B&G Foods Inc (BGS) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the B&G Foods Incorporated third quarter 2011 earnings 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.

And now I'd like to turn the conference over to Dave Wenner, Chief Executive Officer for B&G Foods. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to the B&G Foods third 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.

We will start the call with our CFO Bob Cantwell discussing our financial results for the quarter. After Bob's remarks, I'll discuss the various factors that affected our results for the period, selected business highlights, and our thoughts concerning the last quarter of 2011. Bob?

Thank you, Dave.

Net sales for the third quarter of 2011 increased $7.9 million, or 6.3%, to $133 million compared to $125.1 million for the third quarter of 2010. The increase was attributable to an increase in unit volume and pricing of $6.9 million and $0.1 million, and a decrease in coupon and slotting expenses of $0.9 million.

Net sales of our Don Pepino and Sclafani brands, which we acquired during the fourth quarter of 2010, contributed $3.4 million to the overall unit volume increase for the third quarter of 2011. Our 10-Q has additional disclosure on individual brand performance for the quarter.

Gross profit increased $2.3 million for the third quarter of 2011, or 5.8%, to $41.5 million from $39.2 million in the third quarter of 2010. Gross profit expressed as a percentage of net sales decreased 10 basis points to 31.2% for the third quarter of 2011 from 31.3% for the third quarter for 2010. The decrease in gross profit percentage expressed as a percentage of our net sales was primarily due to the increase in commodity and distribution costs, partially offset by a sales mix shift to higher margin products.

Selling, general, and administrative expenses increased $0.3 million, or 2.3%, to $12.7 million for the third quarter of 2011 compared to $12.4 million for the third quarter of 2010. This increase is primarily due to an increase in consumer marketing of $0.3 million. Expressed as a percentage of net sales, our selling, general, and administrative expenses decreased 30 basis points to 9.6% for the third quarter of 2011 from 9.9% in the third quarter of 2010.

Operating income increased 7.8% to $27.1 million for the third quarter of 2011 from $25.1 million in the third quarter of 2010.

Net interest expense decreased $2 million, or 19.5%, to $8.3 million in the third quarter of 2011 from $10.3 million in the third quarter of 2010. The decrease was primarily attributable to the termination of an interest rate swap causing a reduction in the effective interest rate on our $130 million of term loan borrowings from 7.09% to 2.3% 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 $12.4 million for the third quarter of 2011, a 25.5% increase as compared to an adjusted net income for the third quarter of 2010 of $9.8 million.

Adjusted diluted earnings per share for the third quarter of 2011 were $0.25, a 25% increase as compared to adjusted diluted earnings per share for the third quarter of 2010 of $0.20.

For the first three quarters of 2011, the Company's adjusted net income was $38.4 million, or $0.79 per diluted share, a 29.6% increase as compared to adjusted income for the first three quarters of 2010 of $29.6 million or $0.61 per diluted share.

Our EBITDA increased 7.7% to $31.1 million for the third quarter of 2011 compared to $28.9 million in the third quarter of 2010. EBITDA as a percentage of net sales increased to 23.4% in the third quarter of 2011 compared to 23.1% for the third quarter of 2010.

Our EBITDA for the first three quarters of 2011 was $94.5 million, an 8.7% increase compared to $86.9 million for the first three quarters of 2010. EBITDA as a percentage of net sales increased to 24% in the first three quarters of 2011 compared to 23.4% for the first three quarters of 2010.

Moving on to the balance sheet, we finished the third quarter with $98.1 million of cash compared to $87.5 million at the end of third quarter of 2010. As previously announced last week, our Board of Directors has increased the Company's quarterly dividend rate for the second time this year, this time from $0.21 per share of common stock per quarter to $0.23 per share of common stock.

The first quarterly dividend at the new rate is payable on January 30th, 2012 to shareholders of record as of December 30th, 2011. The increased current dividend rate of $0.92 per share per annum equals an approximate $43.9 million per annum in the aggregate based upon our current shares outstanding.

