senior subordinated notes on November 2nd, or approximately 55% of the senior subordinated annual notes that are outstanding.

We are doing this for several reasons. First, we saw an opportunity in the markets to delever the Company without significantly impacting free cash flow or earnings per share. Post the stock offering and bond call, projected free cash flow in the Company after we pay interest, dividends, CapEx, and taxes is estimated to increase slightly, while earnings per share are projected to decrease only slightly. We believe that this made the stock offering and bond call neutral from a stockholder perspective on these two measures.

Meanwhile, we have reduced net leverage in the Company on an LTM EBITDA basis from over 5 times EBIDTA to approximately 4.1 times EBITDA. We believe that this makes our Company stronger and will broaden the appeal of our stock to institutional investors. It also positions us to better execute the financing of a potential acquisition should one arise.

In addition, the splitting of the automatic separation of EISs into the component shares of Class A common stock and senior subordinated notes in connection with the redemption, means that going forward, all of our shares of Class A common stock will now trade under a single ticker symbol, BGS. With the addition of the approximately 18 million shares of Class A common stock that had previously traded as part of EISs under the symbol BGF and the 11.5 million shares of Class A common stock issuing in September, a total of approximately 47.4 million shares of Class A and common stock now trade under the symbol BGS. We are hopeful that this, too, will make us more attractive to investors as the volume of shares traded on a daily basis is likely to increase.

Finally, it's very important to note that even with the increased number of shares of common stock, our ability to pay dividends is unaffected. We still generate significant free cash flow and we still believe that returning a large portion of that cash flow to stockholders as a dividend is the best use of that cash.

As I said at the beginning of our remarks, this was a very important quarter for our Company. We made substantial improvements in our operating results and capital structure, setting the stage for a solid fourth quarter in what to date has been a very strong year for B&G Foods. Given the fact that fourth quarter 2008 was a 14-week quarter, it will be a challenge to match top and bottom line for the quarter. But we believe that is doable.

In that vein, we have tightened the EBITDA guidance for 2009 to a range of $100 million to $102 million. On an LTM basis through third quarter 2009, we are right at the mid-point of that guidance, $101 million in EBITDA. We are very proud of the fact that our Company has performed strongly and reliably in these difficult economic times. And we are dedicated to continuing that track record of solid, predictable performance as we finish the year and enter 2010.

At this point, we would like to open the call up to questions. Operator?

Thank you. (Operator Instructions.) We'll hear first from [Tom Sherer] with Federated Investors.

Yes. Thank you for taking my call. Congratulations on the quarter.

Thank you.

Thank you.

Just a question with your capital structure. The senior bonds you have are starting to get relatively short maturity and you still have 69.5 million of relatively expensive subnotes out there. What are your thoughts as to what you want to do with your balance sheet from that perspective?

Well, I mean, the senior notes are due in October of 2011. And so some time between now and then, we'll be refinancing those.

What we do with the 69.5 million, as of today, we have no plans. But we're looking for the best use of our capital assets. And we'll look at all of that as part of a refinancing down the road. No current plans on touching the 8 percents but at some point here between now and October 2011, we'll be dealing with them.

Thank you.

And, ladies and gentlemen, (Operator Instructions). We'll hear next from Reza Vahabzadeh with Barclays Capital.

I've covered B&G for a long time and just the growth that you've been able to sustain in Ortega is pretty notable. And I'm just wondering, is that -- do you think that momentum can continue in the near future? And can you spread the wealth to other brands as well? Because Ortega is a big brand and performance at retail, whether it's A.C. Nielsen or your retail, shipping data is impressive.

Well, we think we're building momentum in Ortega. And if you look at the year, the sales growth has actually been accelerating as the year goes on. And that's a reflection of new products rolling out there, distribution expanding on the entire line. I mean, we've gained significant distribution on the entire line in retailers like Kroger and Target, and obviously, the consumer trends as well, with people looking for inexpensive ways to feed their family at home. And, of course, that's a niche that Ortega fits perfectly.

So Ortega is a priority because it's the largest brand we have and it's a profitable brand. And so, we're putting a lot of our effort behind Ortega.

We're also putting effort behind a number of other brands like Cream of Wheat and like Polaner to grow them. And then there's part of the portfolio that we're more in a maintenance mode. But yes, we would hope that momentum would spread to other brands as our new products efforts take hold, especially with Cream of Wheat, and Polaner as well. And as we get more resources and more flexibility in our financing, we're more able to invest in the growth of these brands. And that's important, too.

