B&G Foods Inc (BGS) 2011 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the B&G Foods Incorporated second quarter 2011 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 to David Wenner, Chief Executive Officer of B&G Foods. Please go ahead Sir.

Thank you operator. Good afternoon everyone and welcome to the B&G Foods second quarter fiscal 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 undo 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 will discuss the various factors that affected our results for the period, selected business highlights and our thoughts concerning the second half of 2011. Bob?

Thank you, Dave. Net sales for the second quarter of 2011 increased $8.3 million or 6.9% to $129.4 million compared to $121.1 million for the second quarter of 2010. The increase was attributable to an increase in unit volume of $11.3 million, offset by a net decrease in pricing of $1.7 million and an increase in coupon expenses of $1.3 million. Net sales of our Don Pepino and Sclafani brands which we acquired during the fourth quarter of 2010 contributed $3.5 million to the overall unit volume increase for the second quarter of 2011. Our 10-Q has additional disclosure on individual brand performance for the quarter.

Gross profit increased $2.8 million for the second quarter of 2011 or 7% to $42.2 million from $39.4 million in the second quarter of 2010. Gross profit expressed as a percentage of net sales increase 10 basis points to 32.6% for the second quarter of 2011 from 32.5% for the second quarter of 2010. The increase in gross profit percentage was primarily due to a sales mix shift to higher-margin products. This mix shift offset the net decrease in pricing and slightly higher input costs.

Selling general and administrative expenses increased $0.7 million or 5.4% to $14.2 million for the second quarter of 2011 compared to $13.5 million for the second quarter of 2010. This increase is primarily due to an increase in consumer, marketing and trade spending of $0.4 million and brokerage expenses of $0.2 million. All other expenses increased $0.1 million. Expressed as a percentage of net sales, our selling general and administrative expenses decreased 10 basis points to 11% for the second quarter of 2011 from 11.1% in the second quarter of 2010.

Operating income increased 8.3% to $26.3 million for the second quarter of 2011 from $24.3 million in the second quarter of 2010. Net interest expense decreased $2.6 million or 23.5% to $8.3 million in the second quarter of 2011 from $10.9 million in the second quarter of 2010. The decrease was primarily attributable to the termination of the interest rate swap, causing a reduction in the effective interest rate on our $130 million of term loan borrowings from 7.09% to 2.26% and the elimination of the unfavorable fair market value adjustment relating to the interest rate swap.

The Company's adjusted net income, which excludes the impact of items affecting comparability relating to the interest rate swap, was $12.9 million for the second quarter of 2011, up 36.6% increase as compared to adjusted net income for the second quarter of 2010 of $9.4 million. Adjusted diluted earnings per share for the second quarter of 2011 was $0.26 a 36.8% increase as compared to adjusted diluted earnings per share for the second quarter of 2010 of $0.19. The first two quarters of 2011, the Company's adjusted net income was $26.1 million or $0.54 per diluted share a 31.6% increase as compared to adjusted net income for the first two quarters of 2010 of $19.8 million or $0.41 per diluted share. Our EBITDA increased 8.2% to $30.3 million for the second quarter of 2011 compared to $28 million in the second quarter of 2010. Our EBITDA for the first two quarters of 2011 was $63.3 million a 9.1% increase compared to $58 million for the first two quarters of 2010.

Moving onto the balance sheet, we finish to the second quarter with $101.5 of cash compared to $80.5 million at the end of the second quarter of 2010. Our current dividend rate is $0.84 per share per annum, or approximately $40.3 million per annum based on our current share count. Our leverage net of cash was three times EBITDA as of July 2, 2011.

Our inventory at the end of the second quarter was $89.9 million compared to $94.1 million at the end of the second quarter of 2010, a reduction of 4.5%. Our expected cash interest expense for 2011 is approximately $30 million. Our expected 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 over to Dave for his remarks.

Thank you Bob. Good afternoon again, everyone.