Our net -- our leverage net of cash was three times EBITDA as of October 1st, 2011. Our inventory at the end of the third quarter was $94.3 million compared to $89.4 million at the end of the third quarter of 2010.

Our expected cash interest expense for 2011 is approximately $30.1 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 back over to Dave for his remarks.

Thank you, Bob. Good afternoon again, everyone.

Given the general environment of rapid cost escalation and turmoil in the retail markets, we were especially pleased with the third quarter results. The net sales increase of 6.3% was an almost even mix of growth from the acquisition completed last November and organic growth in our base business.

While price was not a meaningful factor in the sales increase, we did see pricing take effect in September as expected. And we should see a growing benefit as we proceed through the fourth quarter.

Especially gratifying is the continuing success of our tier strategy in driving growth in the most important brands in our portfolio, both in terms of opportunity and profitability. Our tier one brands grew by 6.5% in the third quarter and are now up 6.2% for the year. Volume in these brands is up even more with the difference representing the investment we're making in their growth.

Our two Hispanic brands, Ortega and Las Palmas, both had excellent quarters with net sales up 7% and 9% respectively. Ortega did very well in mass merchants in particular, while Las Palmas growth was broad, basically growing in all channels. In both cases, new products and new distribution played a role in their success.

Cream of Wheat net sales grew by 4.2%, but unit volume was up over 7%. Heavy coupon support for new products in this brand lowered the net sales but clearly helped drive volume. The brand continues to grow sales and gain share in a hot cereal category that seems to be trading down overall.

We interpret this outcome as proof that we are delivering the right products to consumers and justifying the premium they pay versus private label hot cereals. Distribution on the Cinnabon instant flavor expanded to over 50% ACV during the quarter, and we expect to achieve our 60% goal by year-end.

With new products planned for all three brands in 2012, it is our intention to keep up the momentum in these important elements of our business. So far this year, they have accounted for nearly 60% of B&G Foods total EBITDA, even after the enhanced investment we have made in the brand.

Tier two brands grew by just over 9.4% in the quarter, largely due to the contribution of the Violet acquisition completed during the fourth quarter of 2012 -- '11, excuse me, '10 actually.

Sales of the other tier two brands were essentially flat in total for the quarter which minor ups and downs depending on the brand. The most notable decline came in our molasses brands, which seemed to have a slow start for the fall season towards the end of the quarter.

Early fourth quarter volumes are reassuring, however, and we expect the brands to make up any shortfalls in the next few months. We continue to gain volume on brands such as Accent and Underwood in dollar stores, helping overall tier two sales.

Tier three brands grew by 3.3% in the quarter largely due to the Maple Grove Farms brand, which had a very good quarter with maple syrup sales. Here again, consumers contradict the conventional wisdom that they are trading down everywhere. Maple syrup is the prototypical premium product, yet it grows consistently for us in virtually all channels. The brand was up almost 14% for the quarter despite an August price increase. That price increase contributed less than a third of the overall growth for the brand.

As I mentioned earlier, the price increases that we announced effective on August 1st for the maple syrup products and September 1st for many of our other brands went into effect on schedule. The third quarter benefit was limited, but we expect to see further positives. And, as intended, we believe that they should offset cost increases we will see as the year closes out.

It is too early to tell if there will be a volume effect from the price increases. But, in most cases, they were very modest so we are optimistic that volume losses will be minimal.

We have announced another round of price increases effective February 2nd in response to further industry wide cost increases, especially in minor crops and sweeteners. This increase is much more limited in scope in that seven of our 20 brands are involved. The August/September increase affected prices for 18 of our 20 brands.

Third quarter sales trends by channel followed the pattern of the last few quarters. The volume growth we achieved came from non-supermarket channels, especially mass merchants and dollar stores. Sales to Wal-Mart saw a double-digit increase due to expanded distribution complementing good growth in the other outlets as well.

