B&G Foods Inc (BGS) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the B&G Foods Inc. fourth quarter and full year fiscal 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. Instructions will be provided at the time for you to queue up for questions. I'd new like to turn the conference over to Mr. David Wenner, Chief Executive Officer of B&G Foods. Please go ahead.

Thank you, Sarah. Good afternoon, everyone, and welcome to the B&G Foods fourth quarter and full year fiscal 2009 conference call. You can access detail financial information on the quarter and our full year on our earnings release issued today. Which is available on our website at bgfoods.com and in our annual report on Form 10-K 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 a result of new information, future events or otherwise. We also will be making reference on today's a 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 and the full year. After Bob's results. I'll discuss the various factors that effected our results for both periods, selected business highlights and our updated thoughts concerning 2010. Bob.

Thank you, Dave. First, I will review the full year briefly, then talk about the fourth quarter. Net sales for 2009 increased $14.1 million or 2.9% to $501 million compared to $486.9 million for 2008. The increase was attributable to sales price increases of $27.2 million, partially offset by a decrease in unit volume of $13.1 million. Our 10-K has additional disclosure on individual brand performance for the full year.

Gross profit for 2009 increased $14.8 million or 11.1% to $148.7 million from $133.9 million in 2008. Gross profit expressed as a percentage of net sales increased 2.2 percentage points to 29.7% in 2009 from 27.5% in 2008. The increase in gross profit percentage was primarily due to an increased sales prices of $27.2 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.

Operating income increased 19.5% to $88.3 million during 2009 from $73.9 million in 2008. Net interest expense decreased $8.7 million to $49.4 million in 2009 from $58.1 million in 2008. Net interest expense in 2009 included $0.2 million charge relating to our interest rate swap versus $6.1 million charge in 2008.

The remaining decrease in net interest expense was primarily attributable to our repurchase and redemption of $96.3 million principal amount of our 12% notes during the third and fourth quarters of 2009.

Loss on extinguishment of debt for 2009 includes $10.2 million of costs relating to our repurchase of $96.3 million principal amount of our 12% notes during the third and fourth quarters including $5.8 million for the payment of a repurchase premium and a non-cash charge of $4.4 million for the write-off of unamortized deferred debt financing costs associated with the notes repurchased. During 2008 we did not extinguish any debt.

Excluding the impact of items affecting comparability relating to our interest rate swap, loss on extinguishment of debt and severance, the Company's net income and earnings per share for 2009 were $23.9 million, a 70.4% increase and 61% share, a 60.5% increase as compared to net income and earnings per share for 2008 of $14 million and $0.38 per share. Including items effecting comparability the Company experienced net income for 2009 of $17.4 million or $0.44 per share.

Our EBITDA increased 15.2% to $103 million for 2009 compared to $89.4 million in 2008. Turning now to the fourth quarter of 2009, net sales increased $0.7 million or .6% to $135.6 million compared to $135.9 million for the fourth quarter of 2008. This increase was attributable to sales price increases of $4 million partially offset by a decrease in unit volume of $3.3 million. Net sales increases are Ortega of $2.7 million, Maple Grove of $1.9 million, Las Palmas of $1.5 million and B&M of $1.1 million were offset by reduction in net sales of Polaner of $2.3 million, B&G of $2 million, Cream of Wheat of $1.3 million and Vermont Maid of $0.7 million.

In the aggregate, net sales for all other brands decreased by $0.2 million. Gross profit increased $2.2 million for the fourth quarter of 2009 or 6.3% to $36.9 million from $34.7 million in the fourth quarter of 2008. Gross profit expressed as a percentage of net sales increased 1.5 percentage points to 27.2 % for the fourth quarter of 2009 from 25.7% for the fourth quarter of 2008.

The increase in gross profit percentage was primarily due to increased sales prices of $4 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. Sales, marketing and distribution expenses increased $0.2 million or 1.8% to $10.5 million for the fourth quarter of 2009 compared to $10.3 million for the fourth quarter of 2008. Performance-based compensation increased $0.3 million offset by a reduction in trade and consumer marketing of $0.5 million.

All other expenses increased $0.4 million. General and administrative expenses decreased $0.3 million or 8% to $3.1 million for the fourth quarter of 2009 compared to $3.4 million in the fourth quarter of 2008. This decrease is due to a $0.7 million of severance and termination charges taken in 2008.

All other expenses, including the accrual for performance-based compensation, increased $0.4 million. Operating income increased 11.8% to $21.6 million for the fourth quarter of 2009 from $19.4 million in the fourth quarter of 2008.

Net interest expense decreased $11.6 million to $9.4 million in the fourth quarter of 2009 from $21 million in the fourth quarter of 2008. Net interest expense in the fourth quarter of 2008 included a $7.5 million charge relating to our interest rate swap versus a fourth quarter 2009 benefit of $1 million relating to the swap. The remaining decrease in net interest expense was primarily attributed to our repurchase and redemption of $96.3 million principal amount of our 12% notes during 2009. Loss on extinguishment of debt for the fourth quarter includes $9.5 million of costs relating to our repurchase of 12% notes during the fourth quarter including $5.1 million for the payment of a repurchase premium and a non-cash charge of $4.4 million for the write-off of unamortized deferred debt financing costs associated with the notes repurchased.

