B&G Foods Inc (BGS) 2010 Q2 法說會逐字稿

(Operator Instructions). Welcome to the B&G Foods, Inc. second quarter 2010 financial results conference call. Just a quick reminder, today's call is being recorded. (Operator Instructions).

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

Thank you, Operator. Good afternoon, everyone, and welcome to the B&G Foods second quarter fiscal 2010 conference call. You can access detailed financial information on the quarter in our earnings release issued today, which is available on our website at bgfoods.com, and in our quarterly report on Form 10-Q that we have filed today with the SEC.

Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance, and therefore undue reliance should not be placed upon them.

We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition. The Company undertakes no obligation to publicly update or revise any forward-looking statements, 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 results, selected business highlights, and our updated thoughts concerning the remainder of 2010. Bob?

Thank you, Dave. Net sales for the second quarter of 2010 decreased $1.8 million, or 1.4% to $121.1 million, compared to $122.9 million for the second quarter of 2009. The decrease was attributable to a unit volume decline of $3.8 million, partially offset by sales price increases of $1.5 million, and reduced coupons and slotting expenses of $0.5 million.

Our 10-Q has additional disclosure on individual brand performance for the quarter. Gross profit increased $2.5 million for the second quarter of 2010, or 6.9%, to $39.4 million from $36.9 million in the second quarter of 2009. Gross profit expressed as a percentage of net sales increased 2.5 percentage points, to 32.5% for the second quarter, from 30% for the second quarter of 2009.

The increase in gross profit expressed as a percentage was primarily due to increased sales prices of $1.5 million, decreases in commodity and ingredient cost, along with the sales mix shift to higher margin products slightly offset by an increase in packaging and fuel surcharge cost. Sales, marketing, and distribution expenses decreased $0.3 million, or 2.9% to $10.6 million, compared to $10.9 million for the second quarter of 2009.

This decrease is primarily due to decreases in warehousing costs of $0.7 million and brokerage of $0.2 million, offset by increases in consumer and trade spending of $0.6 million. Expressed as a percentage of net sales, our sales, marketing, and distribution expenses decreased 10 basis points to 8.8% for the quarter, from 8.9% in the second quarter of 2009.

General and administrative expenses increased $0.3 million, or 15% to $2.8 million for the second quarter, compared to $2.5 million in the second quarter of 2009. This increase is primarily due to an increase in professional fees.

Operating income increased 11.3%, to $24.3 million for the second quarter, from $21.8 million in the second quarter of 2009. Net interest expense for the second quarter of 2010 decreased $1.2 million, or 10.2%, from $12.1 million in the second quarter of 2009 to $10.9 million in the second quarter of 2010.

The decrease in net interest expense in the second quarter was primarily attributable to the refinancing we completed during the second half of 2009 and first quarter of 2010 that reduced our long-term debt and effective interest rate on our long-term debt from 9.9% in the second quarter of 2009 to 7.9% in the second quarter of 2010.

The Company's adjusted net income which excludes the impact of items affecting comparability relating to the interest rate swap and loss on extinguishment of debt was $9.4 million for the second quarter of 2010, a 75.4% increase as compared to adjusted net income for the second quarter of 2009 of $5.4 million.

Adjusted diluted earnings per share for the second quarter of 2010 were $0.19, a 26.7% increase as compared to adjusted diluted earnings per share for the second quarter of 2009 of $0.15. For the first two quarters of 2010, the Company's adjusted net income was $19.8 million, or $0.41 per diluted share, a 64.8% increase as compared to adjusted net income for the first two quarters of 2009 of $12 million, or $0.33 per diluted share.

Our EBITDA increased 10.1% to $28 million for the second quarter, compared to $25.5 million in the second quarter of 2009. Our EBITDA for the first two quarters of 2010 was $58 million, a 9.9% increase compared to $52.8 million for the first two quarters of 2009.

Moving onto the balance sheet, we finished the second quarter with $80.5 million of cash, compared to $29.6 million at the end of the second quarter of 2009. Our current dividend rate is $0.68 per share, or approximately $32.4 million per annum, based on our current share count.

Our leverage net of cash was 3.7 times EBITDA as of July 3, 2010. Our inventory at the end of the second quarter was $94.1 million, compared to $111 million at the end of the second quarter of 2009, a reduction of 15.2%.