Sales to grocery stores were flat, but sales by account within this channel did shift noticeably depending on the customer. In general, we are seeing the same sales trends with supermarkets as they are reporting publicly, although our sales tend not to be down as much as some of the struggling chains are reporting for same store sales.

Food service sales were up modestly but seem fragile. The general sentiment appears to be that any food service increase is a positive but that it may reverse at any moment. We continue to agree with the sentiment that the price of gas is an important factor here. So, the recent retreat on gas prices was encouraging, although that retreat now seems to be reversing.

Commodity and other crop cost increases began to have a noticeable effect on overall costs during the quarter, but their effect on margins was minimal due to pricing and the positive sales mix. Distribution costs remain stubbornly high and only declined very slightly even with oil dropped markedly during the quarter.

Fuel surcharges continued to run approximately 40% higher than the 2010 rate, increasing our distribution cost by over four-tenths of a percent of net sales so far this year. The increase has been softened by a reduction in mileage due to cost reduction efforts, but at current oil prices surcharges will continue to be a negative well into the first quarter of 2012.

We expect to begin seeing meaningful manufacturing cost increases in the fourth quarter as our commodity purchasing positions rollover and new costs on minor crops take effect. The increases are in line with our earlier projection of 1.5% of net sales on an annualized basis and, in fact, may come in slightly lower than estimated due to enhanced performance on cost reductions.

Cost reduction efforts are generating savings of over $8 million in 2011, holding net cost increases to the very modest 1.5% increase I just mentioned and insulating us from some of the very dynamic and uncontrollable cost elements like fuel oil.

Our entire Company, under the continuous improvement initiative, is working hard to identify similar savings in 2012 out of an opportunity pool of $15 million or roughly 4% of manufacturing and distribution costs. Costs for most crop related purchases other than maple syrup are fixed for at least the first nine months of 2012 and, in some cases, for the entire year. Again, these costs are in line with our earlier estimate of an additional 2% of net sales or about $10 million.

Packaging costs are projected to be flat overall for the next 12 months, as are manufacturing overhead costs.

SG&A expenses remain tightly under control, up very slightly in the marketing area and were the final contributor to our 7.7% EBITDA gain. As Bob related, our adjusted net income rose by 25.5% and adjusted diluted earnings per share rose by 25%. These are outstanding numbers in a very challenging environment.

Cash on the balance sheet rose by over $10 million from where it stood at the end of third quarter 2010. This cash gain, coming in in the very late stages of the seasonal B&G and Violet production cycles, is a testimony to the strength of the Company's strong cash flow generation.

Based on this performance, our Board of Directors decided last Tuesday to raise the quarterly dividend by 9.5% to $0.23 per share per quarter. We continue to believe that returning cash to our shareholders through strong dividends is a key component of B&G Foods total shareholder return.

We also used a modest amount of our cash to repurchase approximately 218,000 shares of common stock at an average price of $16.73 excluding fees. We will continue to watch the markets closely and judge what is the best use of available cash to maximize shareholder return.

And as I have stated in the past, we also remain committed to our acquisition strategy and continue to pursue accretive acquisitions when opportunities arise. Given our strong balance sheet, we believe our Company is as ready as it has ever been to execute an acquisition quickly and effectively.

Finally, based on our solid performance this quarter we are raising the 2011 EBITDA projection to range of $127 million to $129 million. At the midpoint of this projection, this forecast implies an EBITDA improvement of 8.1% over 2010, setting aside the $1.3 million one-time gain we experienced in the fourth quarter of last year.

It also implies a 6.4% EBITDA improvement in the fourth quarter, a forecast we believe is achievable. Producing a quarter with these results would cap another very good year for our business with excellent top and bottom line performance. Our employees have dealt with a wide variety of challenges in an outstanding manner so far this year, and the results to date certainly bear that out.

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

Thank you. (Operator instructions.) Reza Vahabzadeh with Barclays Capital.

