B&G Foods Inc (BGS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by and welcome to the B&G Foods, Incorporated First Quarter 2011 Financial Results Conference Call. One note that today's call is being recorded. At this time all participants are in a listen-only mode. Following their presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions.

Now, I'd like to turn the conference over to David Wenner, Chief Executive Officer of B&G Foods. Please go ahead.

Thank you, Sara. Good afternoon, everyone, and welcome to the B&G Foods' first quarter fiscal 2011 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 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.

As usual, we'll 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 for the period, selected business highlights, and our thoughts concerning the remainder of 2011. Bob?

Thank you, Dave. Net sales for the first quarter of 2011 increased $6.2 million or 5% to $131.4 million compared to $125.2 million for the first quarter of 2010. The increase was attributable to unit volume and sales price increases of $5.9 million and $0.3 million, respectively. Net sales of our Don Pepino and Sclafani brands, which we acquired during the fourth quarter of 2010, contributed $3.6 million to the overall unit volume increase for the first quarter of 2011. Our 10-Q has additional disclosure on individual brand performance for the quarter.

Gross profit increased $2.9 million for the first quarter of 2011, or 6.8% to $44.9 million from $42 million in the first quarter of 2010. Gross profit expressed as a percentage of net sales increased 50 basis points to 34.1% for the first quarter of 2011, from 33.6% for the first quarter of 2010. The increase in gross profit percentage was primarily due to a sales mix shift to higher margin products and slightly reduced input cost.

Selling, general and administrative expenses increased $0.1 million, or 0.7% to $14.2 million for the first quarter of 2011, compared to $14.1 million for the first quarter of 2010. This increase is primarily due to an increase in compensation expense of $0.3 million and brokerage expenses of $0.2 million, offset by a decrease in consumer marketing and trade spending of $0.3 million and warehousing costs resulting from warehouse consolidations of $0.1 million. Expressed as a percentage of net sales, our selling, general and administrative expenses decreased 40 basis points to 10.8% for the first quarter of 2011, from 11.2% in the first quarter of 2010.

Operating income increased 10.3% to $29.1 million for the first quarter of 2011 from $26.4 million in the first quarter of 2010. Net interest expense decreased $2.4 million, 22.9% to $8.2 million in the first quarter of 2011 from $10.6 million in the first quarter of 2010. The decrease was primarily attributable to reduction in the effective interest rate on our $130 million of term loan borrowings from 7.09% to 2.31% due to the termination of the interest rate swap on January 18, 2011.

During the first quarter of 2011, we did not extinguish any debt. In the first quarter of 2010, we recorded a loss on extinguishment of debt of $15.2 million of costs relating to our repurchase and redemption of $69.5 million aggregate principal amount of 12% Senior Subordinated Notes, and $240 million aggregate principal amount of 8% Notes. 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 $13.2 million for the first quarter of 2011, a 27.1% increase as compared to adjusted net income for the first quarter of 2010 of $10.4 million.

Adjusted diluted earnings per share for the first quarter of 2011 were $0.27, a 22.7% increase as compared to adjusted diluted earnings per share for the first quarter of 2010 of $0.22. Our EBITDA increased 10% to $33 million for the first quarter of 2011 compared to $30 million in the first quarter of 2010. EBITDA expressed as a percentage of sales increased to 25.1% for the first quarter of 2011, compared to 24% in the first quarter last year.

Moving on to the balance sheet, we finished the first quarter of 2011 with $99.6 million of cash compared to $98.7 million at the end of 2010. Our current dividend rate is $0.84 per share per annum, or approximately $40.2 million per annum based on our current share count. We finished the first quarter of 2011 with $477.8 million in long-term debt. Our leverage net of cash was 3.1 times EBITDA as of April 2, 2011.

Our inventory at the end of the first quarter of 2011 decreased $11.3 million to $77.5 million, compared to $88.8 million at the end of the first quarter of 2010.