Our expected cash interest for 2010 is approximately $36 million. Our expected cash taxes for 2010 are approximately $4.5 million, and our capital expenditures for 2010 are forecasted at $11 million. I will now turn the call back over to Dave for his remarks.

Thank you, Bob. Good afternoon again, everyone. As Bob's comments highlight, the second quarter was more challenging for us than the first, but in the end it was an encouraging outcome. While we expected, and would have preferred, a better top-line result, margins in the business continued to improve and EBITDA and adjusted earnings per share both showed healthy increases at plus 10.1% and plus 26.7% respectively.

The business maintained its strong cash generation as well, and we ended the quarter with a record $80 million in cash on the balance sheet. We are confident, therefore, that the fundamentals of B&G's business remain solid, which is why we are increasing EBITDA guidance to the $109 million to $112 million level.

Going into the particulars of the quarter, net sales were down 1.4% after a 5.5% increase in the first quarter. That leaves us up 2% for the first half.

Second quarter sales were down $1.8 million, primarily the result of, we believe, several unique factors and a few things we need to address in the second half. The first of the unique events was the timing of the Easter holiday, which fell very early in the second quarter. As we discussed in the first quarter conference call, we estimated that there was some shift in sales from second quarter into the first quarter. April sales bore that out to a great degree and, after seeing the April results, we estimated that it may have been as much as $2 million.

The second factor, which we also believe is unique, was an inventory draw down at several major customers. In the case of one large customer, we documented an inventory decrease of one week's worth of sales, or $1.4 million. We also had warehouse consolidation within the specialty distributor customer base that temporarily lowered sales as warehouse inventories contracted.

Finally, in the case of maple syrup, we faced a tough comparison in the second quarter of 2009 caused by pipeline sales as maple syrup inventories recovered in that year. In each case, these events were unique and should not repeat in the second half. Having said that, one factor that affected second quarter sales and will almost certainly be an issue in the second half, is competitive promotional activity, particularly in brands that are highly dependent on promotional sales. In our case, the brands in question are B&G, B&M and Joan of Arc. Each of these brands saw a significant increase in activity from our competition in the quarter.

This affected the sales of each brand negatively, as we reported, and will require a competitive response on our part. The volume loss on these three brands was $4.8 million compared to our overall volume loss of $3.8 million in the second quarter.

I have always maintained that promotional spending is a short-term way to grow sales, because it will eventually bring a competitive response leaving everyone where they started, but at a lower net price. Apparently, we will see this play out in these categories as the year progresses, and we will compete at the levels needed to defend these brands.

The good news for us is that we continue to lower our overall promotional spending. The $3.4 million price increase that we have reported for the first half is largely from lower promotional spending. Our continued success in this area, throughout our portfolio, should allow us to respond to competition without compromising overall revenues or earnings.

It's also worthy of note that the second quarter sales decline all took place in retail and mass merchant channels. Our food service group actually saw a 1.3% sales increase in the quarter, something we hope is the beginning of a trend. The improvement in this channel was fairly broad based and was led by Maple Grove Farm brand sales of pure maple syrup. The channel has been steadily improving in recent quarters, though still negative until this quarter, and our food service team is now optimistic about the second half. We have new products here in the Ortega, Cream of Wheat, and Trappey's brands that should help food service generate growth for the rest of the year.

Gross profit for the second quarter improved by 6.9% or $2.5 million. Our sales mix played an (important) part in this improvement, as did the $1.5 million improvement in net pricing. Cost was down modestly in the quarter and also contributed to the gross profit improvement.

We continue to see a steady bleed-down in cost for commodities such as wheat, which have more than offset increases in sugar and meat. Since we have locked in most meaningful commodity costs, up to and in some cases beyond, the second quarter of 2011, we have very good visibility on costs for the next 12 months. Between the purchasing positions we have taken and our overall cost saving efforts, we expect that manufacturing costs will continue to decline modestly for that period.

Distribution costs increased by two-tenths of a percent of sales in the second quarter, but here, as in the first quarter, our cost saving efforts have softened the potential impact. Fuel surcharges for the quarter were up 86%, which would have more than doubled the potential increase as a percent of sales. Our Pennsylvania distribution center has offset much of this increase through mileage reductions, thus limiting the impact of these higher fuel surcharges.