Our business turned in another strong performance in the second quarter as you can clearly see in the results. After a very strong fiscal 2010, it's gratifying to see the business consistently beat those already good numbers. In particular, net sales growth of 6.9%, EBITDA growth of 8.2% and diluted earnings per-share growth of 44.4%, all speak to how well the business is performing in an increasingly difficult environment. Underlying the 6.9% net sales dollar increase was an impressive 9.5% unit volume increase, whose dollar benefit was reduced by higher trade and coupon spending. I'll speak to those factors in a moment.

Coming into the second quarter, we had expected a sales lift from the late Easter holiday. You will recall that we estimated that is much as $2 million in sales shifted from Q1 to Q2 due to that timing. That number turned out to be very close to what we actually saw. This shift and the Violet acquisition accounted for not quite half the volume increase for the quarter. The remainder came from growth in the large majority of our brands. And growth that was very much in line with our objectives for our tier one, tier two and tier three brands. In that vein, the net sales for our tier one brands grew by 7.8% for the quarter.

These brands have contributed just under half of our total sales so far this year and over half of our EBITDA. Las Palmas had an especially good quarter with a 22.4% increase in net sales. This brand benefited significantly from the Easter holiday, so a more fair indication of its performance is the 10.2% increase in net sales year-to-date. Cream of Wheat was also strong with an 8.4% net sales increase. And Ortega contributed a 4.2% net sales increase.

Clearly our objective of focusing on our opportunities in these strong, profitable brands is paying off with superior results. In the case of Las Palmas, growth is primarily coming from new distribution and a number of channels including grocery, club and mass merchants. Cream of Wheat is gaining share in the hot cereal and arguably driving overall category growth, through new distribution of Cinnabon product and higher sales of existing product. As we examine expand the Cream of Wheat shelf presence with new products we find that they are enhancing sales of the existing products as well and not cannibalizing their sales as one might fear.

Ortega actually showed a solid volume increase of over 8% but the net sales gain was decreased partly by high coupon expenses. New products and new distribution continue to grow this brand as well, especially our health-oriented products such as; the whole grain taco kit, whole wheat tortillas and low-sodium taco seasoning mix.

Tier two brands grew by over 10% for the quarter, with the Violet acquisition accounting for all of the growth. The acquisition continues to perform in line with expectations and new retail distribution in the second half should boost its already solid sales trends. Brand performance within of the tier tended to even out over the brands. Underwood net sales for instance were up 9.2% on expanded distribution in drug and dollar stores, while the Emerald line declined 9.5% due to timing of warehouse club rotations.

Tier three brands net sales to grew by 3.1%. Our syrup businesses; Vermont Maid and Maple Grove Farms both saw double-digit growth, offsetting small declines in the B&G and B&M brands. The Joan of Arc brand bounced back from a weak first quarter with an 8.6% increase in net sales, largely due to Easter promotions. As with the case with Las Palmas, these brands sales are highly dependent on promotions. And the timing which hurt that brand in Q1 and helped it in Q2.

We continue to see trends in sales by channel similar to those seen in the first quarter. Growth in the traditional supermarket channels has been challenging. First, because consumers are shifting their buying patterns away from those venues to some extent. And second because category views are getting less frequent, slowing the expansion of our new products distribution.

Our highly successful Cinnabon product for instance is only in about 40% of grocery stores. Mainly we believe because of infrequent category reviews at major chains. We expect that number to increase to 60% by year-end. But the introduction is taking longer than hoped or expected.

This slow list to adopt successful products has reinforced the trend we've seen for some time now, where most of our organic growth is coming from mass merchants, dollar stores and drugstores. We are seeing significant growth on a small base in some of these outlets. Sales to dollar stores for instance are up 91% this year and are now approximately 2% of our total sales. Sales to Wal-Mart in the first half were up 11%, largely due to the distribution gains we saw last fall. We anticipate that trend continuing in the second half with further distribution gains.

