B&G Foods Inc (BGS) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the B&G Foods, Inc. third-quarter 2012 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 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, Erin. Good afternoon, everyone, and welcome to the B&G Foods third-quarter 2012 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.

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 most recent annual report on Form 10-K, and subsequent SEC filings, 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, 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 EBITDA, adjusted net income, and adjusted diluted earnings per share. 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 will discuss the various factors that affected our results for the quarter, selected business highlights, and our thoughts concerning the final quarter of the year. Bob?

Thank you, Dave.

Net sales for the third quarter of 2012 increased $21.1 million, or 15.9%, to $154.2 million, compared to $133 million for the third quarter of 2011. Net sales of the Culver Specialty Brands, which we acquired at the end of November 2011, contributed $20.2 million to the overall increase for the quarter. For our base business, a sales price increase of $3.5 million, partially offset by a $2.6 million unit volume decrease, resulted in a net sales increase of $0.9 million. Net sales increased by $1.2 million for Las Palmas, $0.9 million for Maple Grove Farms of Vermont, $0.4 million for Ortega, $0.4 million for Accent, and $0.4 million for B&M products. These increases were offset by a reduction of net sales for B&G of $1.3 million and Cream of Wheat of $0.9 million. All other brands decreased [$0.2] million in the aggregate.

Gross profit increased $13.8 million for the third quarter of 2012, or 33.4%, to $55.3 million from $41.5 million in the third quarter of 2011. Gross profit, expressed as a percentage of net sales, increased 470 basis points to 35.9% for the third quarter of 2012, from 31.2% for the third quarter of 2011. The increase in gross profit, as a percentage of net sales, was primarily due to pricing gains of $3.5 million and a sales mix shift to higher-margin products, primarily due to the Culver Specialty Brands acquisition, partially offset by commodity cost increases.

Selling, general and administrative expenses increased $2.2 million, or 17.4%, to $14.9 million for the third quarter of 2012, compared to $12.7 million for the third quarter of 2011. This increase is primarily due to increases in marketing and selling expenses of $1.6 million, warehousing expenses of $0.3 million, professional fees of $0.2 million, and all other expenses of $0.1 million. Expressed as a percentage of net sales, our selling, general and administrative expenses increased 10 basis points to 9.7% for the third quarter of 2012, from 9.6% in the third quarter of 2011.

Operating income increased 41.5% to $38.3 million for the third quarter of 2012, from $27.1 million in the third quarter of 2011. Operating income, expressed as a percentage of net sales, increased to 24.9% in the third quarter of 2012, from 20.4% in the third quarter of 2011.

Net interest expense for the third quarter of 2012 increased $3.7 million, or 44.1%, $12 million from $8.3 million for the third quarter of 2011. The increase was primarily attributable to the additional indebtedness incurred during the fourth quarter of 2011 to finance the Culver Specialty Brands acquisition and an additional $0.8 million of amortization of deferred-debt financing cost and bond discount relating to the acquisition financing.

The Company's reported net income was $16.9 million for the third quarter of 2012, a 39.8% increase as compared to reported net income for the third quarter of 2011 of $12.1 million. Diluted earnings per share for the third quarter of 2012 was $0.35, a 40% increase as compared to diluted earnings per share for the third quarter of 2011 of $0.25. Adjusted net income for the third quarter of 2011 was $12.4 million.

For the first three quarters of 2012, reported net income was $49.7 million, or $1.02 per diluted share, a 30.8% increase as compared to reported net income of $38 million, or $0.78 per diluted share, for the first three quarters of 2011. Adjusted net income for the first three quarters of 2011 was $38.4 million and adjusted diluted earnings per share was $0.79.

Our EBITDA increased 37.7% to $42.8 million for the third quarter of 2012, compared to $31.1 million in the third quarter of 2011. EBITDA, as a percentage of net sales, increased to 27.8% in the third quarter of 2012, from 23.4% for the third quarter of 2011. Our EBITDA for the first three quarters of 2012 was $125 million, a 32.4% increase, compared to $94.5 million for the first three quarters of 2011. EBITDA, as a percentage of net sales, increased to 27.2% in the first three quarters of 2012 from 24% for the first three quarters of 2011.