Our expected cash interest expense for 2011 is approximately $30.1 million. Our cash taxes for 2011 are approximately $11.4 million. And our capital expenditures for 2011 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 is evidenced in the numbers Bob just reviewed, our business maintained strong momentum coming out of record breaking fiscal 2010, and produced another outstanding quarter in the first quarter of 2011. In fact, our $33 million EBITDA was the highest quarterly EBITDA ever achieved by B&G Foods, a remarkable accomplishment.

This was partly due to excellent sales performance with a 5% increase in net sales and partly due to a very good cost base. These two factors combined to produce an excellent gross profit margin of 34.1% of net sales, which eventually translated to the high 25.1% EBITDA margin. They also contributed to the $0.27 diluted earnings per share number, a 22.7% increase and B&G Foods' second best quarterly EPS number ever. All in all it was an exceptional quarter, even in comparison to a very good first quarter of fiscal 2010.

Our net sales increase of 5% was actually somewhat depressed by the late Easter holiday. You may recall that we attributed approximately $2 million of the net sales gain we saw in first quarter 2010 to an early Easter. Easter in 2011 was three weeks later, just two days ago in fact, which appears to have shifted similar sales volume from first quarter to second quarter of this year. We have seen the effect in early April sales, so we're fairly comfortable with this thesis.

Having said that, the 5% net sales increase for the quarter was a good outcome in and of itself; virtually all of the increase was volume related as well with price contributing only minimally. Of that volume increase, nearly 60% was related to our acquisition of the Don Pepino and Sclafani brands last fall, and the remainder was organic growth in our base business.

The acquisition brand sales are performing as expected and showed a net sales increase of 6% versus the prior owner's net sales. EBITDA is tracking slightly below our Company average as a percent of sales, as expected, but above our projected margins for the brands. As a result we are very pleased with the performance of the business.

We are securing further retail distribution of the brands in the Northeast, but gains here may be offset at least somewhat by rationalization of the cold pack portion of the business as we increased price this year. That dynamic has not sorted out yet, but should not affect the overall performance of the acquisition in any meaningful way.

Overall, we did not expect and did not see very much price improvement in our business in the quarter. The little we did see came from further refinement of our promotional activity. Gains here were limited a bit by net price decreases in several areas in response to competitive activity. I'll discuss the cost environment in a few moments, but in response to cost increases we foresee in 2011, we did announce price increases on most of our brands in the first quarter effective September 1, with the increases ranging from approximately 1% to 8% depending on the brand and with the average increase at approximately 2.5%.

Turning to the sales performance of our base business, we were pleased overall with the 2% base business volume gain we saw in the first quarter, especially in light of the presumed volume shift to second quarter.

Our Tier 1 brands accounting for 46% of overall sales grew by 4.6% for the quarter. We believe several of the Tier 1 brands were affected by the volume shift making this a very good outcome.

Tier 2 sales, about 25% of overall sales, were flat in the first quarter. Brands such as the Molasses brands were very clearly affected by the late holiday and actually saw sales' declines. Most of the other brands here had modest growth.

Tier 3 grew very modestly in the first quarter and, here again, we saw brands such as Joan of Arc with promotions that revolve around the Easter holiday, seeing declines that offset gains in other brands. A brand that bounced back in the first quarter was B&M, which saw 12.9% growth versus last year. This brand is a perfect illustration of what can happen when promotional price points change in a category. Retailers in the key B&M markets did not perform any baked bean promotions last year because of higher promotional prices. This year they relented and executed the promotions with very good results. Two important brands, Ortega and Cream Of Wheat, both had very good quarters, growing by 5.7% and 4.7%, respectively.

New products and new distribution continue to drive improvement in these brands. Our healthy product initiative in Ortega, which includes whole grain taco shells, whole wheat tortillas, and now a whole grain-whole wheat taco shell, tortilla dinner kit was key in driving growth in the brand. Cream Of Wheat growth was greatly aided by the very successful Cinnabon Instant Cream Of Wheat product. As predicted in our last call, this product is on track to account for as much as 1% of our overall net sales in 2011, its first year of distribution, and it appears to be lifting sales of other instant products as well.