Foodservice sales meanwhile were up 10% for the quarter, primarily due to the Violet acquisition. Foodservice sales on the base business were down slightly in the quarter and are essentially flat for the first half of the year. In our view this channel remains very fragile and vulnerable to factors such as gas prices. Another challenge is that cost pressures are making distributors foodservice private label products more attractive, requiring us to work closely with end users to maintain branded sales.

Pricing was down $1.7 million for the quarter after a slight gain in the first quarter. Promotional activity was a key factor here affecting here affecting the net price received in brands such as Ortega and B&M. In the case of Ortega, timing of promotions, that Easter holiday again, drove the change. B&M saw a higher level of execution of promotions at retail in the first half and gained volume while lowering net pricing. In addition to these factors, approximately 25% of the pricing decline was a response to food service private label, as referred to earlier.

As Bob mentioned, higher levels of couponing lowered sales by almost $1.3 million. While we have seen a higher level of redemptions among consumers, the larger factor in this case is timing. Coupons in 2011 have been dropped earlier than they were last year. We anticipate most of this added expense reversing in the second half of the year.

Of course the hot topic in our industry continues to be cost, and each company's ability or inability to offset cost with price increases and cost savings. We have been very proactive on the pricing front and announced early in the year that we were raising prices in anticipation of cost increases. Our price increases were announced to take effect on August 1 or September 1, depending on the brand.

Because we were so early and publishing these increases, they have been accepted by virtually all of our customers and are scheduled to take place on time. In total as we have said before, the increases represent an overall price increase of 2.5% of net sales, a very modest number. Increases vary by brands depending on the category and the cost pressures seen within the commodity is relevant to that category. Those are the knowns as we approach the dates when our price increases take affect.

What is unknown is what our competition is going to do, and what consumer reaction to pricing will be. And as you would expect, with as varied a portfolio as we have, each brand will see some variation of the possibilities. What we do know at this point is we have seen very little competitive pricing activity at the shelf, which leads us to believe that we are leading prices in more cases than we might like. The situation will bear watching as we proceed into the fall.

The good news I believe is that we have pricing in place. Given the number of recent earnings announcements citing delayed pricing, I'd prefer to think that we have done a better job than most at this stage.

Cost increases for the remainder of 2011 should come in very close to what we estimated last quarter. And for the full year should be approximately 1.5% of net sales or $7.5 million dollars. The total of cost increases before netting out savings as a higher number. But our operations group has done an impressive job of identifying and acting on cost reduction opportunities to defray the number. These efforts are evident in our distribution costs for example, which came in slightly lower for the quarter as a percent of sales and are up a very modestly year-to-date. While fuel surcharges continue to run over 50% higher than 2010, we have reduced mileage in our supply chain by almost 10%; effectively offsetting a potential cost increase of nearly $800,000, so far this year.

Looking forward to 2012, our current estimate is that we will see a cost increase of approximately 2% of net sales or roughly $10 million. We have locked in a significant portion of our commodity costs for the second quarter of 2012 -- not to save money most cases, but to define that cost increase as clearly as we can. But it seems like there is very little good news in world commodities these days and some of our 2012 positions already have a cost avoidance aspect to them. Despite all of this good work, depending on how various uncontrollable cost such as fuel move, we may need to take further price increases in early 2012.

Our overall approach to commodities and cost in general remains very conservative. We would rather fix costs as a certain level and manage to that known quantity than let costs float hoping for a better outcome. While that may cost us an opportunity down the road, it clearly has been a positive in the past few years. As the news on oil prices and commodities in general continues to be dismal, we see no reason to change this approach.

As Bob related, our SG&A expenses are well under control; up slightly due to early spending and advertising and higher sales volume. Outstanding management of our inventories has lowered them still further, dropping year-over-year inventory 4.5%, even after the Violet acquisition. This effort and our strong operating results increased cash on our balance sheet by $21 million compared to second quarter 2010. Net of the cash spent to unwind an interest weight swap earlier this year and fund the Violet acquisition last year.