Moving on to the balance sheet. We finished the third quarter of 2012 with $15.4 million of cash, compared to $16.7 million at the end of 2011. We finished the third quarter of 2012 with $713.4 million in long-term debt. Our net leverage, based on the midpoint of our 2012 EBITDA guidance, is at 4.1 times. Our expected cash interest expense for 2012 is approximately $43 million. Our expected cash taxes for 2012 are approximately $21 million, and our capital expenditures for 2012 are forecasted at between $11 million and $12 million.

Earlier this week, our Board of Directors increased our dividend rate, beginning with the quarterly dividend to be paid on January 30, 2012 from $1.08 per share per annum to $1.16 per share per annum, a 7.4% increase. Based on our current share count, this equates to $61 million of dividend payments per year in the aggregate.

On October 9, 2012, B&G Foods completed an underwritten public offering of approximately 4.2 million shares of common stock. The proceeds of the offering were approximately $120.3 million, after deducting underwriting discounts and commissions and other estimated offering expenses. We expect to use the net proceeds of the offering for general corporate purposes, which may include among other things, the payment of all or a portion of the purchase price and related transaction costs for the New York Style and Old London brands acquisition, or any future acquisitions, and the repayment or retirement of a portion of B&G's long-term debt. Following the offering, we now have 52.560765 million shares of common stock outstanding.

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

Thank you, Bob. Good afternoon, again, everyone.

The third quarter was another quarter of significant gains in our operating results, as can be seen in the numbers Bob just cited. The Culver Specialty Brands acquisition continued to perform as expected and drove most of the 15.9% gain in net sales for the quarter, as well as our 39.8% gain in net income and 37.7% gain in EBITDA. For nine months, the acquisition has added $65.3 million in net sales; and at this point, is on track, given seasonality, to at least meet our previously announced guidance of $88 million in net sales. Given that new products and new distribution are now entering the market, we are hopeful that we will improve on that number by year end.

The quarterly results also reflect continued success with our price increases announced in September 2011 and, more modestly, in February of this year. As with last quarter, price increases are tracking slightly ahead of our projections and contributed approximately 2.6% in net sales gains on our base business for the quarter and for the first nine months.

Pricing, combined with cost reduction and a favorable sales mix, raised the margins in our base business again this quarter, adding to the margin improvement realized from the Culver acquisition. Given the pricing momentum we saw in September, it is realistic to expect that we will see additional pricing gains in the fourth quarter at perhaps 0.5 the level so far this year, as we lap the timing of last year's increases. This, combined with the momentum we saw building in the base business in the third quarter, makes us more hopeful that the fourth-quarter sales increase in the base business will go beyond the 0.7% increase seen in Q3.

As I mentioned a moment ago, pricing, cost reduction efforts, and success with our tier-based system of managing brands continues to expand margins in the business. EBITDA margin in our base business grew by 200 basis points in the quarter and by 70 basis points so far this year. Tier I brands saw 1.3% growth in Q3, led by a very strong quarter for Las Palmas and solid growth in the Ortega brand. Tier II brands grew by 1.4% overall. Performers included the seasoning businesses in this tier, which benefited from the introduction of Crock-Pot slow cooker mixes, our molasses businesses, and the Emeril's brand. Tier III sales were down slightly, due to an exit from a segment of B&G Food Service business and the timing of Sa-son export orders.

Overall, brand sales in the base business firmed, making us optimistic that momentum is building going into the fourth quarter, and that we may begin to see volume improvement in the quarter. In fact, as I referred to in the last call, our base business volume decline remains very concentrated in certain specific brands and customers. As I mentioned a moment ago, we exited a piece of Food Service business with the B&G brand in the last quarter of 2011. That business exit accounted for 0.5 of the volume decline in Q3. The good news is that this should have a minimal effect on Q4 sales, as we lap the exit timing.