Good afternoon.

Afternoon, Reza.

In the categories, Dave and Bob, that you have raised pricing, are you leading in those categories? Is the competition leading? Are you maintaining price gaps? Any color on that?

We seem to be leading. I have seen some price announcements recently from a number of competitors that indicate that they're following. The ones I've seen are in the November timeframe. So, I guess we lead the crowd by a month or two.

I see. And then, as far as elasticity of demand on the higher prices, it is too early to tell if demand would fall off for a while before adjusting to the higher prices?

It's absolutely too early to tell. It's only been three or four weeks. And on the factory order side, price increases tend to muddy the waters with inventory buy-ins and things like that. So, it's very hard to tell right now exactly what the effect will be.

Right. And then, when you are taking the price increases that you alluded to, how do you control retailers overloading on inventories before the price increase goes through?

Well, we do put limits on how much somebody can buy ahead of a price increase. And in a lot of cases, these price increases were not of the size that people were going to buy in. We're talking sometimes a few percent, and that's just not worth buying a lot of inventory for.

Got it. You were talking about your cost inflation outlook. And I wasn't sure if you were talking about the next 12 months as in 2012 or next 12 months from today.

The 2% that we referenced is 2012. The next few months is included in the 1.5% 2011 number.

I see. Okay. And packaging, you mention, is going to be --.

So, if -- excuse me. Go ahead.

No, you go ahead.

I said if you put those together from a dollar point of view, you're talking a two year total just north of $17 million in cost increases.

Right. And that includes the Canadian crop?

Yes, that includes -- actually, not so much the crop as the currency, the exchange rate. But, yes, that includes that. Now, 2012 is an unknown because we don't know where the dollar is going to be. And we assume there will not be a crop increase right now, given high inventories of maple syrup. But, that remains to be seen.

You never know, yes. And then, as far as packaging, it was interesting that you mentioned you expect it to be flat. Is this for cans as well as glass?

It's overall. There are some pluses and minuses there, but it's pretty much overall. Our purchasing group has done a really fantastic job of managing that to a neutral position.

Got it. Thank you much.

Thank you.

Sean Naughton with Piper Jaffray.

Hi. Thanks for taking my question.

Sure.

Just curious on the organic versus the acquisition revenue in the quarter and then kind of year-to-date. Can you give us an update on what those numbers are, and then also kind of the expectation for the fourth quarter in between those two?

Well, it's pretty much 50/50 between the acquisition and organic, and that's true for the quarter and for the year. Pricing has been a nonevent, actually slightly negative for the year, and pretty much very, very slightly positive for the quarter.

We'll rollover against the acquisition results a little more than halfway through the fourth quarter. So, it'll be more organic in the fourth.

Okay. So, a little bit more from the organic in the fourth quarter.

Yes, because the acquisition is going to tail off.

Fair enough. Makes sense. And then, on the hot cereal category, you had mentioned before this is one that you felt like some of the retailers weren't taking a sharp enough eye or a close -- kind of what was going on in that category. Do you feel like that people are starting to look at this a little bit more in some of the results that you had put up in getting a little bit better shelf space and allocation within that category?

Well, I think the last call we referenced the fact that it's just harder to get products on shelf. The categories aren't reviewed as often. We did not get Cinnabon on shelf nearly as quickly as we would have liked for that reason.

We're getting to -- like I said, we're getting to a 60% ACV number probably by the end of the year. But, we would have liked to have been there going into the early fall. So, it's certainly delayed. And what's the retailer reason other than much longer periods between category reviews, I couldn't tell you.

Okay, that's helpful. And then, on the -- just on your outlook kind of for the kind of 2012, do you think that the tier -- we should continue to expect the tier one and tier two brands to continue to accelerate faster than the tier three brands?

If we successfully do what we intend to do, yes, they will.

Okay, great. Thank you.

Robert Moskow from Credit Suisse. Robert, your line is open.