We finished the quarter with $101 million on the balance sheet, the first time our Company has ended a quarter with over $100 million in cash. With significant cash on our balance sheet and net leverage at three times EBITDA, we are very well-positioned to execute on our acquisition strategy, should we find the right opportunity. Consistent with our strategy, we continue to review those opportunities.

In the meantime, our Board of Directors announced last week our 28 consecutive quarterly dividend since our 2004 IPO. Our quarterly dividend which the board increased earlier this year to $0.21 a share, reflects the board's continued confidence and the overall financial strength of our Company. At this dividend rate, we will distribute over $40 million a year in dividends to our shareholders; or for 2011, approximately 55% of our free cash flow after interest, taxes and CapEx.

Given our excellent performance in the second quarter, we are maintaining our guidance for the full year 2011 EBITDA at $125 million to $128 million. Discounting the one-time gain of $1.3 million we experienced in the fourth quarter of fiscal 2010, this means we are forecasting an EBITDA increase of between 2% and 7% for the second half of fiscal 2011. The second half of the year promises to be even more challenging than the first half, but we believe that we are well-positioned and are cautiously optimistic about this continued improvement in B&G foods already superior performance.

At this time would like to open up the call for questions. Operator?

Thank you. (Operator Instructions) Reza Vahabzadeh, Barclays Capital. Please go ahead.

Good afternoon. In terms of tone of competitive and promotional intensity, any moderation in your promotional intensity or any meaningful price increases by your competitors in some of categories that you compete in?

No and no. We have not seen any slacking off in promotional intensity in the categories where promotions make a difference. And as I have said, we really have not seen shelf prices move, generally; there are a couple of exceptions. But broadly, we have not seen competitive shelf prices move yet.

Now we're hoping that is timing. Our increases don't take affect for the most part until September 1, so you would hope that our shelf prices haven't moved yet either. But, we're hoping that it's coming, but we have this feeling that we are leading more than we might like to, as I said.

Got it. And then as far as the summer crop for some of your products -- I don't know if you commented on it or not, but any color on how the crop is coming in the summer?

Not a lot gets published about a lot of those crops. Because we deal with a lot of secondary crops. And the costs are pretty much locking in as we roll into the fall here. And the increases are in the 30% to 40% range in general, and it's all driven really by corn and wheat as an alternative.

So, as I've said before, the secondary crops, the farmers just look at you and say -- I can make this much money in corn, so you need to pay me this much more to plant beans. And like I said, it's running in the 30% or 40% increase range, in general.

And would you anticipate being able to pass on these higher cost to consumers?

That's what the price increases are all about. We anticipated those things in our price increases.

Got it. And then any thoughts on the M&A front? I know you've made a couple of small acquisitions, but is the environment conducive to a rich number of targets?

It really isn't, Reza. We are not seeing anything -- certainly nothing that we're interested in coming out of larger food companies.

I think everybody is still in that same boat of struggling to get to the organic sales growth that they've set for themselves in terms of goals. In that context where they're struggling to get to those goals as it is, divesting things really doesn't get them where they want to go.

I got it. Thank you much.

Brian Hunt, Wells Fargo.

Good afternoon, David, this is Kevin McClure standing in for Bryan. Just wanted to drill down a little bit into some of the new products that you have in your pipeline. How would you characterize the health or the depth of that? And I have a follow-up.

Well, we really don't have a huge number of new products. We tend to focus on a dozen or so products across the brands. So, from a depth point of view, it's not significant. But, it does add up in terms of sales. We are counting on new products launched in the last couple of years to account for about 5% of total sales.

And that -- if you look at it that way, it's about half of the organic growth that we see the business beyond the acquisition growth and hopefully to come some pricing growth. But, given the resources we have, we're better served focusing on things that clearly are successful for us and executing on them rather than doing a broad array of products.

Okay. And I missed some of the numbers that you quoted when you were talking about your distribution costs. Do you mind repeating them? You said that you expect inflation in that line item of about 2% for fiscal year 2011? Is that correct?