During the fourth quarter of 2008, we did not extinguish any debt. Excluding the impact of items affecting comparability relating to the interest rate swap and loss on extinguishment of debt and severance, the company's net income for the fourth quarter of 2009 was $6.6 million, a 62.6% increase as compared to net income for the fourth quarter of 2008 of $4.1 million.

Earnings per share of 2009 was $0.14 a share, a 27.3% increase as compared to $0.11 a share in 2008. Including items affecting comparability, the company experienced net income for the fourth quarter of 2009 of $1.3 million or $0.03 a share. Our EBITDA increased 8.5% to $25.5 million for the fourth quarter compared to $23.5 million in the fourth quarter of 2008.

Moving on to the balance sheet, we finished 2009 with $39.9 million of cash compared to $32.6 million at the end of 2008. Our ongoing dividend rate is $0.68 a share or approximately $32.4 million per anum based on our current share count. We also finished 2009 with $439.5 million in long term debt. Our leverage net of cash was 3.9 times as of January 2, 2010.

In the first quarter of 2010, we issued $350 million principal amount of 7.625% senior notes due in 2018. As discussed earlier, we purchased and redeemed the remaining $69.5 million principal amount of our 12% senior subordinated notes and the entire $240 million principal amount of our 8% senior notes. In connection with the issuance of the 7.625% senior notes, in January, 2010, we capitalized approximately $8.3 million of debt financing costs which will be amortized over the term of the senior notes.

In connection with the retirement of the 8% notes and 12% notes, we incurred a loss on extinguishment of debt in the first quarter of 2010 of approximately $15.4 million including the repurchase premium of $10.8 million a write-off and expense of $4.6 million of deferred debt financing costs. Our inventory at the end of 2009 decreased $2.8 million to $86.1 million compared to $88.9 million at the end of 2008. Finished goods decreased $14.7 million offset by an increase in our maple syrup, raw material inventory of $12.8 million. Annual cash interest expense for 2009 was $46.5 million. Cash interest expense for 2010 is expected to be approximately $36 million. Capital expenditures for 2009 were $10.7 million and capital expenditures for 2010 are expected to be approximately $11 million. I will now turn the call back over to Dave for his remarks.

Thank you, Bob. Good afternoon again, everyone. After listening to Bob describe our performance, I think the year can be summed up with the phrase what a difference a year makes. 2008 was a challenging year for our business and the food industry, but we ended that year confident that we would substantially improve our performance.

Looking at our 2009 results, I would say that we exceeded almost every aspect of our plan and turned in a very positive year. The fourth quarter had one less week, approximately 7% less time than Q4 2008. With that in mind, bringing in a positive sales number for the quarter was a very encouraging result, especially considering that we once again cut back promotional activity around the Christmas, New Year holiday time frame.

The net sales gain of almost 1% in the fourth quarter was all related to improved net price as volume was down 4%. And the net price improvement was primarily related to trade spending, which we again reduced for the quarter. As we have said in previous calls, we expected price benefits to shift from list price gains to reduced promotional spending as the year progressed and that is precisely what has happened. Going forward, we expect to see modest continued reductions in promotional expenses but very little benefit from list price increases.

We have taken a few price increases that were effective January 1, of 2010, but those will not be meaningful for our overall results for next year. But we are very pleased with our success in gaining price benefits in 2009 and at this time expect those benefits to hold for 2010. Looking beyond the overall sales results fourth quarter 2009 gross profit was improved by 1.5% of sales and $2.2 million. Cost of goods was flat for the quarter reflecting a trend of ever smaller cost increases throughout 2009. This was also expected.

We project that manufacturing costs will continue their downward trend and actually decrease slightly in 2010 barring unforeseen events. We have locked in all major commodity costs and have good visibility on packaging costs as well.

The wildcard here is maple syrup. As you may know, that crop is a unique event every spring and relatively unpredictable. What we do know is that the US/Canadian dollar exchange rate is unfavorable by roughly 20% versus this time last year. We expect, however, that the field price of syrup will decline. Most likely enough to essentially offset the currency negatives. There is a surplus inventory of syrup right now that should pressure the price down in a normal crop year.

We have also insulated ourselves from any immediate cost impact by carrying heavy inventories of syrup into the new crop. Gross profit was also aided by a decrease in distribution costs of 0.5 of 1% of sales. Our exit from the direct score delivery system in the New York area has lowered costs here, as has the new warehouse we opened in Pennsylvania in 2009.

As Bob said, operating costs were slightly lower for the quarter. The savings from headcount reductions we implemented in Q4 2008, which compared favorably to the severance charges we took last year. We continued to incur higher warehousing costs due to our new facility in Pennsylvania, but those were more than offset by distribution efficiencies.