We continue to invest additional money in slotting products into distribution and in supporting that distribution with coupon and consumer advertising. Ortega, for instance, was on television in select markets in the second quarter. In all, we have spent $2 million more than last year in these efforts in the first half, a 23% increase in spending. This is the primary reason that operating expenses are higher than prior year for the first half. It also netted sales down more than $1.2 million in the first half of 2010, due to higher coupon and slotting expenses as compared to the first half of fiscal 2009.

For the second quarter, our increased advertising spending was offset by savings in selling expenses and in warehousing as the facility consolidation we did in 2009 generates savings in 2010.

The bottom line of all these factors shows that the business is still performing very well. At $28 million, second quarter EBITDA showed a 10.1% increase and was at a record level for second quarter EBITDA results. The first half EBITDA of $58 million, another record, puts our trailing 12 months EBITDA at $108.2 million, very close to the bottom end of our revised 2010 EBITDA guidance.

So far I've discussed the issues and challenges underlying the sales results, but there were many positives as well. We have targeted several brands for higher growth in 2010. These included Ortega, Cream of Wheat and Las Palmas, all of which did well in the second quarter. We continue to emphasize new products and new distribution with these brands and our successes are growing.

Ortega new products, especially those with whole grain and whole wheat, have gained immediate acceptance with retailers and are performing well where they have entered distribution. In most cases, they have not cannibalized existing business. Instead they have contributed for the brand and category growth. Ortega retail sales were up 4.7% for the quarter and are up 6.8% for the year.

Cream of Wheat has also had strong sales momentum. Retail sales were up nearly 10% for the quarter and are up over 13% for the first half. New products, our instant products with fiber for instance, are continuing to gain distribution. We have been successful with a three-pack instant product in dollar stores. That product will expand distribution in the second half based on its success. We have also introduced instant Cream of Wheat in a microwaveable cup for food service and that product is just being sold into the food service distribution channels.

In second quarter, we also began producing and distributing a Cinnabon flavor instant Cream of Wheat. This product will go into extensive distribution in the second half of 2010 and we are very optimistic about its prospects. Acceptance at the retailer level has been remarkable.

Las Palmas continues to perform very well as we expand distribution of those products into new geography for both retail and mass merchant channels. Retail sales of Las Palmas were up 9% in the second quarter and are up over 11% in the first half. We are rationalizing manufacturing here, as well, and now produce most of the sauces in B&G facilities at a lower cost.

All in all, we think we are doing a solid job of creating new products and finding new distribution for our brands. The second half of the year should see better evidence of these efforts as distribution of existing and new products expand. We should also see the reversal of some distribution losses. As many of you have heard, Wal-Mart has announced an expansion of selection in their stores and at least a partial reversal of their actions over the past year. So far, for B&G, that means over 9% more points of distribution for our products in Wal-Mart, much of that coming in July and August. That's a solid gain at our largest customer.

As Bob outlined, the balance sheet is in great shape with a record $80 million in cash on the books. Our inventory reductions continue to bear fruit. Total inventory was down nearly $17 million versus second quarter 2009. We believe we can reduce this number further by year-end, mainly by rationalizing where we manufacture various lines of products. As an example, we are currently in the process of shutting down a B&G auxiliary facility. This is nearly complete, and when it is, we will have reduced inventory, eliminated the need for capital spending and reduced operating cost. We continue to examine all of our manufacturing for opportunities such as this.

While we have not done an acquisition yet this year, we are seeing an increasing number of opportunities, approximately one every other week. The most common theme in these opportunities is that they are private businesses and we have to speculate that they are being offered for sale in anticipation of potential tax changes in 2011. None have been appropriate for B&G so far, but we continue to look hard for that right acquisition. We are certainly well prepared in terms of our balance sheet, our stock value and access to the financial market should the right opportunity present itself.

In summary, while the top-line was more challenging this quarter, we are encouraged by the continued success of our efforts to grow our priority brand and by our ability to improve margins as we do so.

Year-to-date EBITDA margin is now an impressive 23.6% of net sales. Competitive activity is picking up and we will respond as necessary to that activity. The recovery of food service and the continued success of our new products and priority brands makes us confident that the business will perform well in the second half of 2010 and that we will meet our latest EBITDA guidance of $109 million to $112 million. That confidence is bolstered by the fact that the cost outlook for the business remains favorable well into 2011.