Our 2% inflation is really of the total basket of cost of goods sold and distribution costs together. And it's 2% of net sales in 2012 which will be about $10 million. And it really is all costs of manufacturing and distribution, which totals I think around $370 million or so. So, that would be about a little less than 3% on that base.

Okay thanks for clarifying it. As far as potential uses of cash, you highlighted acquisitions. What is the likelihood that you pursue share repurchases or raise the dividend or buyback bonds? How would you rank potential uses of your cash -- acquisitions number 1, and are there other secondary and tertiary concerns?

Clearly as far as we're concerned, if we can do acquisitions, that's the best use of our cash. Over the years that has created the most shareholder value for us. And so that is our first objective in terms of use of cash.

Failing that and having the cash continue to pile up like it is, the board just did raise the dividends. I think the board looks at what proportion of free cash flow we are sending out and tries to keep that at a reasonable proportion. So, that would certainly be a consideration as cash builds up and as we increased EBITDA and free cash flow.

Then you get into really kind of the yield consideration that everybody including you and I looks at when we say -- where do I invest my money? Right now, if I buy stock back I'm retiring about a 4% dividend. So, that's my return on an albeit not tax-deductible dividends. So, that's 1 possibility.

And then buying back debt. We could certainly buyback bank debt. I don't think we are paying 3% on bank debt -- 2.25% on bank debt. So, that's not a bargain after what we lose the tax deduction. Or we could buy back our senior notes, which I looked at today and are priced at $107.25, so they are pretty rich.

Not from a return point of view, not a great investment option in any of those. And as I said, our preference is to spend it on acquisitions. But I certainly recognize and the board certainly recognized as cash continues to build on the balance sheet, that there would be an expectation that we would do something useful with it.

Great. Thanks for the color I appreciate your time.

Ed Aaron, RBC capital markets.

Thank you good afternoon everybody. So, I just wanted to ask a high-level question about your categories, because they just seem to be different from a lot of others. Most companies that we follow have seen some pricing go through. But, you haven't yet, and yet you still think that you're leading the competitors on price. And I'm just trying to understand why your categories seem to be so much different?

I think that 1 thing is that it's reflected in our costs. Some of these categories are not seeing significant cost increases. So, there's not as much pressure as you might think there is on those categories for dramatic price increases. We are looking at 1.5% of net sales inflation here, you're not talking a monumental number. That's true in some cases.

Other cases, I'm not necessarily expecting shelf price to move; because in the very promotionally sensitive categories, you get a lot more revenue changing the promotional price points than you do changing the list price. There is almost a disincentive to hurt your everyday business by raising list and you can raise your promotional price and as I said, reap a better benefit. And that is typical of what has happening in baked beans in the past, for instance.

Once upon a time it was at $0.99 for a 28 ounce been. Now it's 3 for 5 dollars. That's a 67% price increase over the last 3 or 4 years. So, that is the kind of thing that can happen to.

So, I guess where we are commenting is that we have seen dramatic cost increases in a few categories and we are kind of surprised that there has not been movement in those categories. In others, the cost increases are not that great, so it would be more subtle. And on others, I expect it more on a promotion front.

And it might be a little bit premature for you to answer this question, but is it possible for you give us an earl look into your 2012 inflation outlook? I know you tend to grow pretty far out on some of your key commodities, so I that you might have some more visibility than the average food company right now.

Well we did comment on that and we said that 2012 we are expecting about 2% of net sales cost increases. That would be about $10 million.

Oh, I missed that. Thank you. And then just a last question. You talked about some potential distribution gains at Wal-Mart coming into the back half. Could you potentially elaborate on that little bit?

I would rather not define it, because Wal-Mart is an ever-changing thing. But, everything that we see is that we are going to gain a decent amount more distribution. But, as I said, lately Wal-Mart seems to change their mind pretty quickly. So, I wouldn't define it yet.

Fair enough. Thank you.

Sean Naughton from Piper Jaffray.

