B&G Foods Inc (BGS) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you standing by and welcome to the B&G Foods, Incorporated third quarter 2010 financial results conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for your questions.

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

Thank you. Good afternoon, everyone, and welcome to the B&G Foods third 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 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'll start the call as we usually do, 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 third quarter of 2010 increased $1.2 million or 1% to $125.1 million compared to $123.9 million for the third quarter of 2009. The increase was attributable to sales price and unit volume increases of $0.4 million and $0.3 million, respectively, and a reduction in coupons and slotting expenses of $0.5 million. Our 10-Q has additional disclosure on individual brand performance for the quarter.

Gross profit increased $3 million for the third quarter of 2010, or 8.2%, to $39.2 million from $36.2 million in the third quarter of 2009. Gross profit expressed as a percentage of net sales increased 2.1 percentage points to 31.3% for the third quarter from 29.2% for the third quarter of 2009. The increase in gross profit expressed as a percentage of net sales was attributable to increased sales prices and a reduction in coupons and slotting, which accounted for 0.5 percentage points. The remaining 1.6 percentage points is attributable to decreases in commodity and ingredient cost and a sales mix shift to higher margin products, slightly offset by an increase in packaging and fuel surcharge costs.

Sales, marketing and distribution expenses decreased $0.8 million or 7.1% to $9.9 million compared to $10.7 million for the third quarter of 2009. This decrease is primarily due to a decrease of warehousing cost of $0.6 million attributable to warehouse consolidations and reduced consumer marketing and trade spending of $0.2 million. Expressed as a percentage of net sales, our sales, marketing and distribution expenses decreased 70 basis points to 7.9% for the quarter from 8.6% in the third quarter of 2009.

General and administrative expenses decreased $0.4 million or 13.7% to $2.5 million for the third quarter compared to $2.9 million in the third quarter of 2009. This decrease primarily resulted from reduction in share based compensation expense.

Operating income increased 19.6% to $25.1 million for the third quarter from $21 million in the third quarter of 2009. Net interest expense for the third quarter of 2010 decreased $3.3 million or 23.8% from $13.6 million in the third quarter of 2009 to $10.3 million in the third quarter of 2010. The decrease in net interest expense in the third quarter was primarily attributable to the refinancing we completed during the second half of 2009 and the first quarter of 2010 that reduced our long-term debt and the effective interest rate on our long-term debt from 9.6% in the third quarter of 2009 to 7.9% in the third quarter of 2010.

The Company's adjusted net income, which excludes the impact of items affecting comparability relating to our interest rate swap and loss on extinguishment of debt, was $9.8 million for the third quarter of 2010, an 88.1% increase as compared to adjusted net income for the third quarter of 2009 of $5.2 million.

Adjusted diluted earnings per share for the third quarter of 2010 was $0.20, a 42.9% increase as compared to adjusted diluted earnings per share for the third quarter of 2009 of $0.14.

For the first three quarters of 2010 the Company's adjusted net income was $29.6 million, or $0.61 per diluted share, a 71.9% increase as compared to adjusted net income for the first three quarters of 2009 of $17.2 million or $0.47 per diluted share.

Our EBITDA increased $4.2 million or 17% to $28.9 million for the third quarter compared to $24.7 million for the third quarter of 2009. Our EBITDA for the first three quarters increased $9.4 million to $86.9 million in 2010, a 12.2% increase compared to $77.5 million for the first three quarters of 2009.

Moving on to the balance sheet, we finished the third quarter with $87.5 million of cash compared to $39.9 million at the end 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 3.5 times EBITDA as of October 2, 2010.

Our inventory at the end of the third quarter was $89.4 million compared to $103.6 million at the end of the third quarter of 2009, a reduction of 13.7%.

Our expected cash interest for 2010 is approximately $36 million. Our expected cash taxes for 2010 are approximately $5.4 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.

Thanks, Bob. Good afternoon again, everyone. As you can see, this was another great quarter for us on the bottom line, and an improvement from second quarter on the top line. But sales are not quite where we would like them to be yet. Even so, margins improved throughout the P&L due to a variety of factors that I'll speak to, and our business continued to look very solid overall.

The EBITDA increase of 17% exceeded our expectations, as did the 43% improvement in earnings per share. And it's worthy of note that the increase in earnings per share comes even though we have about 28% more shares outstanding in the third quarter of 2010 versus third quarter 2009.