Our balance sheet is the strongest it's ever been. Net leverage is at a comfortable 3.7 times EBITDA. The business remains very healthy and we look forward to a successful second half of 2010.

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

Thank you very much sir. (Operator Instructions). We'll first go to Barclays Capital, Reza Vahabzadeh.

Good afternoon.

Good afternoon Reza.

Dave, you talked about the increase in promotional intensity in certain categories. Are you seeing any change in that in the third quarter, is that intensifying, is it spreading to other categories, is it diminishing? Any color on that would be appreciated.

It's very hard to say what's going on in the third quarter. We haven't seen it let up, I don't think we've seen it intensify either, but it's a very dynamic situation, but it's early in the third quarter, so it's hard to say.

Got it. And then, as far as your plan to deal with that higher promotional intensity, is it just basically to match the competition, essentially, and to reallocate dollars from other brands?

Well, the dollars would come from the brands that are involved and in some cases it's very finite, B&G for instance. It really is a handful of items that we have to execute promotions on. There are higher volume items in the category, but we have a broad line of products, and we don't feel that we have to do a lot with many of the products, but there are some key items that we need to respond to.

In the case of B&M, it's a broader proposition as is Joan of Arc and in the case of Joan of Arc it's not so much deepening promotions as it is really retrenching from a price increase we took at the beginning of the year that it looks like we wrong-stepped ourselves with that price increase.

Got it. And then, lastly, in terms of your EBITDA guidance, just to understand that better, does that imply roughly flattish EBITDA for the second half?

Well, the 112 doesn't.

Right, but the middle of it.

The middle of it would imply modest EBITDA. As I said, we are very close to the bottom, so we are very comfortable with that guidance.

Okay. Thank you much.

We will next hear from Ed Aaron of RBC Capital Markets.

Thanks. Good afternoon guys.

Good afternoon.

Good afternoon.

Just on the full year sales outlook. I think last quarter you mentioned expectations for volume growth in the 3% range and maybe just modest pricing. And when you think about Q2 coming in a little bit later, do you still feel comfortable with that sales level on a full year basis? I know you did seem a little bit more optimistic on the back half, so just wanted to get an update there.

Well, I am more optimistic on the back half, but going out of a 5.5% increase we thought 3% was very doable. After the first half now, with second quarter being where it is, I think we are more comfortable in the 2% range.

Okay. Thanks, that's helpful. And then just on the kind of pricing environment. I know you have a few brands where you have to get a little bit more aggressive, but do you have anything in your portfolio where maybe there is some inflation pressure that's picking up, to the point where you can actually, maybe not put (through) risk price increases, but still manage down promotions in other areas to kind of offset what you might face in those more price competitive brands, and if so can you maybe just give us a few examples of where we might see that happen? Thanks.

We really are not seeing commodities in any part of our portfolio crank up to the point that we would say there is inflationary pressure and there will be pricing that's justified. I have read that there is some prospects for people seeing that kind of inflation, we just don't see it. I mean maybe it's unique to us in terms of the commodities we buy, and we are not a commodity driven company, per se. Materials like that are not a huge part of our cost. But, no, we don't see that in the portfolio of brands we have, where there is inflationary pressure that's going to justify pricing going forward.

Thanks. And then just one last one if I could. You mentioned some changes coming at Wal-Mart, just curious when you look at your portfolio are there any areas where you think specifically you might pick up some shelf space over the next six months or so?

Well, as I said, we know today that we are going to pick up over 9% more points of distribution at Wal-Mart. By a point of distribution I mean a single product in a single store. So, our largest customer, we will have 9% more products in their stores in probably the next three months and that's what we know today. We think there is still some more coming, but Wal-Mart is moving very quickly to reestablish branded distribution in their Supercenters, at least as far as we can see.

Helpful, thank you.

Yes.

(Operator Instructions). And we will next move to Andrew Lazar of Barclays Capital.

Good afternoon, everyone.

Good afternoon, Andrew.

Couple of things. First, with respect to the back half and the way you are thinking about the increased promotions on certain brands, but you still had trade spending efficiency and kind of net positive pricing in the second quarter. Do you think that, all in, in the second half you are still likely to have positive net pricing even with the increase in promotions that you expect or does that become flattish or even a modest detractor to the top line?