The remainder of the decline is primarily tied to weak sales to wholesalers, who supply several struggling grocery chains. The effect of weak retail sales in these customers is compounded by the resultant inventory reductions. We believe that we have seen the final effects of inventory reduction and should be able to offset any further retail weakness at these customers with stronger sales in other grocery accounts. It's important to note that beyond these two factors, the business shows good signs of firming, and we expect the trend to be bolstered by new product activity that I will discuss in a moment.

Those comments lead me to a review of our base business sales by channel, where the trends remain very much the same as they have all year. Sales to supermarket customers, roughly 50% of our business in Q3, were down 2.1% for the quarter. As I mentioned earlier, this decline was very specific to several chains, and sales to the large majority of customers in this channel were flat or positive. The expectation for fourth quarter is that the declines will recover somewhat, and we will continue to see sales lift at the remaining supermarket chains.

Special markets, which includes mass merchants, club, dollar, and drug customers, roughly 25% of our business, saw a 9.7% sales increase. This was driven by excellent results at Walmart and Target, where our points of distribution continue to grow nicely, and by a nearly 80% increase in sales to dollar stores. You may recall that dollar store sales were flat last quarter. That result and this quarter's surge reflect the volatile nature of the dollar store business.

Rotational placements can swing the business by quarter by quarter; and new distribution, typically, has a very significant pipeline effect on sales. We continue to build our dollar store business, on a very small sales base still, in an attempt to follow consumer buying patterns. Over one-third of our brands now have some distribution in one or more dollar store chains, and that presence is growing.

Finally, the Food Service channel, nearly 20% of our sales, showed signs of revival in Q3, growing by just over 1%. This figure is net of the B&G loss, reflecting a stronger performance than the total increase would indicate, and reason for optimism for this channel's performance in the fourth quarter.

I have made several references to increasing optimism about volumes going forward. Part of that optimism stems from a belief that the overall food industry trends are improving, and part of it comes from building momentum in introducing new items and slotting new and existing items in our portfolio. Our success at mass merchants reflects this trend. Points of distribution on our base business are up over 20% at both Walmart and Target. I have already discussed the growth at dollar stores.

This increase in momentum is now building at supermarkets as well. Our Crock-Pot line has been accepted into broad supermarket distribution and is on track to do $1 million in business in the latter part of 2012. Kroger has accepted three additional Cream of Wheat SKUs, all successful items that are finally in the nation's number-two retailer. The Emeril's line recently added two new pasta sauces, Alfredo and Four Cheese, that are gaining broad acceptance. And, Ortega is launching value packs in both taco shells and taco kits to appeal to today's cost-conscious consumer.

In the Culver line, we are launching over 30 products in 5 brands, including 10 new Mrs. Dash items, aimed at a different usage and form than its traditional Mrs. Dash products. This is just a sampling of the efforts we are making throughout the portfolio to return our business to positive volume growth. Having said that, we are doing so in the context of growing, cost effectively. We do not tout B&G Foods as an organic-growth investment. Our above-average growth comes largely from solid, accretive, cash-efficient acquisitions that we manage for, on average, modest cash-efficient organic growth.

The cost outlook for B&G Foods remains a non issue for the foreseeable future. Pricing has offset the cost increases that we expected in the latter part of this year, as purchasing positions rolled over into higher cost on some commodities. Our cost reduction efforts continue to whittle away at the total cost increases that we would have, otherwise, seen this year and next. Active projects totaled just under 4% of our manufacturing and distribution costs and have reduced potential cost increases by over $9 million so far this year, roughly 2% of total cost. This is part of the reason margins in the base business have improved, as we realize both price gains and chop away at cost increases.

