B&G Foods Inc (BGS) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the B&G Foods, Incorporated fourth-quarter 2010 earnings 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 questions.

I would now like to turn the conference over to 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' fourth-quarter and full-year fiscal 2010 conference call. You can access detailed financial information on the quarter and the full year in 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 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 diluted 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 with our CFO, Bob Cantwell, discussing our financial results for the quarter and the full year. After Bob's remarks, I'll discuss the various factors that affected our results for both periods, selected business highlights, and our thoughts concerning 2011. Bob?

Thank you, Dave. First, I will review the full-year briefly, then talk about the fourth-quarter. Net sales for 2010 increased $12.3 million or 2.5% to $513.3 million compared to $501 million for 2009. The increase was attributable to unit volume and sales price increases of $7.5 million and $5.6 million, respectively, partially offset by an increase in coupon expenses of $0.8 million. Our 10-K has additional disclosure on individual brand performance for the full year.

Gross profit for 2010 increased $19 million or 12.7% to $167.7 million from $148.7 million in 2009. Gross profit expressed as a percentage of net sales increased 3 percentage points to 32.7% in 2010 from 29.7% in 2009. Of the 3 percentage point increase, 2 percentage points were primarily attributable to decreases in commodity and ingredient costs, and a sales mix shift to higher margin products, slightly offset by an increase in packaging costs. 0.7 percentage points was attributable to increased sales prices net of increased coupon expenses, and 0.3 percentage points was attributable to a gain on a legal settlement.

Operating income increased 18.6% to $104.7 million during 2010 from $88.3 million in 2009. Net interest expense decreased $9.1 million to 40.3 million in 2010 from $49.4 million in 2009. The decrease in net interest expense in 2010 was primarily attributable to refinancing we completed during the second half of 2009 and first quarter of 2010, that reduced our long-term debt and the effective interest rate on our long-term debt from 9.5% in 2009 to 8% in 2010.

Loss on extinguishment of debt increased $5 million to $15.2 million in 2010 from $10.2 million in 2009. Loss on extinguishment of debt for 2010 includes costs relating to our repurchase and redemption of $69.5 million aggregate principal amount of our Senior Subordinated Notes, and $240 million aggregate principal amount of our Senior Notes. 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 $43.2 million for 2010, an 81.1% increase as it compared to adjusted net income for 2009 of $23.9 million.

Adjusted diluted earnings per share increased 47.5% from $0.61 per share for 2009 to $0.90 per share for 2010. Our EBITDA increased 16.2% to $119.7 million for 2010 compared to $103 million in 2009. EBITDA as a percentage of net sales was 23.3% for 2010 compared to 20.6% in 2009.

Turning now to the fourth quarter of 2010, net sales increased 4.6% to $141.9 million compared to $135.6 million for the fourth quarter of 2009. This increase was attributable to unit volume and sales price increases of $4.6 million and $1.8 million, respectively, partially offset by an increase in coupon expenses of $0.1 million. Net sales increases in Cream of Wheat of $1.9 million; Ortega, of $1.6 million; the Don Pepino and Sclafani acquisition of $1.6 million; Maple Grove Farms of Vermont of $0.8 million; Polaner, $0.5 million; and Grandma's of $0.4 million, were offset by a reduction in net sales of B&M of $0.4 million and Joan of Arc of $0.4 million. In the aggregate, net sales for all other brands increased $0.3 million.

Gross profit increased $10.2 million for the fourth quarter of 2010 or 27.6% to $47.1 million from $36.9 million in the fourth quarter of 2009. Gross profit as a percentage of net sales increased 6 percentage points to 33.2% for the fourth quarter of 2010 from 27.2% for the fourth quarter of 2009. Of the 6 percentage point increase, 4.2 percentage points was primarily attributable to decreases in commodity and ingredient costs, and a sales mix shift to higher margin products, slightly offset by an increase in packaging costs. 0.9 percentage points was attributable to increased sales prices net of increased coupon expenses, and 0.9 percentage points was also attributable to the gain on our legal settlement in the fourth quarter.