Another offset to our cost reductions in this area was higher accruals for incentive compensation. Management did not earn bonuses for 2008 results but happily will earn bonuses in 2009. In addition, the significantly improved results in 2009 led to increased accruals for long term performance-based equity compensation. Marketing expenses also appeared lower.

In fact, 2009 spending was similar to 2008, but there was a shift to more couponing. That expense nets down sales rather than showing as an operating expense. Every other expense area was well under control. At the end of the day all of these factors contributed to the EBITDA gain of $2 million for the quarter. EBITDA for the year of up 15.2% to $103 million ahead of guidance. 2009 EBITDA was also at a very respectable 20.6% of net sales which puts us in line with some of the best margins in the food industry.

Getting a bit more granular on sales, we remain very pleased with the performance of our Hispanic food brands, Ortega and Las Palmas. Which were up 9.5% and 19.4% respectively for the quarter. For the year, these two brands net sales increased by 14.9% and 12% respectively. The brands continue to benefit from consumer trends, expanded distribution, new products in the case of Ortega and price, although both are seeing very solid volume gains as well.

We expect both brands to maintain their momentum in 2010. Cooking and eating at home remain themes here and for other brands as well. Our bean brands, B&M and Joan of Arc, were both up for the quarter and the year. B&M also benefited somewhat from an inventory buy-in in advance of the January 1st price increase.

Additional growth came as we continued to rove volume in maple syrup business. Maple Grove sales of these products were up over 50% in the fourth quarter.

Our two molasses brands both had an excellent baking season posting double-digit sales increases.

There were negatives as well for the quarter but we believe that the causes are by and large unique events. Both B&G and Polaner sales declined by roughly 20% as we exited the DSD delivery system in the New York area. Part of this was an inventory effect as we changed over to the classic retailer warehouses and/or wholesalers. Part of it was the rationalization of SKUs to the best selling items. We expect sales of both brands to recover early in 2010 as the new distribution systems stabilize.

Our changes in promotional activity also caused temporary declines on few brands, most notably Cream of Wheat down 6.6% for the quarter. Consumer trends on this brand remain positive. And we have considerable new product activity in place, so we're confident Cream of Wheat will be a growth brand in 2010. The only brand with a worrisome issue in 2009 was Regina, a relatively small brand. The wine vinegar category has seen significant price deflation by brands and private label. This has taken share from us and we will have to respond with promotional activity to counter competition, but again this is a very small piece of our 18 brand portfolio and one of the few places where we're seeing that kind of price pressure.

We ended 2009 with as strong an offering of new products as our Company has ever had enhancing we believe our prospects for solid volume growth in 2010. Ortega is a major focus for new products. The list here includes reduced sodium taco seasoning, whole grain taco shells and a whole grain taco kit and the Spongebob Squarepants taco kit. That kit was sold exclusively at Target in the fourth quarter and will now expand nationally.

Polaner sugar free preserves with fiber will continue to expand distribution in 2010. We have recently introduced Polaner all fruit fortified with fiber as well. Cream of Wheat will introduce new instant cereal products in retail and other channels.

Our Cream of Wheat instant cereal product designed for dollar stores with a $0.99 price point is expanding distribution and selling well. We are also creating further products in a number of brands for warehouse clubs and food service.

Looking briefly at sales activity by channel, our retail sales are driving growth in the business. While specialty holds its own and food service struggles. Within retail we saw the mix of sales growth slowly shift as the year progressed.

In the fourth quarter most of our growth came from traditional supermarket customers as opposed to mass merchants. Growth at Wal-Mart in particular slowed due to their clarity program and private label initiatives. Here the good news is that we are still growing despite these changes.

In the meantime our efforts with new products and distribution gain momentum in supermarkets and replace the Wal-Mart increases. We expect that trend to continue in 2010. Specialty sales were flat for the quarter which again was a positive outcome. Specialty products have been pressed for shelf space as retailers expand private label in 2009. Both Maple Grove and Emeril have new product offerings designed to increase 2010 sales in this channel.

Finally, food service which represented 18% of our sales in 2009 declined by 5% in the fourth quarter on weakness which was pretty much across the board. This channel continues to struggle in the current economic environment and prospects for improvement in 2010 look dim. Having said that, we believe that B&G Foods has many opportunities in this channel. We have reorganized our food service sales force and are creating new products designed specifically for the channel in a number of brands.

In any event, our growth prospects on the retail side are strong enough to offset a soft 2010 for food service and still yield overall volume growth. As Bob indicated, our balance sheet is in excellent shape. Cash ended the quarter at nearly $40 million, increasing by 23% from last year. We did a tremendous job of reducing finished goods inventory in 2009. Lowering case volume by 23%. This freed up cash, some of which we used to purchase extra maple syrup essentially hedging our 2009 syrup costs for the first half of 2010.

Our strong operating results in 2009 also allowed us to work on the overall capital structure and make important improvements. The combination of the common stock offering we completed in September and follow-on repurchase of 12% notes lowered net leverage to 3.9 times EBITDA at the end of the year. We subsequently refinanced all of our noncredit facility long term debt with a new issue of senior notes in January 2010, obtaining a favorable interest rate and pushing out the maturity date for that debt into 2018.