Hello good afternoon. A quick question for you. On the Violet acquisition, it sounds like the revenues are coming in inline with what you were anticipating for the full year through the first half. Can you comment on the profitability that you are seeing in those brands as well?

Well, we have commented on in the past that the EBITDA margin is just slightly below our average EBITDA margin in the business.

But, it's coming in similar to the expectation you were looking for though right now?

A tad higher, but pretty close to what we were expected, yes.

Okay good. And then on the distribution front, I think you talked about the dollar stores growing nicely, being about 2% of revenues now. Where do you see that business going to overtime?

Well it just keeps growing. And as it does, it just reinforces our belief that we need to create more products to go through those stores as long as we can do it with the margins that we want. But it's 1 of those things that is very economical to do, there is no slotting.

And the leverage as far as the number of stores is substantial. You can be in 6,000 to 8,000 stores overnight if something hits. So, the velocity out of the stores is not what the velocity out of the supermarket or a Wal-Mart is; but when you look at thousands and thousands of stores, it adds up. So, it's a low cost way to grow business, as long as you can find the appropriate products.

Got it. And then just lastly across the tiers that you operate in tier 1, tier 2, tier 3; there any changes in the profitability across those tiers? It still sounds like tier 1 is doing very, very well from a profit standpoint. Anything on tier 2 and tier 3 that you would care to comment on?

No, the margins in each of the tiers is pretty much staying where it has been. What is happening to our overall margins is that obviously as we sell more of the higher-margin products, the mix affect takes our margins up and it is kind of an -- I meant to do that kind of thing -- where that is our objective and we are achieving it.

Okay great. Best of luck in the back half.

(Operator Instructions) Andrew Lazar, Barclays Capital.

Good afternoon Bob and Dave. First off, I wanted to try to get a sense of how you see the second half playing out both on the sales line and at the gross margin side? In the third quarter, you have got like a month of the pricing starting to kick in, so maybe a little bit more pricing and then more in the fourth quarter?

But then given your leading -- and I understand the reason for doing that -- perhaps and not knowing what ultimately the consumer reaction is in certain categories; what are you thinking about and how are you building in sort of the volume elasticity? Because my sense is that maybe that weakens a bit from where it has been in the last 2 quarters. That's first on the sales line.

Well, we are going into the third quarter with great volume momentum, which is always encouraging. And we've told ourselves that we need to watch very closely what goes on with price and volume category by category.

And I guess I would say that in most cases, I don't expect there to be a lot of issues. Again, the areas where we have taken more substantial price increases, if competitors don't follow, we are going to be $0.10 to $0.20 a unit higher on the shelf and that is not something that is going to be good.

There is brand loyalty out there, but we are going to test how loyal that brand loyalty is. We choose not to do that if we don't have to. But, having said that, like I said, we can't panic and say -- well because nobody else's prices went up September 1, that we need to immediately give back our price increase.

I don't know what the timing of other peoples increase is, assuming they have taken them is. We need to wait and see, to some extent. But we are ready to react, if we fee; we need to react on a category by category basis. And as I said, I expect that to be the exception rather than the rule.

And some of the obviously negative pricing, it sounds like at least from this quarter, was as you said, timing related. So, I'm assuming that you expect pricing to be back in positive territory, at lease starting in the third quarter?

In most cases yes. I think there was a significant promotional aspect to it in the first half. In the case of B&M for instance, we know that we had promotional activity in the second half more than we did in the first half of last year.

So, it's a better comparison. I think it definitely will firm and hopefully start to advance with the price increases in the second half. I am looking at that as a 1-time thing right now.

The exception would be as we said, in foodservice we've had to react to some private label pressure in a few categories. And that definitely took pricing down here and there.

And then how about on the gross margin line in the back half? You had some nice expansion in the first quarter, but essentially flat to up slightly year-over-year in the second. You have a little pricing kicking in, but it does not seem like inflation, at least unless I am mistaken on how it flows, gets dramatically worse? In the second half or maybe it does.