Our outlook for next year continues to be an expectation of flat costs throughout most of the year, pending the outcome of next fall's crops. As I mentioned last quarter, we have commodity positions well into 2013, and in some commodities such as corn, throughout the entire year at costs that are typically favorable to this year's costs. In general, the, quote-unquote, non-commodity annual crops in 2012, beans, cucumbers, peppers, and tomatoes, did not see the drought effect that corn and wheat saw. And, prices have remained flat, and even decreased in some cases. All of this makes for a very stable cost outlook in 2013.

We remain committed to our approach of covering commodity costs by maintaining a 12-month window on a large majority of our purchases, and even extending beyond that, when we see favorable opportunities. It is very hard to argue with the success this approach has brought in controlling costs and providing ample warning for pricing, as needed, to offset downstream cost increases. We remain convinced that managing to a known-cost picture is the best approach for the business. It is also hard to find the excess agricultural capacity that would allow you to argue that cost could decline meaningfully in the right circumstances.

Distribution expense is the only other meaningful operational expense we have; and here, we have limited control over cost. Our distribution cost, as a percent of sales, was down 10 basis points in the third quarter, despite higher fuel surcharges, reflecting the dilutive effect of the Culver acquisition. Surcharges are tracking roughly 10% higher than last year, right now, which could portend a slight, but manageable, cost increase for next year for this cost component.

Bob mentioned the stock offering that we completed earlier this month. Let me add a bit of color to his comments. As anyone who has followed our Company for a while knows, our ability to source, purchase, and integrate accretive acquisitions has created tremendous value for our shareholders. The point of the offering was to reposition our capitalization in anticipation of the next Cream of Wheat, Ortega, or Culver opportunity. Before we purchased the Culver Brands, our leverage was nearing 3 times EBITDA. After the acquisition, it was closer to 4.5 times. With this offering, we expect the year to end at approximately 3.4 times leverage, a very manageable number in terms of running our business and financing another Culver-sized acquisition.

In fact, given our larger EBITDA base at 3.4 times leverage, another Culver-sized acquisition would bring us back to roughly 4.5 times leverage. Keeping our leverage within those bounds is important for several reasons. The first is that it facilitates a quick transaction, which is extremely important to a large strategic seller, whose primary concern is speed and certainty of closing the transaction. The second important consideration is the sensitivity of our equity investors to leverage. We know internally that our debt is easily managed, given the cash efficiency of our business, but we also understand that equity investors have an inherent concern with leverage beyond a certain level. The recently completed stock offering addresses both of these needs.

As far as the M&A outlook goes, the opportunities are shifting somewhat as we approach year end. Earlier this year, there was a flurry of properties coming from private equity and/or private ownership. That flow appears to have slowed as we have gotten closer to year end, which is not unusual. With the recent reports that the Breakstone and Skippy brands are for sale, we are seeing an increase in activity from large food companies. All the more reason to have our capitalization primed and ready should the right opportunity present itself. Having said that, as we examine acquisition candidates, we remain highly selective in terms of our requirements for a fit to our business and a strong free cash flow outcome.

In an anticipation of questions I often receive during the Q&A portion of these earnings calls, I remind you that our Company policy is to not comment on any specific acquisition opportunity, unless and until, we reach an agreement with the selling party. In the meantime, we do anticipate closing the acquisition of the New York Style and Old London brands from Chipita America by year end, and perhaps, as soon as the end of October. This acquisition brings us a stable grocery snack business with the Old London brand, and exciting prospects in snacks in the deli section of the supermarket with the New York Style brand.

New York Style is primarily a bagel chip business today and essentially the same business we sold in 2001. The opportunity that we see is that the deli-based snack business has expanded significantly beyond what was 10 years ago, an order of magnitude greater than the New York Style brand. New York Style has not participated in that growth for a number of reasons, but we believe it represents a significant opportunity. In the intervening years, issues that once existed, such as a diverse and antiquated production facilities, have been resolved. And, we are buying a business with a state-of-the-art manufacturing facility that will cost-effectively support growth.