B&G remains a very strong cash generator. Even with an early end to the B&G pickle and pepper seasonal pack, we increased cash on our balance sheet to $87.5 million. As a result of this very strong quarter we are increasing full year EBITDA guidance for the third quarter in a row, this time to between $113 million and $115 million.

As I just said, we would have preferred a stronger top line this quarter, but the 1% net sales growth was still an improvement from last quarter's decline. Sales declines in two brands were mentioned in our 10-Q, a decline of $1.5 million in Cream of Wheat, and a $700,000 decline in B&G. Both of these were caused by structural decisions around the brands and not consumer sales. In the case of Cream of Wheat, we curtailed deep promotional activity that we executed in Q3 of 2009. As a result, we did not see the retailer inventory buy-in at the end of the promotion that we saw last year. Cream of Wheat sales in the final week of the promotion which was near the end of September were down $1.6 million, more than the brand sales variance for the entire quarter.

The B&G brand sales were adversely affected by our exit from the Store-Door distribution system in New York in the latter part of 2009 and early 2010. Most of the sales decline came from lost sales of items we discontinued as part of that exit.

In more general terms, we saw softness in the traditional supermarket segment of the business in the third quarter that was compensated for by growth in mass merchants and other retail channels.

In last quarter's call I mentioned that Wal-Mart was expanding distribution of various B&G brands as part of their new market strategy. So far we have gained over 10% more points of distribution, most of that coming in the latter part of August. Our sales to Wal-Mart were up over $1 million in the third quarter as a result. While we do not expect this new distribution to be as efficient as the existing base in producing sales, it is generating a welcome lift.

Similarly, we have steadily expanded our distribution in dollar stores, warehouse clubs and the drug channel in a number of brands. We have designed items specifically for dollar stores in Accent and Cream of Wheat, for instance, and those products are doing very well. Sales to dollar stores on a relatively small base are up almost 50% this year. Sales through all of these retailers, excluding Wal-Mart, are up 40% and accelerating. This has allowed us to offset declines at several supermarket chains, the result of their struggle to maintain market share as consumers shop for food at new outlets.

Another topical issue in the food industry is promotional spending. We reduced our promotional expenses by another 0.4% of gross sales in the third quarter, making the year to date promotional spending decrease 1.3% of gross sales. Even as we are doing that, however, we acknowledged last quarter that increased promotional activity by competitors cost us sales in several brands, specifically B&G, Joan of Arc and B&M. We responded during the third quarter with positive results. B&M and Joan of Arc net sales were up 12% and 7%, respectively. While B&G sales were down in the quarter, that was all related to the distribution decisions I referred to earlier. Sales of products we maintained in distribution were flat.

We have since seen competitive promotional activity expand to Las Palmas which was also flat for the quarter, and we will respond here as well. All told, the brands involved in this promotional push represent just over 20% of our sales. So the effect on our overall performance should not be meaningful.

Two of the brands we are focusing on in retail, Polaner and Ortega, had a solid third quarter, growing by 6% each. All of that organic growth stems from new products and expanded distribution. Our healthy initiatives in these brands, adding fiber to the Polaner products and innovating with whole-grain tacos and tortillas have been key to growth. We have recently adjusted our whole-wheat tortilla to be WIC compliant which we believe will add to distribution and sales.

While the retail part of our business comprising over 80% of the overall business was up in the third quarter, food service was down 1.4%. This segment had been up in the second quarter, which we had taken as a sign of further recovery in the entire industry. All of that prior gain had been in maple syrup sales, and in the third quarter syrup sales accounted for the entire decline. Looking at the two quarters together, food service is flat, encouraging given where we've been for the past few years. We are still looking for this industry's recovery and subsequent lift to our sales. But food service appears to have sagged somewhat recently, and that's a setback to those hopes.

Gross profit improved by 8.2% in the third quarter, the result of lower trade spending, favorable sales mix and slightly lower manufacturing and distribution costs. As a percent of sales, gross profit rose by 2.1% of net sales to 31.3%. Lower trade promotion and distribution costs contributed roughly half of the improvement, each dropping by 0.4% of sales.

Manufacturing cost declined by 0.9% of sales. While we continue to refine promotional expenses, the benefit is narrowing as time goes on, affected first by less opportunity, and secondly, by the need to spend more in selected brands. We foresee this benefit steadily decreasing in the fourth quarter and in 2011.