Hello?

We can hear you now, Robert.

Yes. No question at this time. Thank you.

Bryan Hunt with Wells Fargo Securities.

Thank you and good afternoon.

Afternoon.

I was wondering if you could just give us a little bit more clarity on the 2% inflation. Can you give us a couple of categories where you're seeing the largest amount of cost increase?

(Inaudible - technical difficulty) by what commodity you're talking about. I mean, we don't -- the largest thing we use is wheat. A few years ago we would have told you we used $10 million of wheat. Now we'll tell you it's north of $13 million of wheat. And a lot of that is due to the cost inflation that we're seeing there.

So, you've seen the wheat prices out in the marketplace. We eventually see those wheat prices. And our positions will roll into probably the maximum numbers in the middle of the year there.

But, that's a sizeable -- maybe almost close to a third of the increase on a year-to-year basis. Maple syrup contributes another bit of it because we're going to roll over another three, four months of higher costs from 2011 into the first part of 2012, then we'll have a hopefully even comparison there. We definitely are going to see about another $1 million of distribution costs out of fuel surcharges.

And then, you start drilling down to smaller pieces of things like sweeteners and corn. There's not a huge number on any of those things, but all of them are up dramatically. I mean, beans, for instance, we bought well for the upcoming season. Our bean cost is only up 40%. If you were to go out to the market today, it would be up 60%. So, it's those kind of things. They just pile up on top of each other.

Got you. And with regards to pricing, can you give us an idea of what your net price was over August and September, the price increase you passed through as well as the one that's kind of planned for 2012?

Again, depending on the product line category you're in, it varied from 2% to up to about 8%. Average was a little north of 2%. So, most of the stuff was down in the lower part of the increases.

We're actually seeing a larger percentage increase in the February one, not as a percent of the total portfolio but within the areas we're doing, because a lot of it tends to be focused on things that use sweeteners that have had very large cost increases. So, you're seeing mid single digit price increases there.

Okay, great. And you saved $8 million in efficiency initiatives this year. Is there an opportunity to do that again in 2012?

We hope so, yes.

Is that a reasonable range?

Yes, it is. I mean, we identify about 4% -- or we set ourselves a goal of about 4% of manufacturing and distribution costs, which puts you in the $15 million ballpark. That's the amount of active projects we like to have. If we can turn half of those or half of that amount into cost savings in a year, we'd consider we've done a good job.

But, those savings then net out from the increases that I mentioned. So, the 1.5% increase that I referred to in 2011 has netted out that increase. One way to look at it is that increase would have been double without that effort.

And then, Dave, my last question. When you look at your product pipeline for 2012 and the magnitude of it, is it similar in scope and scale as the one in 2011, or are you trying to introduce new products to kind of offset the cost increases that you're seeing?

Well, we're trying to offset the cost increases with the price increases and by honing our trade promotion and reducing expenses anywhere we can. The new products hopefully are additive, but to some extent they offset the erosion you typically see in a portfolio.

I mean, not every single thing you sell is going to stay the same or grow. Some things are going to decline. Part of why you do new products is to continue to move the whole mass forward even as a few pieces might fall off.

The product effort in terms of the dollar contribution we hope will be similar to 2011. I would say the amount of new products will be less so that we can focus on things that we think are going to be more successful and put more resources against those things.

Thank you for your time this afternoon.

You're welcome.

(Operator instructions.) Adam Plissner with Credit Suisse.

Hey, good afternoon. I'm just curious. It's difficult for you guys to talk about the customer reaction in advance of these price increases. But, maybe just looking at a historical perspective, have you been the price leader in the past? And maybe in context, if it turns out that there aren't -- there isn't a following and there's a customer reaction, what's typical in that regard, kind of thinking in a worst case scenario? Is there sort of a 10% volume reaction to that kind of scenario, and how big is the gap in pricing to the competition if they don't follow?