Having said that, at the end of the day, you have a finite amount of resources and you can only do so much. But I would say that we have as much resources to grow this business as we've ever had. And I've only been doing this for 20 years with this Company. So we're as strong as we've ever been, and so we hope to grow more and more as we go forward.

Got it. Input cost moderation has helped the gross margin line. Is that likely to continue for a couple of more quarters? And when do we just run out of improved gross margins merely from lower input costs? When do we cycle out of that?

I can't tell you when we cycle out of it, Reza, because my window is 9 to 12 months and I don't know what's going to happen beyond that window in terms of -- a number of these commodities are still well above their historic highs, as much as 30, 40, 50%. Now, will they ever go back down to what was normal three or four years ago? My opinion is no, they won't, that we've structurally reset at these new cost levels, give or take. But for the foreseeable future on the commodities that we're able to lock costs in on, like wheat and corn and some others, we will continue to see costs bleed down as we work through those 9 to 12-month positions. That's pretty much a given.

Packaging's a little bit more of a wild card. And especially as energy starts creeping up, we are unable to lock in packaging costs as much as we are commodity costs, or agricultural commodity costs. And a lot of packaging contracts have energy inflators. So what's the outlook there? Well, if you can tell me what oil's going to do in the next 12 months, I can tell you what our costs are going to do. But again, that's more of an unknown.

So, for the foreseeable future, we expect our costs to bleed down, not nearly as dramatically as they have in the past. We expect our price to creep up as a result of some very select price increases and continued work on trade promotion, but again, not as dramatically as in the past. But we do expect to get some margin improvement out of all that activity.

Got it. And then, as far as competitive intensity, have you seen any pickup in pricing intensity at retail, or is it about the same as before? And do you anticipate seeing any additional promotional intensity at retail going forward?

I think it's going to be very select. We have seen some very, very limited activity in a very small number of brands. I think that will continue. And we may see a little bit more of it, but it's really not meaningful at this point.

Okay. Got it. Thank you very much.

Yes.

We'll take our next question from Gregory Nathan with First Pacific Advisors.

Hey, guys. Just want to know how many Wal-Mart stores are you currently selling into?

Well, we sell into every single Wal-Mart. Now, we don't sell all products into all Wal-Marts, so that's a very hard question to answer. About 17 of our 18 brands are in some Wal-Marts. Some brands like Accent and Underwood are in every single Wal-Mart. Other brands are in a few hundred Wal-Marts.

Okay. And so, I guess my question really goes to -- with Wal-Mart's SKU reduction plans out there with their Win, Play, and Show, are you seeing any change in terms of what they're asking of you guys?

Not -- we haven't seen a change in what they're asking of us. If you're asking me if that's affected us, it has. It's affected us positively in some cases and negatively in others. A brand like Maple Grove has benefited tremendously from it because our maple syrup competitor was taken out of Wal-Mart and we're the only brand of maple syrup in Wal-Mart right now.

Our Joan of Arc brand lost some distribution where it was on the fringes of that brand's strength. The good news is that where we have stayed in the stores with something like a Joan of Arc, our sales have actually gone up because some of the competition has gotten chopped out of those stores.

I think the last call what we said, and it remains true, is that we have seen very nice growth with Wal-Mart in the last few years. We expect to continue to grow with Wal-Mart. But activities like this are slowing that growth to some extent.

Okay. So net-net, it's been a positive neutral or a negative?

No. If I had my choice, they wouldn't have done it. It's been a negative in that it has slowed our growth somewhat. But we're still growing nicely with Wal-Mart.

Okay. And then, going forward, do you expect any -- is this pretty much already done as it relates to your Company? Or is there a future impact?

I think the vast majority of it is played out. Wal-Mart, I think next year is going to do reviews in two categories, which says they're not going to change much next year at this point in time. So I think they've -- they're pretty much where they want to be. There are a few more changes coming but not a lot. And then I think they're going to assess how it all worked.

You said -- is it two food categories you're --?

Two of the -- when I say categories, syrup, for instance, it can be a category. Yes, two of the categories of the 17 or so that we're in in Wal-Mart still are going to have some kind of review in the next year. Other than that, everything's pretty set.

Which are those two?

Hot cereal is one of them. And I frankly don't remember the other one.

Okay. Thank you very much.

Yes.

We'll take our next question from Andrew Lazar with Barclays Capital.