Sales, marketing and warehousing expenses increased $2.2 million or 20.9% to $12.7 million for the fourth quarter of 2010 compared to $10.5 million for the fourth quarter of 2009. The increase was primarily due to increases in consumer marketing and trade spending of $2.1 million.

General and administrative expenses increased $0.7 million or 22.9% to $3.8 million for the fourth quarter of 2010 compared to $3.1 million in the fourth quarter of 2009. This increase resulted from an increase in depreciation of $0.3 million; compensation expense of $0.2 million; and all other expenses of $0.2 million. Operating income increased 33.5% to $28.9 million for the fourth quarter of 2010 from $21.6 million in the fourth quarter of 2009.

Net interest expense decreased $0.9 million to $8.5 million in the fourth quarter of 2010 from $9.4 million in the fourth quarter of 2009. The decrease in net interest expense in the fourth quarter of 2010 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 effective interest rate on our long-term debt from 8.7% in the fourth quarter of 2009 to 7.9% in 2010.

During the fourth quarter of 2010, we did not extinguish any debt. Loss on extinguishment of debt for the fourth quarter of 2009 includes $9.5 million of costs relating to our repurchase of 12% notes. The Company's net income, which excludes the impact of items affecting comparability relating to the interest rate swap and loss on extinguishment of debt, was $13.7 million for the fourth quarter of 2010, more than a 100% increase as compared to adjusted net income for the fourth quarter of 2009 of $6.6 million.

Adjusted diluted earnings per share increased 100% from $0.14 per share for the fourth quarter of 2009 to $0.28 per share for the fourth quarter of 2010. Our EBITDA increased 28.7% to $32.8 million for the fourth quarter of 2010 compared to $25.5 million in the fourth quarter of 2009.

Moving on to the balance sheet, we finished 2010 with $98.7 million in cash compared to $39.9 million at the end of 2009. Our recently announced increased dividend rate is $0.84 per share, or approximately $40.2 million per annum, based upon our current share count. We also finished 2010 with $477.7 million in long-term debt. Our leverage net of cash was 3.2 times as of January 1, 2011. Our inventory at the end of 2010 was 74.6 million as compared to 86.1 million at the end of 2009, a reduction of 13.4%.

In January 2011, we terminated our interest rate swap agreement by making a payment of $12.4 million to the counterparties, representing the approximate present value of the expected remaining settlement payments that otherwise were to have been due to the counterparty through the maturity of our term loan. As a result of the termination, our interest obligations for the term loan borrowings through maturity in 2013 will now be based upon the loan's floating rate.

Annual cash interest for 2010 was $36.2 million. Cash interest expense for 2011 is expected to be approximately $29.8 million. Capital expenditures for fiscal 2010 were $11 million, and capital expenditures for 2011 are also expected to be approximately $11 million.

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

Thanks, Bob. Good afternoon, again, everyone. Our Company has had remarkable years in its history, especially in those years when we made major acquisitions, but we have never had a year like fiscal 2010, in terms of the performance of the base business.

The fourth quarter was the cap to this very good year, and was itself a record-breaking quarter for the Company in terms of total net sales, EBITDA, and earnings per share, leading to annual records in all of those measures as well. As Bob mentioned, our net sales increased by 4.6% for the quarter, with the majority of that increase coming from higher volume. The Violet acquisition accounted for approximately 25% of the total increase and pricing [in] roughly another 25%, but approximately half of the increase came from volume increases across our base brands.

Importantly, the highest proportion of these increases came from key brands such as Ortega and Cream of Wheat, which we are emphasizing due to their growth prospects and margins. This quarterly performance lifted our annual net sales growth to 2.5% increase, of which approximately 13% was from the Violet acquisition and the remainder a close split between volume and price.

Net price improvements in the quarter and for the full year were virtually all the result of reduced promotional activity. As I have mentioned in previous calls, we have worked diligently for several years now to improve the efficiency of our promotional spending, adjusting it when necessary to improve performance, and eliminating promotions that are deemed ineffective. In 2010, we reduced promotional spending by a full percentage point of gross sales, resulting in the net price improvement we achieved last year.

The work continues in 2011. In fact, it will never be finished, but the opportunities diminish as we attune our promotions to an optimal level. We expect to achieve modest price improvements in 2011 from this effort, which should help to offset anticipated cost increases.