Cost reduction efforts get credit for our reduced distribution expenses. Fuel surcharges were up almost 12% in the third quarter and are still trending higher. Higher surcharges would otherwise have increased costs by over $1 million so far this year, but, thanks to warehouse consolidation and other actions, spending is down by over $0.5 million.

In manufacturing, costs are down so far this year primarily in commodities. As all of you know, many of the large commodities have risen recently. But with a few exceptions we have not seen an effect yet. Meat cost for Underwood, for example, is up sharply, and some sweetener costs are higher. With those exceptions, we do not see cost increases impacting us until 2011, assuming energy and commodities remain stable versus where they are today.

All of our other expenses are well under control and actually down by over 8% for the quarter. Here again, the cost reduction aspect of our continuous improvement process has allowed us to reduce expenses broadly. Selling costs were down despite increasing volume, and warehouse costs were down over 26% thanks to facility consolidations.

The balance sheet remains in excellent shape, showing $87.5 million in cash. Our inventory reduction efforts have helped fund that cash balance. Inventory was down $14.2 million versus prior year. We are diligently looking for further opportunities to reduce inventory without affecting our superior customer service record.

During the third quarter we completed shutdown of a tank yard facility that supplied the B&G brand. Much of the inventory in that tank area has been eliminated and either outsourced or the products involved discontinued. Our manufacturing facilities are focusing on improving changeover outages as a further way of lowering inventory requirements.

Consistent with our acquisition strategy, we continue to review acquisition candidates on a regular basis, though the flow has slowed in recent weeks. That may be the result of timing. As year-end approaches, the properties that hope to sell in 2010 may have all come on the market. What we are not seeing is brands offered by larger food companies. In general, we believe that the industry-wide challenge of slower growth is inhibiting these offerings. In the end, all we can do is be ready to execute on an acquisition opportunity when it presents itself, and today we are as prepared as we have ever been. Our net leverage at the end of the third quarter was just below 3.5 times the trailing 12-month EBITDA, which should make it relatively easy to finance the appropriate acquisition.

Looking forward, we have raised EBITDA guidance for the third straight quarter in anticipation of our trends of modest price improvement, favorable mix shifts, and favorable costs continuing. The midpoint of our guidance, $114 million in EBITDA, would represent a 10.7% improvement for the year, on top of a 15% improvement in 2009.

We do not intend to issue guidance for 2011 until our final results are in for 2010. Having said that, we believe that 2011 will be a more typical year for the base business, with pricing and cost changing only modestly. Improvement in our bottom line will be more dependent on organic sales growth and cost reduction next year. All of this assumes, of course, that cost inflation is modest. At this point we believe that to be the mostly likely scenario.

Our focus for the fourth quarter, meanwhile, is on increasing sales volume with new products and distribution, driving continuous improvement of costs and processes throughout our company, and meeting our higher EBITDA guidance. We are confident that we will do that and thereby set the stage for a strong 2011.

And at this point we'd like to open the call up for questions. Operator?

Thank you. (Operator instructions). We'll go first to Karen Eltrich with Goldman Sachs.

Thank you. As you said, you expect commodity costs to be benign next year. But in kind of a worst case scenario, what is the environment right now for taking pricing? Do you think you would be able to pass through higher cost if it does come to that?

Well, I think if there are specific higher costs that you can show retailers, yes, I think you can take price increases. But I think you have to have a very good case in terms of being able to point to those costs.

Right, and as you mentioned very impressively, you have lowered your slotting and your couponing costs. As you look ahead to next year to drive the top line, kind of what initiatives do you have in place in terms of balancing marketing to get that top line going without necessarily resorting to discounting?

Well, we'd prefer not to discount. That is not a real constructive way to drop top line from our point of view. We believe that we've got a stable of new products out there that we haven't taken full distribution on yet. We've got another good number of products in the pipeline. That will probably mean we need to expand slotting, and we're certainly budgeting for that as we go into 2011. And hopefully those new products will drive sales.

I guess on that same note, how is Cinnabon Cream of Wheat being received by retailers?

I would say it's being received as strongly as any new product that we've launched. The September sales of that single item were $0.25 million. Now that's a great deal of pipeline, but that's a very strong performance out of the box for a new product.