We believe that we have positioned the Company well to finance any acquisition opportunity that may present itself in the future. I've also made several references to our expectations in 2010, but let me consolidate them for you. We expect our top line growth to shift from price driven growth to volume growth led by our Hispanic brands, Polaner and Cream of Wheat.

Net sales growth on the order of 3% is very possible. As for costs, we expect a modest cost decline for the year, assuming relatively neutral maple syrup costs and nothing unusual on the energy front. Based on these two factors and assuming operating expenses remain stable, we are projecting 2010 EBITDA of between $106 million and $109 million.

At the risk of repeating myself, 2009 was a tremendous year for our company. We established prices for our products at a profitable and appropriate level, improved margins through pricing and restructured promotional programs, improved the predictability of our manufacturing costs with long term visibility and achieved cost savings throughout our operating expenses. We have restructured our capitalization at a lower level and continued to pay a generous dividend for our stockholders even as we increased our outstanding shares of common stock by 30%.

Last week, our Board of Directors declared the 22nd consecutive quarterly dividend since our IPO in October, 2004. Our business is positioned for profitable growth in 2010 and ready if an appropriate acquisition opportunity is found. We are eagerly looking forward to a very promising year in 2010. At this point we would like to open the call for questions. Sarah?

(Operator Instructions) And our first question is from Reza Vahabzadeh with Barclays Capital.

Good afternoon.

Afternoon, Reza.

You talked about the volume growth for 2010 and the growth coming from your three brands. Can you talk about what was impacting Polaner here in the fourth quarter and the second half as well as Cream of Wheat that should turn around in 2010?

Well, a decent amount of our Polaner sales come in the New York area and we were unwinding our direct delivery system to all the retailers here in the second half of 2009. That causes a lot of inventory disruptions as you're changing the distribution system over to warehouses and wholesalers. You know, you try to make it as smooth of process as possible, but there's no question there was some disruption from an inventory point of view and then there's a certain amount of SKU rationalization, too. We're not going to slot all of the items that we would have -- that we were taking into the stores when we were essentially our own specialty distributor. So you are losing some sales on the bottom 20% of your items, you will, that you're just not going to continue with. Both of those we look at as pretty much one time events.

The 20% or so of the items that we didn't put in the new distribution didn't get put in because they don't sell very much. For instance, we discontinued nine ounce sugar free. Well, nine ounce sugar free did $200,000 in sales last year. So it's not a great loss on Polaner to discontinue those products.

It would have cost more than that to slot those products into distribution in New York. So, you know, we look at B&G and Polaner has having some disruption as we did that. Certainly it's very important to B&G, less so to Polaner but, you know, we think 2010 will be a much more typical year for both brands. And I would add that now that we are in the grocery warehouses, we actually can leverage retailers to put all of those items in all stores more than we have in the past in some chains and in the case of where we're now in CNS in those items we can expand those items into stores that CNS services that we might not have had them in otherwise.

Got it. And so POS transfer Polaner outside of the New York Metro market is still healthy?

Yeah. In fact, we're seeing some very nice gains where the sugar free with fiber has hit Wal-Mart same store sales, for instance accident are up hike 20% and we're, are up 20% and we're seeing retailers that weren't carrying sugar free take it on now with the new fiber appeal.

Stop and Shop in new England, for instance, did not have Polaner sugar free. They've taken it on. We actually have a couple West Coast accounts that are taking sugar free as well. So we're very optimistic about Polaner.

All right. So Ortega obviously has been doing extremely well for a number of years but Cream of Wheat I was a little surprised with fourth quarter sales softness. Can you elaborate on that and what is going to turn that around in 2010?

Well, we really had two tough comps we were going up against at the end of the year. We basically didn't do promotional activity we had done the prior year, so we didn't get the retailer buy-in on that and then we had some pricing buy-in last year that we didn't get in 2009.

So it's purely at the retailer level that we saw those dislocations on Cream of Wheat. We're liking how that franchise looks and with new products and new distribution there, again we're thinking that brand's going to do well in 2010.

Got it. And then you've obviously talked about the potential for acquiring businesses. Any commentary on the, you know, activity level out there and whether you're seeing anything that, you know, catches your eye or not?

Well, clearly we aren't seeing anything that catches our eye enough that we've done it. We are looking at more things than we have in the past. We've got a number of things that we're examining now. You know, we're pretty picky. So, you know, we've said no to a few things here in the last six months and nothing immediate going right now.

All right. And them, Bob, the dividend for 2010 will be what, $25 million?

No. About $32.4 million.

32.4.

$0.68 cents on a little over 47 million shares.

Right, right. Okay. And cash taxes will still be a couple million?

Cash taxes in 2010 will be higher because we paid -- because our interest is now down to $36 million versus kind of in the mid- to high 40's. Cash taxes will be about $5 million.

Got it. Thank you.

Okay.