Our volume gains, as I've said earlier, came in the brands we would most hope to grow. We have formalized our overall brand strategy, dividing our portfolio into three tiers, sorted primarily by growth prospects and secondarily by margins. Tier 1 consists of brands with higher growth prospects and higher margins, and includes Ortega and Cream of Wheat. This tier receives our most focused efforts in terms of new product development, and investment and distribution. This tier grew by 6.2% in the fourth quarter and by 5% for the full year of 2010.

Tier 2 consists of brands with more modest growth prospects but typically high margins. In fact, due to the investment spending on Tier 1 brands, Tier 2 brands often have higher margins. Tier 2 brands net sales grew by 7.4% in the fourth quarter and by 4% for the full year. These two tiers accounted for nearly 70% of our total net sales for the year, and the growth achieved in these tiers drove our sales mix to more favorable margins.

Tier 3 brands are typically brands with limited growth potential, much of which would come from tactical moves in existing distribution. Our goal in 2010 was to rationalize these brands to improve margins and EBITDA. Examples of these efforts are specific to the brands. For example, in some cases, we withdrew from private label business and in others, we reworked promotional strategies. 2010 net sales in this tier fell by 2.2% as we implemented these changes, but EBITDA increased by 40%.

I should note, by the way, that being a Tier 3 brand does not mean that the brand is a poor performer. EBITDA margins in this tier typically run at a level comparable to the average of the food industry. While we sacrificed sales in this tier in 2010, we accomplished our margin goals; and having done that, we expect that this tier's sales will perform much better in 2011.

Encouragingly, both the retail and food service sides of our business grew in the fourth quarter. The food service net sales increase of 6.2% was helped by the Violet acquisition -- approximately 70% of the sales in that business go to the food service channel. Even without the acquisition, sales and food service were up 2%. We are seeing more signs of life in the food service channel as time goes on, and saw a fairly steady progression to positive trends through 2010.

Sales in the channel were flat for the full year, which makes us optimistic that this channel, which represents almost 20% of our sales, will contribute growth in 2011.

On the retail side, growth was better, at 4.3% for the quarter and 3% for the full year. Sales growth with Wal-Mart accelerated, as the added distribution I mentioned in our previous call kicked in; but Wal-Mart growth was proportionate to their share of our overall sales.

Supermarket sales were generally solid over all, but, of course, there were ups and downs depending on the retailer involved. The stronger retailers in this segment are clearly rising above the others in our growth patterns, and we are focusing on our efforts accordingly. But at least in 2010 our growth lay primarily in mass merchants, warehouse clubs, drug and dollar stores, basically following changing consumer purchasing patterns for our incremental sales.

New products and expanded distribution remain key elements of our growth plans in 2011. In 2010, we invested in both, especially in the Ortega and Cream of Wheat brands. The growth of these two brands for the year, up 5.8% and 4.9%, respectively, reflects that effort. Given our financial success, we are better able to execute both elements of our strategy. The best example I can provide is the launch of our new Cream of Wheat Cinnabon product last fall. In just a few months, it generated over $1 million in factory sales and became our third best-selling Cream of Wheat Instant SKU, where it gained retail distribution.

We have hopes that this product alone could generate 1% growth for us in 2011. We believe that we will also have opportunities to increase the distribution of this and other new products and existing products in 2011, and we plan to increase the spending behind that effort by at least 25%.

Cost is, of course, the hot topic in the food industry these days. While storm clouds bloom from the horizon for all of us, we enjoyed a very good cost outcome in 2010, and especially in the fourth quarter. Cost of goods sold for the year decreased by just over 1% of sales, or over $6 million. This came from a wide variety of commodities and ingredients as well as plant operating savings, while packaging costs were fairly flat for the year.

Our continuous improvement efforts served us well for the year, generating net savings while offsetting the normal cost increases from higher wage and benefit costs. This overall cost reduction, combined with higher net pricing, was key to our performance in 2010, and contributed approximately one-third of the gross profit improvement for the year and 40% of the improvement for the fourth quarter.