Great, thank you very much and congrats on the quarter.

Thank you.

And from Credit Suisse we'll move on to Robert Moskow.

Hi, good afternoon.

Good afternoon.

I wanted to know when you say the commodities for next year would be flat if things stay the way they are today, I think of Cream of Wheat and Ortega exposed to wheat and corn. Is it your expectation that those commodities will be up next year, but it's offset by maybe some deflation elsewhere?

Yes, that's -- when we look at our basket of commodities, if you will, some are up and some are down. The net for next year right now is that it's a fairly neutral scenario. Wheat is certainly up but we have insulated ourselves from that increase for most of the year right now. Corn really is not a huge factor for us. I mean, it's important to the tacos, but when you look at the total of the Ortega line it really is not a big factor and you're talking hundreds of thousands of dollars in variance, not millions.

Okay. When you say you've insulated yourselves, does that mean you're hedged on wheat through 2011?

We don't usually hedge. We do take purchasing positions, though, and we've take those positions for virtually all of the year.

Okay. I guess the other positive was that your price at the end of the day was positive versus year ago, and despite the fact that you had a promotional push on 20% of your sales. So on one hand everyone's worried about promo spending being really aggressive, but on a net basis you're still up from a year ago. So is that just a mix of things kind of going in different directions, some you're more aggressive, some you're -- you don't have to be as aggressive?

That's right. We have about five or six brands that are fairly sensitive to promotional activity, and as I've said, about four of those are seeing some significant competitive activity right now. The other twelve brands in the portfolio are much less sensitive to promotional activity. Some of the improvement in terms of the proportion of sales is that some of those brands are growing faster than the promotional brands, so you do have a mix shift to some extent. And as I said, as we gain efficiencies in the other 80% of the portfolio it does help to offset that 20% where we have to -- where we have to fight the good fight.

And then lastly on Wal-Mart, I think you said on one item in particular that the sales are really strong. In general, are your sales to Wal-Mart growing and is that offsetting maybe just like the rest of the world, maybe a weakness in traditional channels? Is that fair?

Well, as I said, and we were up $1million in the third quarter with Wal-Mart, so yes, the sales are growing. The distribution has grown and we think we still have some more distribution gains to be had but not anywhere near the 10% we saw in the third quarter. There is no doubt that our sales gains in mass merchants and other channels like drug, like dollar stores and clubs is offsetting some losses in supermarkets. And our losses in supermarkets are pretty much tracking the individual chain trends. Where you see some change down overall, our sales are following their decline in sales.

Okay, and on Wal-Mart, do you think you're benefiting from Wal-Mart's remerchandising plans where they say that they're going to kind of put more emphasis on brands again and pull back on private label?

Oh, unquestionably.

Okay, very good, thank you very much.

Next we'll hear from Micah Kaplan with Bank of America.

Good afternoon, guys.

Good afternoon.

Just briefly on the -- to touch on the pricing again. I think that obviously there's been a lot of pressure recently about some of the bigger packaged food companies taking pricing. Would you guys to the extent that even if you're not feeling commodity pressure, will you still take pricing to the extent that you can or -- even if there's a general kind of across-the-board increase in some other items? Are there retailers that -- will they kind of have to make your case on a product by product basis?

Well, in general we follow pricing. So to the extent that somebody is going to raise prices in our category, we would certainly follow and we would -- and I'm assuming underlying all of that that there's a cost reason for both of us taking price. But we have rarely led on price increases.

I see. And then on M&A is there a certain point where, obviously the cash balance has grown nicely here. I mean, will eventually if you guys -- if you keep looking and there's nothing there the cash will be slated for something else? Or is the plan now just to kind of stay there until you guys see something that you like?

Well, it's not the worst thing in the world to have your cash balance growing, but we are a dividend paying company and that's one consideration for use of cash as we go forward. Just delevering, though, and we have to look at the sensitivity in terms of return to shareholders. Reducing our debt load with cash is another way to increase earnings per share and perhaps raise stock price. There's a number of options that we have and we're trying to pick out which would be the best one in terms of increasing shareholder value.

Okay, but there isn't any timetable on any potential M&A transaction and when you start looking at those things more closely?

No. No, there isn't, there's no fuse burning on that.