Thank you and our next question is from Ed Aaron, RBC Capital Markets.

Thanks. Good afternoon, guys and congrats on a very nice year.

Thank you.

Thank you.

So I had basically two questions, the first just about the recent volume of performance. Actually, you know, your volumes have held up really quite well relative to what we're seeing more broadly in food and I think what you mentioned in your prepared remarks that your spending on trading consumer marketing was actually down in the quarter and, I'm just a little surprised to see the volumes holding up so well with lower spending just given what we've seen with other companies kind of ramping up spending to try to, you know, protect or grow volumes in what seems to be, you know, a difficult time for the industry to actually get volume growth.

Well, I think part of it is the categories that we're in. You know, I mean we've got some great categories with Hispanic food and we have a lot of products that are all about cooking and eating at home. So I think it hold up better than some other categories might in this environment.

You know, as we've been cutting Brack promotional activity, you know, we've -- back promotional activity, you know, we've said all along we're not cutting back all promotional activity. We're cutting back promotional activity that isn't working and literally pretty promotion now that we're budgeting, you know, six, nine months down the road we're examining what did we get for that promotion? And where it wasn't an effective promotion, we're pushing back on the sales force and saying well, look, you either have to find a way to make this promotion work in terms of consumer pick-up or we're just not going to run the promotion.

It's a waste of money. So in some cases we're getting more efficient and effective promotions and in some cases we're eliminating promotional activity and we're going to continue to run things over that hurdle as we go foward and, you know, where promotions perform, that's wonderful. We want to do them.

Where they don't perform, you know, we're not going to do them, but it's not like we're not doing any promotions. We still, in 2009, spent almost -- spent around $90 million on trade promotion. So we haven't eliminated them. We've just made them jump a hurdle and if they don't, then they go away.

That's fair. Thanks. nd then my second question just on the Wal-Mart changes that you kind of alluded to, I guess some of your peers have talked about those changes being neutral, if not even maybe positive for their business just given number one and number two 2 kind of brand focus and I'm trying to understand whether, you know, there might be a difference in how Wal-Mart views, you know, leading brands in niche categories like you've got versus leading brands in your categories, so just any perspective you might have on that would be great. Thanks.

Well, I mean where we have leading brands in niche categories we continue to do very well, Grandma's Molasses, for instance is, still rock solid at Wal-Mart as is Accent and Underwood and some of the other brands that are distributed nationally. Where we have regional brands you have brands like Joan of Arc that got the distribution trimmed back on the fringe and I think I talked about this in the last call, got trimmed back on the fringe but got reinforced in the core.

So you know, you're seeing increased sales where you maintain distribution and, of course, you lost some sales where you lost distribution and the net of it is a fairly neutral event. Again, it depends on how you're posing what you're saying. Neutral, when other people say neutral, do they mean they're maintaining their sales with Wal-Mart? In our case when we talk about Wal-Mart impacting us, we're saying we're not growing as fast with Wal-Mart as we used to. We're still growing with Wal-Mart, but it has slowed our growth.

So in that sense, you know, I think we're still saying Wal-Mart's a good customer, a growth customer and all that. It's just not rocking and rolling like it was in the past. Having said that, we continue, you know, we've been doing a lot of work with the other supermarket customers and we're seeing more growth with the rest of the retail community than we are with Wal-Mart or more growth with them than we have seen in the past and in some cases we've been able to show Wal-Mart, you know, that customer walked down the street and bought that product at one of your competitors because you discontinued it in this distribution. So it's a very dynamic thing. It's going to be ever changing, I think in 2010. I think everybody's reconsidering what they've done and are going to, you know, keep changing looking for the optimal solution.

Thanks. Just one more quick one before I jump off. Did you actually give an inflation outlook for 2010? I just might have missed it.

Inflation? I have no idea what inflation's going to be in 2010. Very energy driven. I think the only outlook we gave -- I gave is that we expect a slight deflation in our manufacturing costs on the order of 1% or so assuming everything goes as we think it will including energy.

Thank you.

Yes.

Thank you. Our next question is from Adam Plissner with Credit Suisse.

Hi, good afternoon.

Good afternoon.

Just a couple things here. When you talked about the volume growth, David, for 2010, the three main product drivers how should we think about the more mature brand? Is there sort of a growth there offsetting some of the declines or is that sort of a flat line scenario, maybe some of the weaker trend you saw in food service, does that stabilize in 2010?

We think food service is going to be slightly down in 2010, all things being equal. I think in general, though, you know, there's a base in our brands that maintains itself and stays fairly flat.

As we said, there were a couple brands that had more significant declines than we would have liked to have seen in 2009 and we think those had very clear reasons that won't repeat themselves in 2010. So I guess what we're looking at is the basis stays fairly even and then growth driven by the four brands that we were talking about, Las Palmas, Ortega, Cream of Wheat and Polaner.

Okay. I guess in the past you've talked about some of the balance sheet issues you've had and now you have a whole lot more flexible post script this financing that you've done and I think in the past you've even termed that you would like to invest in the growth and brands, but yet I don't think I totally understand what that means, meaning is there any pent up investment that you wanted to do in terms of growth of the brand?