This acquisition is somewhat different for us in that it is focused more on growth prospects than most brands we buy. And, we do not discount competition, which includes Frito-Lay, with the Stacy's brand; and now, Snyder's-Lance, with Snack Factory. By buying this business at a reasonable price, we feel the risk is worth the potential reward. We estimate that 2013 net sales will be between $45 million to $50 million and EBITDA $8 million to $9 million. So, the margins within the base business are healthy, as is.

I'm very pleased to be able to close the comments portion of the call by highlighting the announcement, just a few days ago, that our Board of Directors increased the quarterly dividend by 7.4% to $0.29 a share. This decision reflects the Board's continued confidence in the Business's ability to reliably generate strong free cash flow and comfortably service our needs for CapEx, the interest payments on our debt, and the dividend, while still putting nearly 25% of our EBITDA on the balance sheet as cash.

Our model of solid, accretive acquisitions, management of the business for cost-effective organic growth, and focus on free cash flow have created extraordinary shareholder returns. And, we look forward to continuing to execute that model in the future. We are narrowing our previous EBITDA guidance to a range of approximately $168 million to $170 million for the full year, the higher end of our prior guidance.

At this point, we would like to open the call up to questions. Erin?

(Operator Instructions)

Andrew Lazar, Barclays.

A couple of things for me, thanks for some of the additional clarity on some of the impacts that you are seeing on volume in the quarter. It sounds like you are starting to see some of the similar volume firming, again, knowing that it's going to be a gradual recovery that a number of others in the packaged-foods base have more recently talked about. With respect to the third quarter though, I think on the last call you had talked about the possibility volumes could firm a bit more in this third quarter and be flattish or so. I understand what the issues were; but I'm curious, did something change, or was something more difficult in the quarter itself relative to what you had originally thought?

Nothing really changed. The negatives were what we expected them to be. The lift from the other part of the business, in terms of offsetting those negatives, didn't come in as strongly as we thought it would. We, basically, halved the volume decline from second quarter into third quarter, so we look at it as we got halfway there. Whether that means the glass is half full or half empty, I'm not sure. It was definitely a positive trend; and as we look at fourth quarter, we know we're going to roll over against some of those negatives in the fourth quarter. Hopefully, the positives will continue to increase, and we will have a better outcome in the fourth quarter.

Okay. With respect to gross margin, in the second quarter I think the Culver acquisition was the majority of that 225-basis-point improvement in gross margin year over year. This quarter, obviously, it was nearly double that. You had a similar amount of pricing, as you talked about, so I'm trying to get a sense of, was Culver that much more of a positive mix impact to gross margins? Or, was it pretty similar; and therefore, the base business dramatically improved its gross margins year over year? Yet, pricing was essentially the same on the base business. Trying to get a sense of what drove that -- let's call it this way, the huge sequential improvement in gross margins between the second and third, and what that would mean for the fourth quarter as it relates to your full-year EBITDA guidance?

Sure. Culver was very similar. That really wasn't the factor, except for whatever dilutive effect it has on a few of our costs. Beyond that, though, it's really all about sales mix. The margins in the quarter were stronger because we had some very nice lifts in things like Accent, that have very, very good margins. The third quarter tends to be one of those quarters where the higher-margin brands do sell well, and we saw more of that in this third quarter than we did in the prior year.

Having said that, I caution everybody about the margins in the fourth quarter because the mix reverses a little bit. If you look back, you will see our fourth-quarter margins tend not to be as strong as the third quarter because we are selling more of the lower-margin products in the fourth quarter. You get more of that commodity, if you will, kind of sales as people eat at home more in the fourth quarter. But, it really is more about sales mix than anything else.

Okay, that's helpful. It would seem -- even if margins, in an absolute sense, aren't what they were in the third, even if they're closer to what they were in the fourth, it would seem like we should get a reasonable amount of visibility from an EBITDA-generation standpoint, right, as you go towards the end of the year?

Yes.