Looking forward on cost, I think it's important to note the differences between today's environment and the 2007/2008 timeframe. Four years ago, cost increases came quickly, without warning, and were much more dramatic than today's outlook, at least so far. Wheat today, for example, is up approximately 40% from 2010. In 2008, it had tripled in price. Many other commodities did the same. Today, we have warning in the form of our forward positions, which extend for the rest of the year in many cases, and into the first quarter of next year in a few. All things being equal, however, we will see increased costs at some point in time.

In 2011, we believe that effect will be modest. And here it would be appropriate for me to add a cautionary note -- the price of oil, for example, can be a wild card in my predictions. What is happening recently in the Middle East is a perfect example of the volatility of the markets these days. All things being equal, however, we currently expect total cost increases in 2011 to be approximately 1% of net sales. I'm sure this sounds low compared to other companies' estimates, but it represents the positive effect of our forward positions and the fact that B&G Foods is not as commodity-intensive as other companies may be.

There will be spikes depending on the commodity involved. Beans, for instance, could cost 40% more in the fall, based upon today's market prices, and changes in the US/Canadian dollar exchange rate could affect our maple syrup costs. In those cases, we anticipate taking the appropriate pricing activity. Between pricing and cost reductions from our continuous improvement process, we expect to offset foreseeable cost increases and continue to improve on our margins as we improve our sales mix.

Depending on the fall crops and their affect on commodity prices, 2012 could be a larger challenge. But again, we have ample time to react appropriately to whatever the fall crops bring.

Other operating costs within B&G Foods tend to be very predictable. SG&A expenses increased by several million dollars in the fourth quarter, primarily due to higher marketing spending, as we chose to invest more in our brand marketing. We plan to maintain this higher spending in 2011 and perhaps increase it further to support our Tier 1 brands.

While our overall marketing spend remains relatively modest, this does represent a 20% increase in support when you include higher spending on coupons. This increase was somewhat offset in the P&L by savings and warehousing, the result of warehouse consolidations that we initiated in 2009 and completed in 2010.

All of these factors, and a one-time gain of $1.3 million from a legal settlement, combine to produce an EBITDA of $32.8 million for the fourth quarter, easily a Company record for an individual quarter. The full-year EBITDA of $119.7 million was a 16.2% increase from 2009 and also easily set a record for our Company.

And from outstanding results like these come a very positive effect on our balance sheet and capitalization. Cash on the balance sheet ended the year at $98.7 million, even after paying for the Violet acquisition. Excellent work on inventories, down over $11 million, as well as strong free cash flow, created the substantial increase in cash. Given this cash position and the outlook for future cash generation, the Board of Directors was very comfortable in increasing the quarterly dividend by 24% to $0.21 per share.

Also notable is the change in our net leverage. At year-end fiscal 2008, net leverage stood at 5.6 times EBITDA. Two years later, at year-end fiscal 2010, our net leverage is 3.2 times EBITDA.

The Violet acquisition is performing as expected and should contribute 2% to 3% growth to 2011 net sales and corresponding growth to EBITDA. Margins in the business are near our average margins and should improve, as we identify further cost reductions and operating synergies.

As I mentioned, this acquisition is primarily a food service business today. In that vein, it fits very well with our regional B&G branded food service business, and should provide us the ability to grow both brands in that channel. We also see opportunities for regional expansion of the retail part of the business under the Sclafani and Don Pepino brands, and have been pursuing those in the past few months. We continue to review further acquisition opportunities as they become available, and as you can see from our balance sheet and capitalization, are as well-positioned as we have ever been to act on the right property.

Despite all the dynamic factors that we foresee in 2011, we anticipate this being a good year for B&G Foods, if not quite the superior year seen in 2010. Keeping in mind the one-time, $1.3 million gain from the legal settlement in the fourth quarter of 2010, the addition of the Violet Packing business, and our hopes to continue to increase sales of our most profitable brands, we are projecting 2011 EBITDA to fall within a range of $123 million to $126 million.

The midpoint of this guidance would represent an increase of 5.2% over 2010 EBITDA without the legal settlement benefit. While we do not provide guidance on earnings per share, I would point out that the Violet acquisition and our payoff of the interest rate swap are expected to be accretive to earnings per share in fiscal 2011.