It's certainly not reflected in any CapEx plans that you issued in 2010. Where would that show up and does the increased flexibility allow you to invest where you couldn't before?

Well, we're not -- the flexibility in our capitalization has nothing to do with what we're talking about in terms of investing in brands because we're not talking about CapEx. We're talking about how do we spend more marketing on our brands we're investigating that and looking at brands like Ortega and saying does Ortega warrant a significant marketing effort to really try and drive it up to the next level?

You do that one of two ways.

You lower your EBITDA with some marketing investment and hope that you get a return on the top line that sort of makes you more profitable or break even at worst or you do very well and if we have more up side than even is in our guidance, take that money and plow it back into an Ortega or Polaner or one of the other brands and say okay, let's try and do some serious marketing here and drive some growth in that brand.

We're doing some of that now in the marketing money that we have. Polaner, for instance, is back on television as we speak, all about sugar free and the proposition there with the fiber. You know, we're looking at television for Ortega. So the investment we're talking about is more on the marketing side than it would be on the CapEx side.

That makes sense. And then you had framed the trade promotion around $90 million. What's the marketing spend flowing through around now?

Well, marketing, pure marketing, is around $14, $15 million.

Okay. So any fluctuation is going to come flow through that line item and you're talking about a number. $It doesn't sound huge relative to a 14 million base.

Right.

Got it. In terms of just a follow-up to the acquisition interest that you have, is there a way to kind of frame the wish list you have in terms of timing? Is this something you'd expect to have something tabled by the end of the year, something that would be closer to the NOI?

It's very difficult to put timing on it. We'd love to do one now. There isn't one in front of us that we're going to do today, but these things, you know, the right one comes along when it comes along.

We're out there, you know, beating the bushes and looking and talking to people, but at the end of the day especially with the kind of things we buy, brands from major food companies, those things come out for sale when the major food company decides to sell them, not when we decide to buy them. So you have to be ready and opportunistic when the things present themselves and we think we've done a very good job of positioning ourselves to move quickly with surety of financing.

In the case of a smaller brand, we have enough cash on our balance sheet to move quickly without financing. You know this, latest debt issuance that we've just done, we're actually putting extra cash on our balance sheet so the quarter should end with a higher number than we ended fourth quarter with. Beyond what incremental cash just our pure P&L would put on there. So, you know, we've done everything we can to get ourselves ready for that acquisition, but it's an opportunistic thing that when it's there, you move.

That sounds good. Bob, you've mentioned in the past you've worked with more leverage than you have now. You're down to 3.9 times net leverage. Is there a figure you'd like to see the leverage mark kept in check even post script temporarily for something larger on the wish list that you go after? Is there a leverage?

Well, I think we've moved our leverage to where the market allows us to operate today. If we were to do an acquisition, you know, we kind of look at an acquisition if there was something out there kind of $25 million of EBITDA, that we pay our normalized multiple, our leverage guidance would go up at that time to about four and a half times max and then, you know, quickly thereafter, you know, we can move, you know, get it down another four and half a turn to around four times EBITDA, but, you know, if we do nothing and, you know, no acquisitions show up, you know, at our doorstep here in the next, you know, six, 12, 18 months, you know, we're going to turn leverage down at a rate a little over a half a turn a year.

Yeah. Got it. That's very helpful. Thanks, guys.

Thank you. Our next question is from Tony Gikas from Piper Jaffray.

Good afternoon, guys. Thanks for taking my questions.

Sure.

Can I ask you a couple of housekeeping questions? Can you just provide guidance on the interest expense for 2010 just to cross check our math and then the share count, did you say that the share count expected for 2010 will be 47 million for the full year?

Correct. I mean it's the shares that we have outstanding at the end of the year plus some additional incentive comp that will get issued during the course of the year. So a little over 47 million in total shares that are outstanding and the interest is -- cash interest for the full year is about $36 million.

And then could you just characterize the growth in the Ortega and Las Palmas businesses for, you know, 2010 that you see?

Well, it's fairly safe a to say it's going to be, you know, double digits. We grew, as I said in the remarks, we grew in 2009 in that area around 15% give or take. We don't see -- we don't see that slowing down a lot.

In fact, we think we're actually gaining momentum on those brands to a degree. So we're pretty comfortable. The exact numbers Ortega was 14.9% and Las Palmas was 12% in 2009. Those brands continue to do very, very well.

Okay. And then I know you indicated that there's really nothing in your guidance for price for 2010, but are there any material changes in pricing, you know, by brand that we should be aware of?

No. As I've said, we've taken some very modest price increases in a very small number of areas.

We just don't see that that's going to contribute a lot to the P&L. Any net pricing improvement would be as we trim back promotions, still some more in 2010, but again we just don't see that being anywhere near as substantial as it was in 2009.

Okay. And then just the last question, I guess, what would you characterize is the biggest risk factor to the EBITDA guidance you've given for '10?