Cream Of Wheat national market share in the latest 12-week Nielsen survey has risen to 7.9% of the hot cereal category. That compares to a 6.1% share when we bought the business four years ago. Although we do not view them as direct competitors, it's worth noting that these gains have come in the face of extremely aggressive Quaker promotional activity; presumably aimed at regaining share loss to private labels.

Looking at channel sales within our business, we were further encouraged by the growth seen the Food Service channel, which was up 10% for the quarter. Much of this came from the Don Pepino and Sclafani acquisition last fall, which approximately two-thirds highest Food Service sales and one-third Retail sales. But the base business was solid for the quarter as well, a continuation of the firming trend that we saw starting in the second half of 2010.

The concern, of course, is that this recovery could be adversely affected as gasoline prices continue to rise. We're already at $4.00 a gallon in several states with predictions of $5.00 a gallon prices for the summer. We believe that this could have a very large negative impact on consumer discretionary spending and, in turn, casual dining. What will happen remains to be seen.

Our retail sales also continue to shift away from traditional supermarket channels to mass merchants; dollar stores and drugstore chains. In some cases, this is meaningfully volume. In others, large incremental gains on a small base. Wal-Mart sales, for instance were up 5% as a result of distribution gains from last fall when they reversed their grocery strategy.

Dollar stores, an example of a relatively small base of business, grew by 46% as we expanded distribution of several brands in these customers. Drugstore sales grew even more dramatically, again on a small base, as they added Cream Of Wheat Instant three packs to the distribution. Supermarket sales meanwhile are declining at certain chains as they struggle with their various competitors. In many cases other chains are benefitting, but we believe some of these sales are also shifting to these alternate channels.

Cost is, of course, an ever-growing challenge in the business. In our case, driven largely by energy costs and the decline of the U.S. dollar against the Canadian dollar. Our first quarter results reflect the benefit of our favorable commodity purchasing contracts in the face of widespread escalation of commodity costs. As good as these results were, they were still negatively impacted by higher fuel costs, which we estimate added over $700,000 to costs in the quarter.

Gross profit as a percent of net sales still expanded by 50 basis points, even after losing a similar amount of potential gain to higher shipping costs. This reflected a better sales mix and lower manufacturing costs coming out of the fourth quarter. As has been said in earlier calls, our manufacturing costs will gradually increase as the year progresses. The effect of higher distribution costs on the other hand is immediate. The continued increase in the price of oil has caused us to now project an increase of over $3 million in our distribution costs for the full year, which would bring our overall cost increase projection for the full year to 1.5% of net sales, up from 1% earlier this year.

Fuel surcharges today are fully 50% higher than at this time last year, which was the peak for 2010. It appears that they may continue to rise further this year which would, of course, widen the year-to-year comparison as 2011 goes forward.

The seemingly relentless pressure on almost all major commodities is beginning to ripple through all agricultural costs, pushing up future prices for minor and major inputs. So far, the effect on B&G Foods is minor and manageable, but we do believe it makes further margin expansion in 2011 more challenging. The price increase we announced for September 1 is intended to offset cost increases that we expect to see in the latter part of this year. As 2012 costs become better defined, we will probably need to take further pricing as of January 1 as well.

An example of the ever-changing situation is the cost of beans used in our B&M line. A few months ago we estimated a 30% cost increase this fall, driven mainly by the higher costs of corn and wheat which, of course, competes for the same acreage. Today, we estimate the increase will be closer to 50%. That estimate will almost certainly change in the next four to five months before the crop is harvested, but in what direction is anyone's guess.

We continue to manage other operating costs within B&G Foods very well. SG&A costs increased very slightly in the quarter, largely due to increased sales volume. Our marketing spend has remained consistent, but in the first quarter we redeployed marketing money spent on Polaner advertising in 2010 to the Ortega brand. Television commercials have been developed that are being run as we speak in test markets around the country. We will judge the effectiveness of the commercials before making any decisions regarding increased spending against that brand.