Looking at all the global turmoil in the first two months of 2011, it's easy to predict that the year will be a challenging one in the food business in general and for our Company as well. But we have a portfolio of great brands that have provided stable performance in turbulent times in the past, and we believe they can do so in the future.

We are also fortunate to have protected ourselves, to a large degree, at least for the time being, from the cost volatility of the global markets. This should give us time to react appropriately to an ever-changing world. We had what was almost certainly the best year B&G Foods has ever had in fiscal 2010, and as we enter fiscal 2011, we are as prepared as we can be for the new challenges and new opportunities.

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

(Operator Instructions). Micah Kaplan, Bank of America Merrill Lynch.

David, I think you mentioned -- you talked about the energy as a wild card here, and you're pretty well covered on most of your other inputs. I mean, just using oil as a proxy, I mean, at kind of the current levels, even after the run-up in the past week or two, I mean, is $100 a level that it's going to be a problem for you guys? I mean, is it $120? $110? I mean, just kind of thinking about round numbers, in terms of how you guys track that and thinking about oil as a proxy for your energy costs.

Our energy costs are relatively modest and it mostly is distribution. We pretty much have locked natural gas in, in terms of packaging contracts and for our facilities.

And on the distribution side, where it is today, we're looking at somewhere between $1 million and $2 million cost increase. I think if it went to $140, we'd be looking at another $1 million or $2 million -- not unmanageable, but certainly one more brick on the load.

Got you. And then you mentioned costs have taken the headlines away from some of the promotional activity. I think on the last call, I know you talked about 20% of the portfolio being very competitive. Is that stable? In some of the price increases here with the commodity rise, has that abated from a promotional standpoint?

In general, I'd say it's pretty stable.

Stable? Kind of one-fifth of the portfolio? Okay.

Yes.

And then on the M&A front, you mentioned the balance sheet and, obviously, the stocks had a nice run here. I mean, do you see in terms of the types of things that your filter potentially getting bigger, than kind of what you guys have historically done, in terms of carve-outs from bigger companies? Or has that changed to any degree?

I think in terms of what our criteria is, that hasn't really changed. As I said on the last call, the dynamic that's changed is the cost of financing is down. So to the extent the cost of financing is lower, you can pay more in terms of multiple and still get the right cash-out come on the back-end. But we're pretty rigid about what we expect in terms of free cash flow in a business when we do an acquisition. And I don't think we would -- we'd be loath to expand our horizons, because at some point, we just don't think we're creating value for our shareholders.

Okay. That's all I had. Thank you.

Ed Aaron, RBC Capital Markets.

We've heard an awful lot of price increases having been announced over the past couple of months. And just wondering if you can maybe talk a little bit more about what you've seen so far, just from the price leaders in your categories, and how much pricing has been announced in the parts of the store where you compete?

I only know of one clear price announcement in one category. I really have not seen any widespread pricing activity by our competitors in our categories.

Are you expecting that to stay that way? Or how are you planning the year from a pricing standpoint?

I think it's going to be very specific to the commodities involved and what people's exposure is to those commodities. And we're going to watch it very closely, but I think what price pressure people are seeing from cost is delayed somewhat like we're saying. I mean, our costs are going to be not outrageous for the year, if things stay as they are today. So there's not a lot of urgency.

And you really have to just -- you still have to really justify a price increase in terms of where the commodities are going. So you have to be very specific. And a lot of -- we deal in a lot of secondary crops and those costs on a free -- if you go out in the market today, you're going to pay more; but we're not going to pay more until the fall on some of those. So I just don't see a lot of price activity on a widespread basis in the categories where we compete.

Okay. That's helpful. And then just one kind of last question on the guidance. I guess, f you look at the fourth quarter, you seem to be running at a -- on a run rate of EBITDA that's higher than what you're guiding 2011. And I don't know that there's a ton of seasonality in the fourth quarter that would cause it to -- cause the fourth quarter not to be somewhat predictive.

How should we think about 2011 relative to the quarter that you just printed? Because it sort of seems like you're tracking higher than when you got it.