Well, I mean one large risk factor is energy. If something very strange happens in energy, the question is how fast can you react to costs, you know, commodities and things like that ramping up? That really poses a distribution cost risk more than anything else.

As I've said, we have most of our other costs locked in pretty well and even in packaging where we have energy inflators we have -- you know, we've taken positions on some of the natural gas and things like that that our suppliers use so that we've got those costs locked up as much as possible. So, that's a risk that's always out there for everybody. I guess the good news would be a general price cost increase out of something like that the food industry has shown it can take pricing.

It's a matter of how quickly it can take pricing. The other one is another very bad crop on maple syrup in 2010 and what it might do to costs there. Again, we think there's an inventory overhang that cushions that some and we certainly have taken a position on our inventories that we can buffer ourselves to some extent from something like that happening.

I think that's very unlikely but as a I said, it's a unique event that starts in a few weeks and it is what it is. There's not a whole lot you can do about it. It's whatever nature hands you.

Okay. Thanks, guys. Good luck.

Thank you.

And once again that's star one if you'd like to ask a question. At this time next we'll go to Andrew Lazar with Barclays Capital.

Good afternoon.

Afternoon, Andrew.

Just a couple things. One would be just on volume apples to apples for the extra week, is it volume was up roughly 3% or so? I think you said volume was down 4%, but there was 7% hit from the extra week.

Right. I'm a glass half full guy so I'm saying volume was up 3% apples to apples, yes.

And with respect to, just as it was reported, I guess down 4%, you know, I think as of last quarter you'd mentioned that even with one less week you were hopeful that volume could still be kind of flattish and I'm just trying to get a sense of whether, you know, what was it that changed from that point? Was it just the Polaner and Cream of Wheat issues that you talked about that you didn't have visibility to at that point or did something else change or obviously the industry had a pretty much rough quarter from a volume perspective to begin with but I'm trying to understand what changed specifically in your business.

Those two were a big part of it. The other thing I would say is that we did hear Wal-Mart did some selective inventory pruning, accepted some more out of stocks on the shelf on, you know, things that weren't major pieces of sales to them.

We actually saw that in some areas like this clean store thing they did where they didn't put up baking displays in a lot of stores. That actually trimmed our Grandma's Molasses volume with Wal-Mart in the fourth quarter, but made up -- it wasn't that Grandma's Molasses was down for the quarter. It was up, but it wasn't up at Wal-Mart because they did things like that. So we definitely saw some, I guess, volume we expected not happen and things like that.

Okay. And then just on the topic I think you mentioned that the hot cereal category was one that had yet to go through kind of a go the core reset and I'm curious if that's happened or what your take on that is and looking at what that would be on Cream of Wheat?

It has not happened. We don't expect it to be meaningful when it does happen. We think we have products that are doing well in general and actually have some products that we think would get expanded should they review the category. It sounds like the game is changing at Wal-Mart in that we heard there were only a couple reviews.

Now they're saying they're going to review everything this year. At least that's what I'm hearing. So Wal-Mart appears to be ever changing, as it always is, and there will be more reviews apparently.

Got it. Okay. Anything in their kind of planned relaunch on Great Value category-wise that you think disproportionately, you know, helps or hurts where you are that you can sort of see at this point?

I think we've sort of seen everything on Great Value that we're going to see, at least as far as I'm aware of and the only two categories where great value came in meaningfully to us was maple syrup and they came out with private label taco shells about nine months ago, too. We supply both of those. So to that extent we haven't seen a real big impact.

Okay. Any thoughts on just the -- I know in the seasoning, spice and seasoning aisle there's been some tests going on obviously branded versus not.

Right.

Any impact on any clarity there and importantly, obviously if it impacts your Ac'cent product or not.

No, we haven't seen any impact on that. Clarity, as I've said in the past calls we lost the two flanking items and kept the main item on that and the volume that we lost on the two flankers has, I would say half of that's been regained on sales of the four and a half ounces everywhere, so it wasn't a real big hit because the flankers were in very limited distribution, if you will.

I guess we don't expect Ac'cent to be hit by this test that they're doing because the test is all about should we carry McCormick, should we carry private label, all of that? Ac'cent sells well and is a unique -- totally unique product. There's not any such thing as a private label Ac'cent. So we don't see them eliminating Ac'cent as they go forward no matter what their decision is, but, you know, I guess we'll wait and see what happens there.

Yes. And then last thing, broader -- you talked a little bit about the industry has shown its ability over the last few years to take some pricing if they needed to and, you know, to the extent we have some reinflation over the next whatever it is, year or two and it starts to hit food company P&L's.

Do you think -- what you have seen with respect to the consumer, is there anything there that you think would change the way the industry looks at pricing? In other words, is the consumer really at a point where the industry might risk trying to take some more pricing, particularly as a lot of the industry has ramped up productivity quite a bit and might want to lean on that even though that's probably not enough over time?