And so, Dave, the last two quarters you've talked -- you gave, I think, some numbers around what reduced the trade spending or the trade efficiency sort of contributed to sort of the pricing piece on the top line? I think it was like the trade spending maybe decreased one percentage point in the first quarter and then maybe three-plus in the second quarter. Trying to get a sense of how that worked out in the third quarter.

Third quarter, our trade spending was down not quite 2% of sales. It became a bigger factor in the third quarter than the actual price increases. And that's the shift we expected to see. And I think I said that in the last conference call, was where in the first half, it's been predominantly pure price and an element of trade. Third quarter, it was going to shift more to trade as we rolled over versus our pricing. And fourth quarter, it's going to be any gain we have in net pricing is going to come almost entirely from any reduction we do in trade promotion.

Is there still a decent slug of opportunity on trade efficiency, or are you going to start to lap that pretty soon as well? Or is there a whole different sort of set of buckets that you haven't really gotten after yet?

No, it's diminishing. There's no question about that. And that's when I say we're going to see less benefit from pricing next year. It's going to be because the actual price increases we are doing are very limited. And the opportunities on trade start getting harder to find.

And then, with respect to volume, obviously it went from down 4% in the second quarter to up -- modestly up 1% or what have you in the third quarter. Part of that was, as you expected, around the maple syrup issue and whatnot. Going forward, I guess given some of the new products that you've got and other things, and lapping some of the pricing, what's your expectation around volume, I guess, fourth quarter and then more broadly sort of as you think about 2010?

Well, fourth quarter's problematic because we have a 7% hole to dig out of with that extra week last year. So if we match last year's volume, I guess we would consider that a success. And that's what we're aspiring to.

But then going forward into next year, we're looking for getting back to a more typical food industry growth of a couple, 3% on the top line that's more volume driven.

Got it. If I think about -- by the way, you had some pretty significant inventory deloading last quarter, particularly in some of the areas where you were pulling down some of the trade efficiencies. Do you feel like that's largely worked through?

Yes, that's playing out, too. As I said in the prepared remarks, that was maybe not even quite 1% of sales this quarter. And I think it's going to pretty much evaporate in the fourth quarter.

Okay. A broader question industry-wide, I'm just curious. The industry as a whole really as you get into the calendar fourth quarter starts to finally lap some of the really significant, right, inventory de-loading that the industry saw in fourth quarter of '08. And I'm just curious on your take in general. You talked about how you've benefited pretty dramatically, as have some other food companies from the at-home eating trend or what have you. But why do you think -- what explains, do you think, why volumes in the industry have still been, again, broadly speaking, not just B&G-specific, have been as weak as they have? And do you think that starts to look better as we get into the fourth quarter if nothing else because you've got an easier comp, again, from an industry perspective?

That's a good -- that's a very good question. I think -- I'm really at a loss to explain why the industry volumes wouldn't be up, except that it's a blend of food service and retail. And to the extent you're skewed one way or another, you're going to be affected. I mean, it's not all positive. Food service is obviously down. But on a unit basis, you would expect that the strength in retail would skew the volumes up.

I think what has happened over this whole year is retailers have been trying to trim inventories to improve their own balance sheets. And when you hear some of the results out of some of the supermarket customers we have, you can understand that any cash they can generate would certainly help them.

And then, the guys that are successful like Wal-Mart are on pretty much an ongoing inventory drive.

Right.

And I guess I'd lay it more to that than I would anything to do with consumers. Consumers are clearly consuming more of products that are around eating at home.

How should we be or not that -- I realize you have far fewer categories at a Wal-Mart that need to be kind of reset going forward. Hot cereals is one of them. It's a pretty profitable item for you for sure. How are you set there? I mean, do you feel like from the work you've done, you're not tremendously at risk based on how Wal-Mart's been looking at these things? Or is it just really not clear yet? Or how are you thinking about that when you're building it into your plan for next year?

We actually think we're underdeveloped at Wal-Mart. And I don't think we have very much risk in terms of losing any distribution. And what has worked for us in terms of insulating us from seeing declines at a lot of these retailers as they've gone to private label or clarity, where they're just reducing SKUs in the supermarket, is our new products effort. When we bring people things like the Healthy Grain instant cereals under Cream of Wheat, that gets us not only to where we maintain our shelf presence but we actually increase our shelf presence.

So as long as we drive those kinds of products in the key categories here, I think we're pretty well protected in general.