Okay, okay. And then just briefly, just to touch on the food service again. And I know you mentioned it's been a little weaker as of late. Do you think that's a kind of year-end mix specifically or do you kind of see that throughout -- kind of throughout the system? I know it's harder to speak for other guys. I guess your customers, specifically, I guess if you could just speak to that a little more.

Yes, we tend to be more specific in terms of customers, but I mean when you keep your ear to the ground you're hearing that suddenly food service softened a little bit as an industry for some reason. And nobody -- I wish somebody could give me a good explanation. Then when you see it switch you'd know that things were going to get better. But it just seems to have taken a pause here for a few months.

Okay, great, thank you.

Yes.

Moving on, we'll hear from Reza Vahabzadeh from Barclays Capital.

Good afternoon.

Good afternoon, Reza.

Good afternoon.

So in terms of the promotional environments that you are seeing in the categories that you compete in, do you see the promotional environment having intensified since the second quarter or is it about the same? Has it peaked? Any comments on that?

I think it's getting a little more intense.

Okay. And do you anticipate any changes in that going into 2011?

No, I don't. But then I'm not looking in a crystal ball either. I mean, we will compete. As long as our competition is out there doing these kinds of things, we will compete. At some point you would like to think everybody would figure out this isn't getting us anywhere in terms of building share. Whether it does or not, it sometimes takes awhile and sometimes it may take something like a cost increase in the commodities to shock everybody out of this.

Got it. And then you touched on increases in energy cost but also packaging cost. Can you elaborate on the packaging cost increases that you are seeing?

Well, we're seeing packaging cost increases in anything related to oil. So plastic is certainly going up. There's rumors of a steel can increase. Glass goes up every year no matter what because there's a very finite amount of supply in the United States, and depending on where the dollar is, we have more or less opportunity to source overseas. So packaging is up in a number of areas. Certainly in liner board and anything to do with paper, the industry has constrained capacity to the point they can take price increases pretty much at will. So packaging definitely is an area where we've seen, although not universal, we've seen fairly broad increases.

And the type of increases you're seeing in packaging is -- I guess depends on the exact package, but what are you seeing so far?

Low single digits. We're not seeing huge increases but we're definitely seeing those. And I would note that we've insulated ourselves a little bit in that wherever there's energy inflators in contracts, especially around natural gas, we have taken positions in those energy inflators, for instance natural gas, so that those don't kick in, at least not until our positions run out.

Got it. You touched on Cream of Wheat and the change in your promotional program. How do you anticipate some of your bigger brands to perform given your changes in your promotional programs such as Ortega as well as Cream of Wheat in the fourth quarter?

Well, we changed those promotional programs because we don't see a return on our investment. In other words, specifically we don't see consumer takeaway coming from those promotional programs. So we look at it and say where is a better use for our money than handing retailers cheaper inventory, which is ultimately what those promotions turn into if you can't get consumer sales. So we don't foresee any change from a consumer takeaway on that. And to the extent that we can more efficiently use the money to sell things to consumers, you would hope it would be a positive.

Got it. And then can you touch on some of the other brands that you have in the portfolio such as Maple Grove, B&M and Emeril and how they performed in the quarter?

Well, B&M did well. It was up, I want to say 12% for the quarter. And again, it was all about execution of promotions. And we did more promotions in the third quarter than we did in the first half, although the price level was higher than it was last year. So in a sense we reduced promotional spending year over year, at least the promotional price points were higher. But B&M responded very well to those promotions. Polaner did very well in the quarter.

Maple Grove.

Maple Grove is a nice steady business. We really don't promote that business. And it's just going along very steadily.

And Emeril?

Emeril actually is doing pretty well. Let's see, we're up about 4% for the quarter, so it's going well. We're seeing very good strength in seasonings and pasta sauce, stocks and a few other pieces of that business. And it's another one of those things -- our theory is that as people are eating more at home, and they have been for the last couple of years, at some point they want to splurge a little bit, so a certain proportion of them buy more upscale products to cook at home with.

Thank you much.

Thank you.

Next we'll hear from Thomas Scherr with Federated Investors.

Thanks for taking my call. You mentioned that your commodity basket is ups and downs but generally flat. Could you give a few examples of areas where you're actually down on the commodity cost side?