I think any inflation that you see with commodities and things like that is going to have a decent lag because I think of food company that has learned their lesson in the last few years has taken some pretty long term positions. So, for instance, with us if the price of wheat starts clicking up, it's going to be 12 months before that affects us and we certainly have that 12 months to gauge what we want to do from a pricing point of view.

Having said that, I think, you know, we've also seen that the consumer, you know, needs to continue to buy products and, you know, if we're going to maintain our margins, we have to take pricing sooner or later if costs go up. So it's inevitable. You've got to be careful about it. Where we can offset it with productivity, we certainly would, but at the end of the day I don't think anybody in the food industry can sit and say well, I'm just going to let my margins erode. So sooner or later you have to take the pricing.

Last thing and I'll pass it on is you'd mentioned that perhaps Kraft making an acquisition at Cadbury, could well be like a starting gun going off, if you will, I think those were your words around, you know, potential other things falling out of branded food companies and obviously we haven't seen anything to date but did anything change in your thought process around the importance of that, you know, transaction for Kraft potentially in terms of what could happen down the road?

I think you're seeing more people talking about M&A now because of that, because of that acquisition. I think that's certainly heightened the awareness in everybody's mind that, you know, we need to grow and do more acquisitions and to the extent the big guys do large acquisitions, we think they're going to shed smaller brands, which is where we like to play.

You know, and I think Kraft will be looking at their portfolio and rationalizing it once they get their arms around Cadbury. I think they're very distracted right now, but at the end of the day I think they'll be looking to trim their portfolio, too.

Thank you both.

Yes, thank you.

Thank you and our next question is from Robert Moskow with Credit Suisse.

Good afternoon. This is actually Will Sawyer for Rob.

Hi.

Had a couple questions. Most of them have been answered. I know last time I heard from you guys, you talked a a little bit about the promotional activity in canned beans. I don't know if you spoke about it today but if not, could you give us a little color there?

Well, I think the last time we talked I said that we had actually lagged our competition in terms of taking up our promotional price points and we were planning to start chasing them up as we went forward and that's about where the situation is. We're trying to -- we're trying to match price on our promotional price points versus where competition is. The good news is that their price points were higher than ours, so we have a chance to move it up.

And you're still in the ongoing process of that?

Yes.

That will happen in 2010 and we haven't seen anything that indicates that's the wrong direction to go so far.

Okay. And your comments on 1% deflation, you know, partially from packaging, is that primarily steel packaging and what are you seeing there?

We don't expect deflation from packaging. The cost decreases we're seeing are coming from things like wheat and some other ingredient type of things.

Packaging, yes, steel cans went down this year or rather in 2009 in the middle of the year, but that was on the heels of a fairly large increase at beginning of the year. So net, net 2009 costs on cans did not go down versus prior year and people like the glass suppliers have never taken their price down in recent years. They're a constant increase in price and their attitude after they've rationalized their capacity is here's my price increase. You don't want to buy from me, that's great. Fine, whatever. But here's my price increase. So we haven't seen a lot of relief from the packaging side. It's been more on the commodity side.

Okay. And then, you know, again on deflation, do you have any targets as far as a gross margin expansion for 2010 or do you just plan on holding --

Well, we're talking about all things being equal, our cost of manufacturing going down about 1%, that doesn't translate to 1% margin. It's less than that.

Okay. Thank you.

Yes.

Thank you. We'll take a follow-up from Reza Vahabzadeh with Barclays Capital.

Yeah. I think you answered my question in response to Andrew's question, but basically the Wal-Mart private label initiative and their clarity project, is that likely to taper off during 2010 versus 4Q '09?

I think the major effort is in place. I think they're going to assess, you know, whether it's good, bad or indifferent.

You know, I can't say this with absolute certainty, but the fact that we're hearing that they're going to start reviewing categories in total again to me says that, you know, they're done with that and now they're going to go back to okay, now let's start looking at categories and what manufacturers have to offer and, you know, reconsider what branded products we want to have in here again.

All right. And then as far as packaging costs, just a portion of your COGS, did you give out an expected inflation number?

I tonight think we expect packaging to go up, but we don't expect it to be down substantially either. And as I said, it's sort of one of those well, the can guys go down a little bit, but the glass guys go up. At the end of the day it kind of offsets each other.

And when you said you have visibility on that, does that mean you have contracts on hand or?

We have multi-year contracts, but they all have energy inflators this in them.

Right.

o if energy goes crazy to the extent we haven't been able to do things like hedge natural gas pricing on the cans we're buying or something like that, we would see increases.

Got it. Thank you.

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

Okay. Thank you, operator. Thank you, everyone. We appreciate your interest and your time and thank you for joining us on the call.

As I said, we think that 2009 was a tremendous year for the company. First in the performance of the business but secondly, we think it's very, very significant that we have basically restructured our capitalization, locked in our long term debt to 2018, lowered our leverage and really set the business up from that point of view going forward to take advantage of whatever opportunity presents itself to us. So we're very happy with where the business is and very optimistic that we're going to do more great things in 2010. Thank you.

Thank you and that concludes our presentation. Thank you for your attendance.