As you look out to 2013, you've talked a lot about your cost outlook and the pricing outlook. Are there any -- volumes will be, obviously, what they are, depending upon how some your new products and things play out, but are there any other more sizable either headwinds or tailwinds that could affect '13 EBITDA that would be harder for us to see? Discount rates are really low; some companies have talked more about pension expenses. Things along those lines that are less clear to us.

There really aren't. Some people like to describe our business as boring, except for the acquisition activity. And, to some extent it is in that it is very predictable. The postures we have taken with commodities have made it even more predictable than it was in the past. I know pension is an issue for some other companies. Our pension plans are in very good shape, from a funding point of view. There is really not any significant wild card out there that would swing the base-business results, one way or another, that I can see.

Okay, thanks.

Then, very last thing for me, I appreciate it. Your comment on the M&A environment broadly, and the pipeline was interesting how it shifted from earlier in the year, more private and private equity-related sales, now more to, perhaps, more assets from some of the larger branded companies. I assume your comment was going beyond the one or two assets that, as you referenced, have been referenced in the news as potentially being for sale, that perhaps there's more out there, at least pipeline wise, that you are at least seeing. Is that a fair statement?

Yes, that is a fair statement. As I said in the comments, it's not unusual to see that private-equity and private-offering pipeline dry up towards the end of the year because people want to get the deals done by the end of the year. And, when you get into timing, like right about now, that is highly unlikely, if you're sitting some out there, right now.

What you think is driving the increase in the branded-company, potential-asset-sale camp? Anything in particular, or because it is hard to --?

That's a great question. I wish I knew the answer to that question. It really -- to me, it's a unique situation, company by company, based on whatever strategic decisions they make. You could argue Unilever is certainly more free to do these kind of things because they may -- I don't understand their tax consequences, but they don't -- I don't think they face the same tax issues that a US company faces in trying to dispose of a brand. In the case of Kraft, I'm a little surprised that they're moving on anything right now; but clearly, that was part of their planning as they split the company.

Got it. Okay, really helpful, I appreciate the color, guys.

Bryan Hunt, Wells Fargo Securities.

This is Kevin standing in for Bryan. A couple of questions. You mentioned that your outlook for volumes has turned favorable, especially as it relates to supermarkets. Is it fair to assume that these retailers are conducting more -- are actually conducting category reviews again? You had mentioned in the past that that's one of the reasons why some of your newer products have not been getting onto the shelves.

Certainly, in the case of Cream of Wheat, we saw a category review done that was not done for several years, and that's why we have the distribution gains we have. It really is -- it's not unique to the struggling retailers. Retailers, good and bad, are stretching out these category reviews, in general. You really need to jump on them when they happen, and there has been a flurry of them, here, recently. I wish they would put out a schedule, then we would have some idea what is going on. It pretty much -- you need to be ready when they decide to review, and move when they do. But, it's not predictable.

Okay. As we look out into 2013, is there any sensitivity in your forecast, assuming we go over the so-called fiscal cliff? What would that due to volumes, in your opinion? How would that affect your outlook? You mentioned that your costs are locked up, and that is a good thing. But, what are your thoughts, as a management team, about the potential impact for going over the fiscal cliff?

Wow. You have to think that that's going to have a negative economic impact. And, every other time the economy has turned bad, it has actually been a good thing for a business like ours. People tend to cook at home more, so you see sales of everything that is connected with cooking at home go up. Now, in the last 12 months we have been surprised, as an industry, that the consumer, as they are pressed harder, has evaporated in terms of growing declines in demand. I would hedge any guess based on that very unusual occurrence. But as I said, in general, bad economic times mean that people cook at home more and buy more of the kind of products that we sell.

Got it, okay. Two more questions. One relates to inventory. I know that Q3 is typically a seasonal peak for your Company. Given the seasonality of the business and all the acquisitions you have made and will close on, what is the new baseline, in your opinion, so we can model out working capital usages, or sources, through time?