Our balance sheet and capitalization continue to improve and in directions that we believe are very favorable stockholders. As Bob mentioned, we ended the quarter with very narrowly $100 million in cash on the balance sheet. The business continues to generate cash at a very strong rate, which made the Board of Directors very comfortable in raising the quarterly dividend rate to $0.21 per share per quarter.

The cash balance at the end of Q1 is basically flat when compared with year-end 2010 reflecting, among other things, the use of $12.4 million to terminate an interest rate swap on our $130 million term loans. This action will reduce annual interest costs by $6.2 million at current rates and add approximately $0.08 per share to annual earnings per share. The first quarter results reflect not quite $0.02 per share of that improvement.

A strong cash balance gives us several options on further improving earnings per share and we believe enhancing shareholder value. As previously announced, we have been authorized by the Board to purchase up to $25 million of stock or debt in the open market. To date, we have done neither. Our Senior Debt is trading at approximately $107, reflecting a high valuation in the debt market. We are also in the best position we have ever been to execute an acquisition should we find the right opportunity.

Our cash on hand, very good stock valuation, and relatively low leverage are all valuable assets as we examine potential deals. Consistent with our acquisition strategy we continue to review opportunities.

In summary, we expect 2011 to be another very good year for B&G Foods even if we do not quite match the very significant improvements of 2009 and 2010. The industry is as dynamic and challenging as it has ever been and the U.S. economy seems fragile even as it does recover from the recession.

Based on the strength of the first quarter, we have raised our full-year EBITDA guidance to a range of $125 million to $128 million. The midpoint of this guidance at $126.5 million represents a 6.8% increase over fiscal 2010, excluding the $1.3 million one-time gain seen in the fourth quarter of 2010.

That's a very good outcome in a very challenging year. It's also a clear testimony to the continued strength of our brands and our business model. At this time, we would like to open the call up to questions. Operator?

Thank you. (Operator Instructions) We'll go first to Micah Kaplan with Bank of America.

Good afternoon.

Afternoon.

How are you guys doing? On the pricing, I guess you mentioned September 1, and correct me if I'm wrong, but it seems like I guess a longer window between announcement and actual taking it that has historically been the case. I guess if you could just speak to that and maybe talk about the chain of dynamic there, or whether it just has to do with the way you guys are locked in on certain items?

It's really a recognition of two things. First, when you announce a price increase, it takes a minimum of three months for that price increase to be fully effective. So, we're not delaying the effectiveness of the price increase very much at all, if you will. Secondly, it recognizes that there's an awful lot of promotions in place through the third quarter in the business and those promotions will execute no matter what happens with the list price. So it recognizes that we shouldn't disrupt those promotions.

I see, and then I guess last time, David, you had mentioned that I think it was only one category where you had actually seen pricing taken by competition. Is that still, I mean are we still on a level where that hasn't been enacted yet, or are you generally seeing that more across your categories?

We're not noting a lot of change in shelf pricing. At least it's not come to our attention. We've heard price increase announcements. We continue to look for them on the shelf, but so far we aren't seeing a lot of activity.

Okay, and then you obviously gave a lot of color on the cost issues which is helpful. On the fuel surcharges, I mean is there any cap to that I mean in terms of what you guys may potentially pay, or is it just going to continue? You know, depending where oil goes that's just going to continue rise if oil continues to go up.

It's a straight pass-on. There's no cap at all.

Okay, thank you.

Yes.

Next, we'll move on to Ed Aaron with RBC Capital Markets.

Thanks. Good afternoon, everybody.

Afternoon, Ed.

Afternoon, Ed.

I just wanted to also follow up on the price increases. So you mentioned that it ranges from 1% to 8%. Can you talk about whether you had any more or less pushback from the trade on the price increases that were toward the higher end of the range versus the smaller increases? And also, did you take pricing in categories where you are a price follower?