Well, we were in the fourth quarter, certainly. And the fourth quarter is always a typically strong quarter for us, but please do not take that fourth quarter number and multiply it by four. That's not going to happen.

I think when you look at 2010, in general, you had a positive cost move. And up until -- up into the fourth quarter, we were continuing to see that and you had a positive price move. We don't anticipate as much pricing, at least not from promotions, and we're going to have to adapt our list pricing depending on what competitors do. And we don't see the positives on the cost side that we saw in 2010. So it's -- we're going to have some carryover and that's built into the numbers, but most of it's going to come from just organic sales growth and improved margins as we grow the right brands.

Fair enough. Well, nice job on the year, guys.

Reza Vahabzadeh, Barclays Capital.

I may have missed it, Bob, but did you give the impact of the acquisitions for the fourth quarter sales in EBITDA as well as 2011?

Well, the sales numbers for the acquisition was $1.6 million in the fourth quarter. And we gave a range when we bought the business of about $13 million to $15 million on sales. And EBITDA being a similar percentage to what we run at.

And we didn't own it for the full quarter, Reza.

Right. We bought that toward the end of November. We basically had one month of sales in the number.

Got it. And are there also cost savings that you'd anticipate out of those acquisitions in 2011?

Very small. I mean, it was a very small, fairly family-run business. Some minor cost savings were done in that acquisition, but not a lot of dollars.

And we're still identifying them in terms of -- especially on the packaging and produce side. And those will not kick in until the pack in the summer, in any event.

Sure. You talked about only one pricing increase that you know of in the categories you compete. Have you seen any material moderation in the promotional environments in the categories you compete in?

I think it's business as usual. No, I really haven't seen that. I haven't seen that. The people who were aggressive before still are aggressive. We just haven't -- we haven't seen anybody get more aggressive, but we haven't seen anybody pull back in our specific categories. And that doesn't say that everybody was aggressive in every one of our categories, but where they were, they still are.

Right. And as far as sales trends by channel, are there distinct sales trends by channel that you'd care to highlight?

Well, as I said, we're really getting our incremental sales from, if you will, the alternate channels. Supermarkets are holding their own. And there's pluses and minuses depending on the retailer, but where we're seeing growth is in the mass merchant, club, dollar store, drugstore -- those kind of outlets. And frankly, that's where consumers have moved some of their business. So to the extent we can hold our own in supermarkets and follow consumers' buying trends, we're growing.

Got it. And then as far as new products, 2011 versus 2010, would you anticipate same scope of new products as in prior years, same amount of slotting or other marketing for new products as in 2010?

Well, we're going to spend more on new products in 2011 than we did in 2010 probably, but probably on less -- a smaller number of products. We're going to be more focused in 2011 than we were in 2010. But hopefully, have a better -- you know, the idea is to have at least as good, if not better, an outcome in terms of what those products generate. We're just not going to be as broad as we have been in the past.

Got it. Thank you very much.

Bryan Hunt, Wells Fargo Securities.

Thank you. Looking at the balance sheet, you all have done a very good job on controlling working capital and bringing inventory down in this last year. Given the inflation in the market and maybe continuing sales growth, what's the likelihood you think you'll have a reversal of working capital in 2011?

Well, certainly, if costs ratchet up considerably, that would increase the inventory in and of itself, all things being equal. But we don't see that happening in 2011 and we actually plan to reduce inventory further in 2011, both in volume and in dollars. Probably nowhere near what we did in 2010, but we still have a goal of reducing inventory.

Okay. Next question, with regards to your continuous improvement program, can you give us an idea of the dollar cost savings in 2010 and maybe what your goals are for 2011?

It's hard to nail the number down and we really give a net number. All of those things that we reduce costs, that's -- over $6 million came from continuous improvement, be it purchasing things better or whatever. But it's a net number, because there are obviously cost increases, too. We gave people pay raises; benefit costs went up; and various other inflationary things happened.

So, what we try to do is have active projects that represent about 3% of our cost of goods sold at any point in time. If we can make 50% of those come true in a particular year, we're very happy. And if you can net out to a number like that, you're also very happy.