Pretty much the increase you have seen year over year through September is about where that increase will be toward the end of the year, a little less than that. We're up about $12 million, $13 million this September versus last September; 50% of that increase is the Culver piece of business. This doesn't include the snack business, that will add about another $5 million of inventory, on top of that, before year end. Then, you had -- there's been better produce seasons; so I would look at where we are year over year through September, and apply that to the end of December as a good baseline, plus about $5 million for the snack business that we'll be closing on here this -- toward the end of the year.

Great, okay.

Lastly for us, regarding the use of proceeds from the equity raise, thank you for the color. You have an equity call on your high-yield bonds that expires in January. You can call back the 35%, that's about $120 million. Is it fair to assume, given your comments about deal activity in the space, that we could see some movement before this call expires on the acquisition front? Otherwise -- what are your thoughts with regard to the bonds versus drawing down the revolver to --?

I think we're looking at what the best use of capital is for us right now over the next few months. We have time to make that decision. We certainly, hopefully, will be closing on the snack deal, which is $62.5 million, here in the next few weeks to a month. Certainly, before the end of the year, but hopefully, a lot sooner than that. That will use some of those proceeds and/or revolver we'll use some of those -- will pay for that.

I think we're looking at the best -- at the end of the day, what ends up setting us up for going forward and improves our P&L and improves our earnings per share. So, we're looking at various options right now. I don't think we've made the decision on exactly how to use the $120 million today.

Got it. Thank you for your time.

Reza Vahabzadeh, Barclays.

Dave, and Bob, is this acquisition of New York Style, is this a different rationale and philosophy of acquisitions than prior acquisitions, which have been successful, of course?

It is to some extent. The portion of the business that's Old London is a stable, grocery-shelf business that has good margins. And, we are not looking at that as a set the world on fire kind of business. It's more typical of the businesses we have today. As I said in the comments, the deli snack part of the business is really where we see a totally different opportunity, and we saw an economical way to buy our way into that opportunity and to take on that challenge. As I said, it is really a different world than it was some 10-plus years ago when we sold that business. It was a pretty sleepy section of the supermarket; not a lot going on. New York Style was actually one of the biggest snacks brands in that section of the supermarket.

Today, New York Style isn't much different than it was then, but the deli snack part of the business is 10-times plus what was back then and growing very rapidly. We see the ability here to grab onto a business that we think we understand, having owned it once upon a time, with bigger opportunities. And, a lot of the issues that we saw in the business back then, such as need to consolidate manufacturing facilities, upgrade equipment, and things like that, all those needs really taken care of by prior owners; and really, also, presenting an opportunity in terms of what you can do with the business.

Yes, it is a different business, but it is an exciting business. We are hopeful it is more of a growth play, and -- not without its risks in terms of competition, though. We will see how it works out.

Right. I recall when you owned it last, one of the challenges you had was that it -- you had to sell to a different buyer; really, a different part of the grocery category-management management. And, that represented a different channel because you had to, really, to have different salespeople for that. Is that still the case?

Yes, you remember quite correctly. The business comes with a self-contained sales force, however, that does address that channel. And, that's another reason we like the business. There is no cost addition from an infrastructure point of view to address the sales needs of the business. The sales force is there, and we think we can manage that at least as well as the existing owner.

Got it. As far as the base business, did I hear you correctly that for the base business EBITDA margin was up 200 basis points in this quarter and 70 basis points year to date?

That is correct.

Okay. What about the Culver business? How did the Culver business do against its own performance in the prior year, in the third quarter and year to date?

The business is fairly flat. We had a little bit of a blip on the export side. There's still a little bit of disruption in Canada out of the change in distribution that got finalized in August. But, the business was fairly flat for the quarter, still doing very well considering the declines it was having last year. And as I said, we are really hopeful about the fourth quarter because we have launched a pretty good array of products into a variety of distribution points.

Got it. Your comments on the M&A environment, does that suggest that, given the actions by some players out there that are all in, you would generally expect more activity, in general, in the coming 12 months? Whether or not you might participate, might be a different issue?