Sure. A great example is beans. Beans this year are running in the $0.30-some a pound range. Last year they were in the $0.50-some a pound range. And that tends to be a year-long pricing event, if you will. But that's a big one. Fruit juice concentrates are another one that are down. So there's a number of them that are down and will come up slowly, I would say, as the large commodities increase. Wheat and corn are up substantially. And what happens is that things like beans, if there's going to be a cost change, that will start in January, February when people are talking to farmers about planting beans. The farmers will say well, for this much a pound I will plant beans, because I can make more on corn and wheat if you don't give me that. And then as our positions -- as the fall crop comes in and the new costs kick in, that's when you would see it. So that's a good example of the visibility we have on cost on something like beans, where until next fall we pretty much know what our cost is going to be and we'll get a hint of inflation if there is going to be inflation in the first few months of 2011.

Okay, thank you.

Next we'll hear from Andrew Lazar with Barclays Capital.

Good afternoon.

Good afternoon, Andrew.

David, just a couple of things. I guess, first, more overall. Overall industry volume just in the food space, the packaged food space at retail has continued to be pretty weak. And a year ago maybe it was -- the culprit might have been trade -- industry -- inventory deloading in the consumers' pantries, but I've got to believe that's long done by now. I'm just curious to your take on it, sort of why do you think industry volume has been as weak as it has? And what are the things -- what do you think are the key benchmark or two that we should look at if we're trying to think of when we'll see sort of an inflection from that -- from an industry volume perspective?

I'm afraid I don't have a magic indicator for you, Andrew.

I haven't gotten a great answer from anybody else either, by the way, but I thought I'd give it a shot.

Thank God. It's puzzling, it really is. I mean, when you see restaurants not doing particularly well and volume in the supermarket, mass merchant area not doing particularly well, you really do start wondering what are people eating. And I would -- the only thing I can say is they're trading down, I suspect, to lower cost products and eating more of those products than they are everything else. And -- but it definitely is puzzling. I mean, I'm -- I've looked at a couple of reports today and my take away basically was where are the calories going.

Yes. Okay, no, I appreciate that. You talked about how next year maybe goes back to an algorithm that's a little bit more dependent on organic sort of volume growth as perhaps the really aggressive moves around costs start to wane a little bit and -- or the impact from them, and then some of the pricing impact that you had on the top line this year. I assume most of that pricing this year was primarily the trade spending efficiency?

Yes.

Right. And so I'm trying to get a sense of what's the -- trade spending is such a large number as a percent of sales generally speaking for the average food company. How do you know when you're at a point where that benefit does start to wane or why potentially on some of those brands that are less sensitive to it is there not maybe a little more opportunity? Or is it just that slotting to get after the expanded shelf space starts to click in?

Well, I think it's as simple as we're trimming trade spending based on is this an efficient trade spend. And we're running out of programs that we don't think are efficient. So where a brand is trade sensitive, we will execute those promotions if those promotions perform in terms of producing consumer takeaway and keeping us competitive within the category. Where a brand is not trade sensitive, we've done a great deal of work in just eliminating promotional activity except where we need it to just maintain credibility with retailers, for instance, because we can't convince ourselves it does us any good to do that promotional activity. So eventually you look at it and go well, there's no more of that to be had and it's all about tweaking the promotions to make them just that much more efficient and effective in terms of selling products to consumers.

And I suspect we are 300, 400 basis points lower than the average food company by now in terms of what we spend on trade. And I think we've done a great job of it, but it's a finite bucket and it's starting to look fairly empty. So we need to grow organically, and I think we will because we've done a lot of restructuring that has cost us sales in the last two years. I think that -- we're done with that and now we can start working on a solid base and growing against the solid base.

Thanks for that. One last thing. With the types of distribution gains that you got in Wal-Mart this past quarter, the ten points of distribution, even though that's less efficient sales. I guess is there a way you can speak to what may be the underlying sort of rate of growth was? As an example, at a Wal-Mart? In other words, was it all and then some because of distribution gains or did you have underlying sort of growth there on top of it?

Well, we had some -- you mean as of now? It's pretty much all distribution gains. In the past it has been underlying growth as well. We're not seeing a lot of that. I mean, it's spotty, but overall I'd say most of what was in there already is flat and this is -- the growth is coming from what we've regained.

Got it. Right, because I was thinking of like going forward. Are we seeing underlying growth at a Wal-Mart as an example, separate from the distribution gains that you got in the quarter?