Great. And then looking at marketing for 2011, you had a 20% roughly increase in Q4. Is that the plan for 2011 as well?

Well, we're going to hold marketing at least as high as the total number for 2010. And depending on how a few programs go that we're looking at, we may invest more. But we really have to convince ourselves that we're going to spend the money effectively before we would make that investment.

All right. And then the last question. You mentioned one of your competitors in one of your categories has announced a price increase. Given your hedged position for 2011, are you likely to chase competitors as they raise prices? Or do you think you may allow that price gap to increase and maybe take some volume share?

We will take price as competitors take price. My experience is that if you don't take price when you have the opportunity to do it, that opportunity may go away; and then when you really need to do it, you don't have the opportunity any more. So, you need to take price when you can.

Great. Thank you for your time this afternoon.

(Operator Instructions). Andrew Lazar, Barclays Capital.

Dave, I know you've said here and there when we've chatted that you compete against, obviously, some pretty big players in some of your categories. You have some pretty sophisticated forward buying processes and whatnot. And there's not necessarily any reason why you'd be able to sort of out -- necessarily outsmart them in certain regards, but -- and I know that your commodity basket is a bit different than some of these other large cap names, but overall inflation of 1% or so this year, while it's certainly a good outcome, it still -- I don't know, it just still strikes me as kind of staggeringly low, relative to where a lot of others are coming out.

Is that all just your basket relative to others and how you forward hedge? Or is there just something else there that's helping you maybe more than even some others in your industry? Has something changed there in the way you go about that?

I think it's a number of things. First off, we don't -- I don't think we -- if you were to dissect our business and what the commodity costs were as a proportion of our business compared to others, we would probably be lower. So we don't have the inherent exposure, if you will.

Secondly, we're not as focused in commodities, in any specific commodity, as others are. But I'll give you an example. Wheat is the number two thing we buy; in terms of size, it's $10 million, give or take. We've locked that cost in for all of 2011 at a cost that's pretty comparable to 2010. So to the extent a competitor did not do that, well, then, we have an advantage. But at least we have that stability on one of the larger commodities we buy. But the size of it gives you an example of how little exposure we have to commodities versus somebody else.

And there are actually some quote/unquote commodities that we buy that are going down in costs, and have gone down in costs in 2010, and for the year, will be down year-over-year in 2011 -- even though we expect at some point in the latter part of the year, and certainly in 2012, they probably will go up, if things remain as they are. So, that's kind of our various pieces of the puzzle, if you will, on what gives us the outlook we have.

Got it. And then in thinking about how the year unfolds from a gross margin perspective, and perhaps still some favorability, although I'm assuming more modest than what we saw in the fourth quarter -- in the first portion of the year, and then if there's going to be some additional pressure, depending on what some of the things like oil do, or maple syrup and some of the wild cards -- that pressure comes a little bit more towards the back half of the year from a margin perspective.

Oh, most certainly, the pressure on margins will build as the year goes on. And we're already looking at the thunderclouds for 2012 and figuring out what we're going to do about that. Because purchasing positions aren't forever, and if we were to go out and buy wheat today versus what we're buying it for, we would have a 40% price increase -- or cost increase. And it's similar in any other number of commodities.

Is that unmanageable? No, but it's obviously a challenge that you have to face. The good news to me is I'm not where I was in 2008, where the price of wheat tripled and I didn't have any forward positions to cushion myself against what happened.

Got it. Okay. And then I thought the brand segmentation analysis that you went through was pretty interesting. I don't remember you going -- having gone through that in that level of detail, in terms of breaking out what some of those different tiers of brands grew at or what have you.

Would your expectation for this year be the Tier 3 stabilizes a bit from where it was in 2010, which I think was down 2.2% or so? And then do you think you can get the kind of growth in Tier 1 and 2 that you were -- you know, that momentum, which was pretty strong, again this year? Or would we want to think about that more modestly as well?

No, I think that's our aspiration, to grow the top part of our business like we did in 2010, and have some of the things that dragged the business a little bit in 2010 carry their own weight.