Well, we typically have not been the leader, I would say, in the past. I think we believe that we understand our cost structure better than we ever have before. We have a very long horizon on our cost structure, so we plan these price increases to time against cost increases and to produce consistent results and consistent improvement in the business.

I would argue that, to the extent you're seeing negative earnings results from other companies, they either chose not to do that or just did not do that and misstepped their price increases versus cost increases. I'd rather be where I am, frankly.

And to the extent that -- I think to the extent they don't want to continue to report negative, you'll see price increase out of them, be they somewhat lagged from where ours are. And that sets up a whole dynamic between our prices and competitive prices. And we're going to have to watch very carefully what goes on in the market in terms of elasticity and competitive actions. And we will respond as needed.

But, I'd rather be in a position where I've priced to maintain my business and then I have to tune it rather than trying to climb up a hill and out of the hole that we -- the kind of hole that we saw in 2008. I'd rather be here.

That makes sense. Then just away from that on the cost side, I was just curious in terms of managing some of the incremental costs, how dependent that is on your co-packing arrangements and sort of the make versus buy decision. Is the percentage that you're currently manufacturing in-house versus the co-packing arrangement, does that matter much as to your ability to manage those costs?

We don't think it does in general, because anything that's meaningful in the cost structure we have our hands in. So, if a co-packer is using cans, we're participating in buying those cans. If the co-packer uses commodities, we participate in setting up the buying for those commodities. Energy, same thing.

I mean, we're very active. We're very happy to use their expertise in manufacturing, but we're going to make sure that we're not put in a position by somebody else's management of major cost elements where we're going to have a negative effect. So, we are -- we got our hands in there.

Got it. And then lastly, I just missed what you said earlier in terms of one of the numbers I was jotting down. The $17 million you mentioned in costs increases, that was a total over a two-year period?

It's about $17 million, about $7.5 million this year and $10 million next year. Yes.

Right. And did you give an offsetting number in terms of the price increases that you've already announced?

The price increases are intended to offset all of those cost increases, if they go through completely.

Got it. Thanks, gentlemen.

You're welcome.

(Operator instructions.) We'll take a follow up from Robert Moskow.

I'm going to try to press the right button this time. So, all right. So, apologize for before.

There was some news that I saw that Unilever is probably going to sell a spice and seasonings brand in a auction process. It sounded like it was right in kind of the wheelhouse for the kind of brands you're looking for. Can you kind of speak to what you're seeing in terms of the bidding for kind of these orphan brands? Does it appear rational, or are you surprised by what you're seeing? And if not this brand, then other brands that are for sale.

Well, we have -- I don't have a very large sample, but I would say it's not irrational. I would also say that the multiples have tended to be higher than we've seen in a prior years. But, financing costs are probably lower than they are in prior years. So, the outcome is somewhat similar probably in terms of dollars financed at specific rates.

And can you speak to the degree of private equity that's involved in the bidding compared to prior years?

Again, very limited sample. I think it's less because I don't think there's a tolerance for the leverage that gives private equity the returns they're looking for. But, that's not always true. I mean, look at Pinnacle buying Birds Eye and things like that.

So, they're out there, probably not quite to the degree we've seen them before on some of these brands.

Okay. All right. Well, thank you very much. Have a good night.

Thank you.

Gentlemen, there are no further questions at this time. I'll turn the conference back over to Mr. Wenner for any closing comments.

Thank you.

Thank you all for joining us on the conference call. Again, we're very, very pleased with the quarter's results. We have managed our business in terms of price and cost to produce this kind of consistent improvement in the business. So, it's very gratifying to see it happen even though the world gyrates pretty wildly these days in terms of various costs.

Hopefully we can continue to do that in the future. That's certainly our intention. And we want to continue to give our shareholders the kind of returns that they've come to expect from B&G Foods.

So, thank you again for joining us. Good night.

Ladies and gentlemen, that does conclude today's conference. Thank you for joining.