I think that's going to be all about Wal-Mart's ability to pull consumers into Wal-Mart and get them to buy things in Wal-Mart. And one thing that says it probably isn't going to be as powerful as you might otherwise think is the growth we're seeing in the other areas -- the drug, the dollar, the warehouse clubs. A lot of people are shopping in those and I'd say the dollar stores get them on the bottom end and the warehouse clubs get them on the top end and they have to succeed with that middle consumer, if you will, if they're going to get somewhere.

Yes. Great, thanks very much.

(Operator instructions). From Credit Suisse we'll go to Adam Plissner.

Hi, guys.

Hi.

Afternoon.

A couple of quick follow-ups on the brands that are basically sensitive to the promotional activity. When you said 20%, was that 20% of the brands, 20% of revenues? Have you ever broken out the subset that those four brands represent, either in revenue or EBITDA?

It's about 20%of the revenue.

Okay, and not in terms of earnings as a mature brand?

Highly promotional brands would tend to be at the lower end of our margins.

Right. And if you were thinking about the, I guess the result of the promotional activity you've done, is it more in line to protect share or you ever -- I guess when you look back do you gain share during these periods or is it really just protecting share?

It's -- you might have a point in time gain but you -- overall, it's not constructive in that you're both doing promotions and you're just sort of standing there slugging it out and not getting anywhere. But -- so it's to defend ourselves and, as I said, you may have a short-term gain but we're really not looking to gain share. I really think it is a zero-sum gain.

Is it at an inflection point now where you're looking that you'd actually sacrifice share?

No, we weren't performing the promotions to the depth we are. We weren't satisfied with the where the sales were going in the second quarter, so we stepped up and defended ourselves. We've regained the share in the sales. We can do it as long as they can.

Good. Last thing, on the acquisition front, just to get back and make sure I understand some of the timing situation. You certainly were clear that nothing looks like it has the time to get together before year end. And I wasn't sure what you were referring to as the trigger or the impetus for anything larger in size potentially being put up for sale.

First off, I didn't define whether anything would or would not happen at any point in time. I said we'd keep --

I thought you made a year-end comment there.

No, I really -- what I said was the flow of properties we're seeing has slowed because I think a lot of the private businesses we were seeing that I think were trying to sell before year-end and possible tax laws, there's no more of those coming on market.

Got it.

At least not that we're seeing. I never said anything specific about our activity -- general flow. The trigger -- I think it's one of two things is going to trigger things coming out of larger companies. We're frankly a little surprised that Kraft hasn't started rationalizing their portfolio because one of the things would be a major M&A activity like Kraft did with Cadbury. And the other would be somebody starting to grow significantly enough that they could, again, rationalize their portfolio. I think when you have companies reporting flat and even slightly down sales as most of the major companies are, the last thing they want to do is sell something [low] so they can report even lower sales.

Okay. And then I know you guys have gone through your acquisition criteria in the past and free cash flow seems like the biggest driver there. But when you look at the market multiples, how important do you think that's going to be and do you guys have a threshold? I know you've talked about leverage in the past, but if the space and you guys are trading somewhere around 8.5 times, is there something that you can get comfortable if down the road you're going to have to pay 10, 12 times to get he right acquisition in? Is there any cut-off that you see in terms of what you're wiling to pay?

Well, the multiple and the interest rate, if you're going to finance something, those two things tend to balance each other, if you will. So to the extent the interest rates are lower, we can pay a higher multiple because the cash outcome is the same as the one we're looking for. When you get into double-digit multiples, it's hard to get the cash outcome we're looking for and it's hard to argue that I'm creating value in the business when I'm paying significantly more than my business is valued at. I'm diluting my value is the way I look at it, unless it's some magical acquisition that we can do some tremendous things with. But in general, we've been very disciplined about not paying a huge multiple for these things and following the formula we follow in terms of the cash flow -- the free cash flow coming out that's a good proportion of the EBITDA that's in the business.

Okay, thanks, gentlemen.

Yes.

And there are no further questions at this time. I'll turn the conference back over to management for closing comments.

Thank you. And thank you for joining us, everyone. As we said, we think we had a great quarter. Earnings per share up substantially; EBITDA up substantially; and an increase in EBITDA guidance. We're looking forward to meeting those goals in the fourth quarter and looking forward to doing well in 2011 based on that performance. Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.