We pretty much know what inflation is going to do in the second half. As far as we concerned, the only unknown really is oil and diesel. And we've managed that so far.

But, I think what our forecasts are telling you is we expect our margins to level off some. Obviously, to the extent that we can grow tier 1 faster than everything else, that would help the margin structure. But, I don't expect a lot of margin expansion in the second half.

Okay. And then, when you talked end for '11, about 1.5% net sales or about $7,5 million I think of inflation. I want to make sure I get a sense of it is, what are you seeing in for '11 in terms around the commodity side? And then what is separate from that in terms of productivity and whatnot? Is that a net number of all the productivity that you're doing?

Yes.

So, that's a net number. What kind of cost inflation are we seeing, separate from so the ongoing productivity that you're delivering?

It would probably be about $5 million higher.

Okay. Got it. That's helpful. And I assume that kind of relationship maybe holds. You give just 2% of net sales number for 2012, that's a net number also?

Yes, that is a net number also. Although that is more of a dynamic situation because we are still working on a lot of things that we hope will lower cost next year. As I said, we are looking at some of the positions that we've taken for next year in some of these commodities where when we took them we weren't thrilled, because they were a 30% or a 40% increase versus where were at the beginning of this year.

Looking at it now, suddenly it looks a lot better now because it would've been much worse, had we not taken those positions. Because it just keeps going up. Sugar is a good example of something that just every time you look on the internet and look at commodity pricing, it just gets uglier and uglier.

So, there's a cost-avoidance aspect like I said to some of these things. But definitely productivity has already helped us as some of the increases for next year and we are hopeful that it will continue to kick in more as we go forward.

Great. And you mentioned something else that was interesting. The less frequent sort of category reviews, at I guess traditional groceries. Is that something that has been building for a while? Is that more of a recent phenomenon and is it something that you think the kind of everybody across the industry is essentially struggling with a bit?

It seems to have been happening -- I would say it started a couple of years ago. And it seems to be getting more prevalent, I guess would be a good way to put it. I think part of it is around cost. It costs a lot to review category and reset all the shelves and things like that.

So, it just isn't being done on as regular a basis as it has been in the past. And in some cases, you can break into that cycle and say -- hey, I have this revolutionary product and I'll pay to reset your shelves, or something like that. But a lot of times, you just have to wait for the opportunity in terms of the category review before you can get the products in.

As I said, Cinnabon is a great example. We put money out there to get full distribution of this product in the United States at the beginning of this year. We are at about 40% now and we think we'll be at 60% before the year ends. But, a lot of the delay there is simply because the retailers are not even looking at the hot cereal category and slotting new items.

All right that's helpful. And then last thing. Some of the larger food companies are running into trouble around sort of getting pricing through. When they kind of had to go back to the well relatively soon after they had already taken some pricing.

And that's kind of forced them to have to have a lot more data and more justification and things of that nature. And so, it is great obviously you feel like this pricing is kind of in place going forward. But, to the extent that you have to come back, which you may have to -- and whenever it is, end of this year or early next year -- is that where things perhaps get more difficult? Even though it may be cost-justified? It just isn't that is where some of your peers are running into some more trouble.

I think having to do that a second time does get more difficult. Unless the news warrants it. I would submit that the continued bad news on the commodity front certainly gives you something to talk about.

Because even if you have locked in positions, as I say, those positions roll over at some point in time. And as ugly as those long-term positions may be compared to a where you were 6 to 9 months ago, it's a lot uglier 12 months out down the road. And hopefully there is an understanding. But selling it the second time is a lot harder than selling it the first time.

Okay. Thanks for all your help.

And there are no further questions. I'll turn the conference back over to management.

Take you operator. Thank you all for joining us on the call. Again, we believe that we had a great quarter here. Great momentum going into the second half of the year and we're very optimistic about that. Our guidance we believe shows that we think that this business will continue to perform very well as we finish 2011. Thank you.

Ladies and gentlemen that does conclude today's conference. We thank you for joining.