I'll answer those questions backwards, I guess. We're taking pricing without seeing pricing from competition necessarily in these categories. There's very clear cost increases out there. We assume everybody sooner or later is going to see those cost increases and do what they need to do in light of that. The pushback is really, we really haven't seen a lot of pushback. Part of that is that the range of price increase reflects the range of cost increase. And so, we go in with a defensible position in terms of here's what cost has done. Here's what we need to do in price to offset that. So where we haven't seen a lot of cost increase we have a very modest price increase. Where we've seen very dramatic cost increases, we're taking a more significant price increase.

Okay, and then my second question was just on the guidance. You took it up a little bit and I'm just trying to understand maybe the driver behind that. The quarter came in pretty much exactly where we expected it to and I know you don't give quarterly guidance, so perhaps you over-delivered relative to your own expectations. But you know, with the cost environment getting somewhat more difficult than what it was when you last reported, just trying to understand where that extra $2 million comes from.

Well, I think it is a recognition that we had a better first quarter than we thought we would have; a little better gauge of momentum going into the second quarter. Frankly, the sales in the first quarter were better than we expected given that we did expect volume to shift into second quarter. So when we still produced 5% sales in light of a couple million dollars probably shifting into second quarter that allowed us to say we're probably going to have a better year than we thought we were going to three months ago.

Fair enough; thank you.

Next, we'll hear from Reza Vahabzadeh with Barclays Capital.

Good afternoon.

Afternoon, Reza.

Afternoon, Reza.

I apologize if I missed it, but on the cost inflation front did you have an updated cost inflation estimate?

We had been saying we're going to see about 1% of sales in cost increase. Now we're saying 1.5%. The very large part of that increase is fuel surcharges. Our estimate of what fuel is going to do for us this year basically doubled in the last few months as oil just keeps going up and up. And then the second factor would be the U.S. dollar, which has gone down well below any forecasts of where the U.S. dollar would go.

Got it. And then as far as maple syrup costs, do you have an update on what's happening on that front? I know you've been comfortable in the past on it, but any update would be helpful.

Well, the crop is very good, so there's not going to be any price pressure on the base price of maple syrup. The big factor is the exchange rate since most of the syrup comes out of Canada. And as I said, that's the second largest factor in our estimate of higher costs.

Got it. Can you bring us up to date on a couple of your brands that you may have alluded to in passing, such as Cream Of Wheat and Polaner and Maple Grove?

Well as I said, Cream Of Wheat continues to do very well; a little less than 5% growth in the quarter. The new products, new distribution continue to produce very well. We're seeing a lot of alternate channel penetration with that brand into dollar and drugstores with the smaller-size packages. So we're very pleased with that. Polaner is holding its own. It's relatively flat and it really is -- it's not one of the major focuses right now in terms of where we want to go. And Maple Grove I would say is pretty much holding its own as well. Again, that's not a brand that we are looking for dramatic growth out of. The maple syrup business requires a lot of working capital to support any sales that you gain there. So, we're judicious in terms of how we grow that brand.

Got it. And in a prior discussion you may have mentioned that you are poised and in a good position for acquisitions, but the target pool of candidates is relatively shallow. Any updates on that?

We're still not seeing any brands of the kind that we're interesting in coming out of large food companies and that's really our sweet spot in terms of acquisitions. We are seeing properties on a regular basis, again not typically from large food companies, and most of them just don't meet the needs of our model.

Thank you much.

Yes.

(Operator Instructions) From Wells Fargo Securities we'll hear from Bryan Hunt.

Thank you and good afternoon.

Afternoon.

David, you mentioned that you saw some increased competitive activity on one of the brands in the quarter. I was wondering, one, could you talk about which brand it was again just to give us a reminder, and the type of competitive activity you experienced?

You know, I'd rather not get into the specifics of the brands on that. It's actually several brands. It's spotty in terms of -- it's not broad based. You know, a brand may have five or six facets to it and you get a competitive push in one piece of that brand's business and you have to respond. It's not broad. The way I wanted to have that come across, is we did see modest price increases that were the result of higher net pricing as we trim promotions. We didn't get as much promotion trimming as we would have liked, because we had to enhance some promotional activity here and there. So, there were pluses and minuses that at the end of the day ended up to a very slight net price plus.