Then, just last two very quick things. One would be, with the success you're having in Ortega, is that generally keeping pace with the category? Or are you taking significant share in that category? And I ask, obviously, from more of thinking about competitive response perspective from some sizeable players, potentially.

Well, the category's growing very nicely. But we are gaining share. There's no question about that. (multiple speakers) And I say that broadly because the Ortega brand breaks down into six different categories. But in general, we're gaining share.

Response, Old El Paso definitely has -- they are and have been aggressive. The number three brand is the guy who seems to be losing out in the whole process.

Got it. Okay. And then, very last thing is, in thinking about all of this, SKU reduction and brand reduction, what have you, is it your sense that even across a greater set of food categories, even outside your own at this point, that key retailers are at a point where, I mean, particularly Wal-Mart, are going to kind of stop and assess kind of what's happened? Or is there still a lot more to happen broadly speaking in the industry?

I think we're already seeing that stop, assess, and reset going on in some supermarket chains. I think Wal-Mart is at the -- is pulling up to the "Okay, we're done, let's watch and see what happens" point. And I think just from general impressions of a few categories where they're farther down the road, it's not playing out quite like they would want it to. It's decreasing sales in some of these categories.

Right. Yes. Got it. I appreciate your time.

Thank you.

Thanks.

We'll hear next from Robert Moscow with Credit Suisse.

I guess I wanted to dive in a little bit more on your comments about eating at home. What about in B&M Beans? I would have thought that that business would have been up versus year-ago if cooking at home particularly is up. I know you have some -- a tough competitor there. But I thought that Bush Beans had actually taken a price increase and you had lagged behind. So if that's true and everyone's eating more at home, shouldn't you be taking market share?

You're right. And in the first half of the year, we were doing very well with B&M. And we were very pleased with how it was going. The third quarter we seemed to have hit a speed bump. And why is a good question. I don't think it is a matter of competition because that really -- that dynamic really hasn't changed.

The B&M brand is very strong in the Northeast. That's a significant amount of our sales. And I would tell you that in the third quarter, the weather here in the Northeast has been poor to miserable in general. And we definitely have seen that affect B&G and B&M. And lacking a better answer, that's what we're going with so far. We are continuing to look at pricing and promotions and making sure we're doing everything right there. But third quarter was a little disappointing on the brand after a very good start to the year in the first half.

Dave, do you think that will be -- that will hurt your ability to take pricing on beans for 2010?

Well, the key thing on beans is all about promotional pricing, not list pricing, because a significant majority of the sales are made on promotional pricing. And that's where, as you say, we have lagged what Bush has been doing on promotions. So we're trying to catch up in terms of raising our promotional prices.

And as we decide to do that, I guess we're deciding that no, that won't affect us. And it remains to be seen whether it will or it won't.

Okay. So, really, it's just a matter of holding back some of the vendor allowances or just advising higher price points for the promoted price points (multiple speakers)?

Right. It's a matter of say, instead of selling four for $5, we're going to sell three for $5, those kind of changes to promotional price points.

Okay. And you guys have been one of the better companies in terms of generating trade spend efficiencies. My perception, though, was that the trade spending has got to go up in 2010 overall merely because it's been pretty low for the last couple of years in an inflationary environment. And now it's time to give back some of the commodity benefits. So I guess a couple of things. Is it feasible for us to expect another year of trade spending efficiencies next year in that environment?

And then secondly, your gross margin was very good year over year. But -- maybe there's seasonality to this -- but it is declining sequentially since first quarter. Maybe that's just a seasonal thing. But maybe you can tell me to what extent will the trade spend impact your gross margin (multiple speakers)?

Yes, our gross margin definitely changes according to sales mix. And you're selling more of lower margin products in the middle part of the year than you are on the front and the back end, things like B&G pickles and peppers and B&M Baked Beans.

Right.

As far as the -- giving back trade promotions, a lot of our efforts and a lot of what we have cut, has been funds related to trade promotions that just did not work, where we have brands that are not trade promotion sensitive, especially things like seasonings. They're not trade promotion sensitive. Somebody is going to buy this because they need it, not because it's sitting there on sale for $0.20 off.

Conversely, B&M Baked Beans, B&G pickles, and a number of other items are very trade promotion sensitive. And we really haven't skimped on those funds.

The other point I would make is that we haven't raised prices on those businesses as much as the commodities and packaging have increased in those businesses. So when people say, "Oh, well, costs are going down, so you have to give back on price," well, you really have to look at how much did you take on price versus how much did cost go up.