We are looking at it as flattish, Andrew. And the reason is it's going to increase on some brands, we're going to see some benefit continue on other brands and that should pretty much wash out. In some cases, what we are increasing promotions to is what we did last year. So it's a fairly neutral event from that point of view.

Okay. And then I am trying to think a little bit about some of the changes you've talked about at Wal-Mart or an increase in distribution of branded SKUs and variety and such. But trying to sort of juxtapose that with the commentary around obviously what is a very difficult promotional environment for the industry as a whole. Do you think that some of the changes at Wal-Mart, aside from the distribution piece that you've mentioned, will change the promotional environment or the intensity of that in the next couple of quarters? Because, it seems like that might still be somewhat intense.

I think the promotional environment in brands that respond to promotion or are dependent on promotion is going to be fairly intense in the next six months at least. How much Wal-Mart will influence that? It's very hard to say. I mean, it sounds like Wal-Mart is going back to a more everyday low price format rather than letting people roll back price on a regular basis. That would imply that you are going to have to give Wal-Mart your best price and live with it and, what that means in terms of retail out in the super markets is -- I really can't say.

Right, right. Okay and then just the last thing. Thank you for some of the color around what the incremental distribution might be able to give you. I think it's pretty interesting numbers there. If I think about that and trying to quantify it, if we think that Wal-Mart is roughly, whatever, 16% of your sales annually and you get a 9% sort of bump in distribution. Has it just really become that 9% on 16% of your sales, and I am simplifying this obviously, but on an annualized basis maybe it adds 1.5 points of, sort of, volume opportunity on an annualized basis?

Well, the 16% is a very good estimate. The 9% will not drive a directly proportionate increase in sales. You are obviously talking about restoring some more or less fringe distribution versus the core distribution that's sold well every day. So, we don't look at a one-for-one increase in sales, we are looking at some efficiency factor there of 50% plus, but not a one-to-one.

Okay, that's helpful. And then I guess lastly, I mean it's hard to know obviously, but do you think that your business was hurt disproportionately at a customer like Wal-Mart, when they went through the whole simplification process, versus other peers in the industry, or would there be no necessary -- I mean everyone has their own specific product mix, but I am just curious if there would be anything about your business there that would have made you more exposed to that or not?

No, actually, what happened with us at Wal-Mart is we were growing very nicely at Wal-Mart and their whole clarity program and everything decelerated that growth. But we never stopped growing at Wal-Mart, until their latest inventory actions. So, did it hurt us? Yes, we weren't growing as fast as we had been, but we had continued to grow at Wal-Mart, despite what they were doing. So it's all relative I guess.

Right, right, okay. And then the last thing is, you had mentioned that you expect some of this incremental distribution to come in the July, August timeframe, so it's not necessarily -- it maybe more over time than you currently estimate, but that 9% distribution, a lot of that hits at a more sort of near term timeframe is my sense?

Yes, they are moving very quickly. A bunch of orders are in-house.

Got it, got it. And then I promise one last thing. Just on some of the inventory de-stocking that you saw, I realize some of those things were sort of as you described sort of unique. That inventory draw downs so not the Easter piece and not the tough maple syrup comp, but the inventory drawdown of a week or so, is that -- I mean because you obviously had a pretty strong sales growth and volume growth in the first quarter...

Yes.

I mean was it just more over shipping at the end of the day or takeaway at retail decelerated dramatically -- ?

No, this was the conscious effort by our single largest customer, mostly, to take a week of inventory out of their system and the inventory hadn't been very high to begin with.

Got it, got it. And do you think that was across the board of a lot of players or is it picking things over time who they...

I would be -- that would be more a rumor and all that, but I had heard from a good number of people that they were seeing that kind of thing going on.

Okay. Thanks very much for your time, Dave.

Sure.

(Operator Instructions). There appear to be no further questions at this point. I would like to turn things back to Mr. Wenner for any additional or closing remarks.

Thank you. Thank you for joining us, everyone. We appreciate your interest in the company. As I said earlier, the top line was more difficult this quarter, but we think we will return to a more normal mode of operation here in the second half and we continue to have excellent margins, excellent cash flow, and a very healthy business in general. Thank you again.

That does conclude this conference call. Thank you all for joining us.