And the price mix accelerated a little bit sequentially in this fourth quarter. And that was despite -- I think, if I remember last -- on the last quarter's call, you were thinking that perhaps you might have to up trade spending in some of those brands where you're feeling a little bit more pressure on the aggressive pricing side. So did that not happen? Or is that likely something we'll start to see as we move into first quarter and second quarter of this year?

We really didn't have to get more aggressive than we already were on the promotional brands. And we had some nice growth in the fourth quarter in important brands. I mean, when you look at Cream of Wheat sales, they were up over 10% for the fourth quarter. That's the kind of -- that helps your margins tremendously.

Yes, okay. Then the last thing would just be just your take on the health of the consumer as you see it. We had the CAGNY conference last week, and a lot of companies talked about the need to take a lot more price. But we're obviously worried on the other side of where the consumer is at. And we're going to have to lean more heavily maybe than they did in '08 on productivity, relative to just outright price, because of where the consumer is at.

But any thoughts on anything you have seen, at least in your product categories, change either sequentially or how you're thinking about it?

I don't know that we've seen change yet. I think the latest surge in oil prices has yet to be seen in terms of the effect. But I think we are getting to a level where we risk repeating -- certainly repeating the pressure on the consumer that we saw a few years ago.

Now, the good news for us -- I think that's very unfortunate news for everybody in general -- but the good news for us is, I think the result will be what you saw a few years ago. The restaurant business will suffer. People will eat at home more. We have the right kind of products for people to eat economically at home. Like I said, we haven't seen that shift yet, but we're not that far away from $4 a gallon gasoline, and I think that's certainly a tipping point where I think you could see that.

Yes, great. Thanks a lot.

Robert Cummins, Wellington Shields & Co.

Good. Thank you very much and congratulations on your strong fourth quarter. It looks terrific.

Thank you.

I haven't followed the Company that long, but I'm a little curious about your acquisition strategy. You mentioned that your most recent acquisition will have annual sales of $13 million to $15 million. Is that more or less the range that you're looking for? Would you consider doing a larger acquisition if something attractive came along? And how will you finance the acquisitions? Is it likely to be strictly cash? Or would you consider exchanges of stock?

We're extremely flexible in terms of the size of the acquisition. And what we've said in the past and as far as I'm concerned, it still holds true is, when a brand goes over $100 million in sales, the multiple on the purchase price tends to go very high, because more strategic guys come out to play and they're willing to pay, in the case of several in the last couple of years, double-digit multiples on EBITDA.

And that just doesn't -- that doesn't work for us, in terms of cost of the acquisition and the free cash flow to get out the back-end. We're looking for -- the size is not critical to us. We'll do a large one; we'll do a small one. We've done -- in the case of Ortega, it was an $80 million sales business and we paid several hundred million dollars for a property when we feel the dynamics are correct.

But we're looking for a business that can give us a very good EBITDA margin, number one; and number two, out of that EBITDA margin, produce about 40% to 50% free cash flow on the back-end. If we can find those, we're very eager to do those kind of acquisitions. This one fit that model, it happened to be a small one, but it's not critical to us whether it's large or small, just whether the cash flow dynamics and margins work out.

Would you consider (multiple speakers) --

(multiple speakers) As far as financing goes, obviously, the bigger you get, the less able we're to do it, in terms of cash. But we have very, very good access to the financing markets and have in the past very successfully financed acquisitions. So we don't see that as an impediment. If anything, we have bankers -- now that we don't need money, we have bankers knocking on our door offering us money all the time.

Would you consider issuing stock if somebody wanted shares rather than cash?

Yes, we would. I wouldn't want to -- I don't want to rule that out. Obviously, all the numbers still need to work in terms of where the cash flow goes and all of that, but yes, certainly having a good stock price and equity to do a deal with is another tool in the belt.

And at this time, we have no further questions in the queue. And I'd like to turn the call back over to Mr. Wenner for any further remarks or closing remarks.

Okay. Thank you very much, all of you, for your interest. We're very proud of our results for the fourth quarter and the full year. And although we recognize that 2011 will be a much more challenging year, we're looking forward to doing it and having a successful year in 2011 as well. Thank you.

That does conclude our conference for today. Thank you for your participation.