And in the case of a B&M, the cost of beans that go into a can of B&M Baked Beans have tripled in the last three years. Now, with this crop, we expect it to come down approximately a third. But that still means it doubled in the last three years. And I guarantee you we have not doubled our prices in the last three years.

So there's a lot more to that dynamic than simply saying, "Well, costs have come down so prices have to come down." It's all a matter of, well, how much did cost go up and then come down and net to a certain point and what did pricing do before you reach the answer of whether or not price has to come down.

Okay. And then lastly, on the pickles business in the Northeast, it looks like the weather played a factor here. Is there any competition from private label in pickles? Or are the price gaps pretty constant and really it's just an overall category thing?

It's a category thing. Private label actually in the Northeast, unlike most of the country, private label is not much of a factor in the Northeast in that category. You have Mount Olive, Vlasic, and us fighting it out pretty strongly. Somebody's on sale every week. Private label really is just not a huge factor.

Got it. Okay. Thank you very much.

You're welcome.

We'll hear next from Brant Jaouen with RBC Capital Markets.

It's actually Ed Aaron.

Afternoon, Ed.

Afternoon. I wanted to ask about Cream of Wheat. Did I hear you correctly that you said sales were up 8% on the brand for the quarter?

Yes.

So I'm just trying to understand better what's driving that. When we look at some of the data out there, it looks like the retail takeaway, at least in the measured channels, has been quite a bit slower than that. And I was wondering if you're seeing just better growth in the non-measured channels or if there was perhaps some pipeline [fill] of the new product that you introduced recently that was maybe kind of driving up those shipment numbers a little bit stronger than what was taken away at retail?

Well, actually, yes, when I look at the category in the Nielson numbers we see, the category is down. But it's down because the sales mix has shifted -- and I'm talking dollars, not units -- the sales mix has shifted to private label away from Quaker. Our numbers in Nielson are showing up, not up the 8%, but definitely up and we've gained a little bit of share. We are doing better in the non-measured channels than we show in Nielson. I can tell you that. So, yes, the blend between the two and actually some pretty good food service sales in the quarter give us the 8% increase.

Okay. And then speaking of the comparison between measured and non-measured channels, I mean every food company for the last two or three years has consistently talked about stronger growth in those non-measured channels. And presumably that's continuing. But I was just wondering if you've seen that -- any widening or narrowing in terms of the gap there? In other words, the rate of growth outside of the measured channels versus what we're seeing in measured, just broadly across the business recently?

Across the business, I would say the rate of growth is slowing in the non-measured channels. It's been -- yes, it's been fairly dramatic in the last couple of years. So, it's slowing in the non-measured channels and part of it is self-inflicted. By that I mean Wal-Mart is slowing its branded growth because it's not supporting brands as much as it did in the past. It's reducing SKUs. It's putting out more private label. So a branded manufacturer is almost by definition going to see slower growth if they see growth at all in a Wal-Mart. And that's what we -- I described earlier is happening to us.

The result of that is actually -- and I think again, Wal-Mart is pushing this trend. We're seeing some of the regular supermarket chains come back pretty strongly. People like Kroger who are reporting very good results, I think are benefiting on the branded side from Wal-Mart pushing out some of the branded products. So we're seeing -- we're seeing the shift in our growth move somewhat to supermarket customers and away from the mass merchants.

Thanks for that. And last question, I guess is a little bit more of a housekeeping item. On the incentive comp accruals, I think you had $1.1 million in a quarter. Can you give us the year-to-date number and then what you're expecting for the full year and then remind what those same numbers were in 2009?

Okay. Well, the year-to-date number is $5.8 million in total. Last year at the end of September, it was only $300,000. We're expecting about $7 million for the year; 2009 last year was a little over $800,000. So it's a little over a $6 million change year over year on just pure incentive comp.

And roughly half of that is bonuses that would be paid out in cash. And the other part is accruals on multi-year long-term incentive plans that would be paid out in stock.

Great. Thank you.

And, ladies and gentlemen, we have no further questions at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

All right. Thank you, operator.

Thank you all for joining us on the call. As I said, we think this is a wonderful quarter for the business. We have great momentum going into the fourth quarter and we hope to finish the year very strongly as well. We're delighted with the outcome of the stock offering and the change in our capitalization. And we believe the lower leverage in the Company helps us from a stockholder point of view and helps us in case there are acquisitions that should arise in the future.

Again, thank you for joining us.

Ladies and gentlemen, that does conclude today's conference call. We'd like to thank you all for your participation.