Okay. Thank you for the additional color. And then second, I was wondering if you could go back to your last round of across-the-board price increases and talk about maybe the forward buys that your customers instituted, and maybe how you may change your forward buy policies this time around, or whether you are making any changes to your policies?

The last time we saw a significant forward buy was when we took price increases on our bean businesses, and we did see people buy in a month's worth of inventory. And that's typically what we'll tolerate is about, you know, you can buy the next month's worth of business at the existing price. And so I forget, I think it was the end of 2009, we saw a big surge in B&M and Joan of Arc sales and saw a sag in the first quarter of 2010 as a result. That's typical. Anybody who's trying to buy in more than 30 days we would really resist that.

Would you? So based on that would you expect the Q3 number to be skewed a little bit given the announcement of your price increases?

I really don't think it's going to be meaningful. Again, when the increase is averaging 2.5%, that's not really compelling for people to buy a lot of inventory. You might have the higher, the brands with the higher increase. You might see some inventory buy, but again, it's 30 days on a brand that probably doesn't have a lot of volume.

Okay, thank you for your time this afternoon.

Yes.

Moving on to Andrew Lazar with Barclays Capital. Andrew, your line is open.

Hi, Dave and Bob. How are you?

How are you doing?

Afternoon.

Good. You know, I recall last year really for the group in general the levels of kind of historic lift on promotions didn't really hold true. And maybe that's because everybody was promoting pretty heavily and most of the companies weren't really getting a whole lot in the way volume growth as a result and that deviated from kind of where their historical numbers had been. Based on either what you're seeing on lift from some of your recent promotions, or what you're seeing just industry-wide, does that seem to be changing for the better at all? Or, are we still in a situation where the consumer is not really interested in buying, so they were taking on anymore inventory just because something is kind of on a better deal?

I really don't think we've seen, plus or minus over the last few years, a big change in the productivity of our promotions. I mean the ones we are still doing are fairly productive or we wouldn't do them and they have historically been productive. So, I don't think there's a lot of -- there's a dramatic move one way or the other in what we're seeing. As I said, there was some business that wasn't done last year because the retailers didn't do any promotions. This year, those promotions performed very well when they executed them even though the price point was higher than it was two years' prior. So, I think, to us it's more the situation is back to normal in terms of performance and when they do perform the response is similar.

Thank you. And then, you guys are pretty savvy around your use of cash flow and how you think about your capital structure and you've talked about the really solid cash balance that you've got. No at least sort of imminent acquisitions at this stage that sort of fit the model, although I realize that can always change. So I guess, what's the next thought? I mean how do you -- you mentioned the higher valuation of some of your debt. How do you think about a sort of timeline around when you'd sort of put some of that cash to work and how do you prioritize if acquisitions aren't necessarily imminent?

That's an interesting question. You know, I think you really have to gauge what the value is to a stockholder of doing something like buying back debt versus buying back stock. Those are two things that obviously you can do with cash. You know, the simple arithmetic seems to be that if debt isn't trading at a premium, you're better off buying back some of the debt and raising your net income and raising your earnings per share. And that gets into the theory I have that our stock valuation is going to be bound to some extent by the multiples.

So, if you think we're at the high end of the multiple now because of where we are with earnings per share, raising the earnings per share will raise the stock price more than raising the dividend will. I don't have any great research to back that up. That's just a personal opinion. But that dynamic will change depending on what the marketplace values and what the economics are of buying back the debt or the stock, or increasing the dividend; which are really three uses for cash should we not go forth and do acquisitions. We happen to think that the right acquisition creates more value for our shareholders than any of those three.

Great, that's a helpful perspective. Thank you.

Yes.

(Operator Instructions) And there are no further questions at this time. I'll turn the conference back over to management.

Thank you, operator. Thank you all for joining us on the call. Again, a very good quarter and I do not mean to poormouth the rest of the year. It is going to be challenging, but we have increased guidance so we do think that we will continue to perform well for the rest of year. The hill just is getting a little steeper and we're having to work harder, but again, we think we have brands and a business that are going to continue to perform well. Thank you.

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