You get that sense. You do get the feeling that there's going to be more opportunities out there, and your last comment is well taken. That doesn't mean we are going to buy them, they have to be the right opportunity for us.

Got it. Thank you much.

Karru Martinson, Deutsche Bank.

When we look at some of the brands here like Cream of Wheat, I was wondering how much of the younger flavors, Chocolate and Cinnabon, have we rolled out? Are we in full distribution with that, now?

No, we are not. Chocolate, certainly, is not; and that's because it has been introduced within the last year, and the category reviews have not occurred at a good number of retailers. We have gotten it in where the reviews have taken place. Cinnabon's probably double the level that Chocolate's at; but again, not in full distribution yet.

It's trench warfare on these things sometimes, in terms of getting it in. Now, we have gotten it into alternate channels very well, mass merchants and dollar stores and drugstores and all that. But, the supermarket industry is a little tougher, in terms of getting it in. The good news is, it's a very successful item. We've also put out a variety pack that includes the Cinnabon product, and that is getting into further distribution.

The younger flavors are getting out there. We're grabbing every opportunity we get to put them into distribution. We have just come out with a new shipper that is, basically, we are selling a two-pack package of these new flavors as a trial size that will be going into everywhere that there is distribution. It let's you -- the two-pack package, basically, lets you, for $0.99, buy a couple of these packets on a trial-size basis. Hopefully, that will get some sampling, and people try them and like them. And, we continue to try and pull younger consumers into the franchise.

When we look at the dollar channel where you guys are growing, where are we today? I know you said Specialty is around 25%. How much of that is dollar, today? Where do we think we could take that distribution?

Special markets is about 25% of our sales, dollar is about 2% of our sales in the third quarter.

Okay, so --

Where can it go? That's a very hard one to answer. I am delighted with the progress we're making because dollar is a very broad distribution channel, but not very deep, in terms of the size of the stores and the number products that can go in the stores. And, I assume the rest of the industry is trying to get in there as well. I think we have a bit of a leg up on people in terms of our speed to market and our ability to put out new products to appeal to this channel. But, I would expect competition will rev up as time goes by. So, I'm not sure where it can go. All we know is that consumers are shopping there more, and we are making our best efforts to get the products there when they show up there.

Okay. Lastly, as you guys have done the acquisitions here, or are about to close the acquisition here, to move into the deli, does that change, perhaps, your philosophy when you look at new brands? Are you going to look more into the deli category, or is it still really finding that right fit for yourself, overall?

The first and primary -- the first, second, and third priority is to have the brand be the right brand in terms of fitting the profile that we operate well within, in the Company. The fact that we are going into delis snacks broadens the ability to source these brands, just as the household entry broadened our selection of things that we have to choose from. So, it definitely adds breadth to the opportunity, but the opportunity still has to be the right opportunity.

Thank you very much, guys, appreciate it.

Ed Aaron, RBC Capital Markets.

Wanted to circle back on the earlier comments about mix in the quarter. It sounds like it was a nice contributor to your margins. The Tier I brands were a somewhat smaller driver of your sales in Q3 than I think they were in prior quarters, and I've generally associated those brands as being mix and margin accretive. Is that a false assumption on my part? Because, it is hard for me to understand why you would have had a nice mix benefit without those brands growing faster.

It is only incorrect in that there are actually some brands in Tier II that have better margins than Tier I, and that's for several reasons. Accent is a Tier II brand; it has wonderful margins because it's -- number one, it is in the seasoning category; but number two, it has better margins than some of the Tier I brands because we are not investing in an Accent product like we are investing in a Tier I brand. When you look at P&L, if we didn't invest anything in Tier I and left it where was, it might have better margins than Tier II, overall. But the fact is, we are trying to drive growth in these higher-margin brands, and the investment is pulling those margins down some as we make that investment, at least temporarily.

So, it is a mix and match kind of a thing. Sometimes, Tier II brands actually have a better margin than Tier I brands. I would also note that the mix shift, in terms of favorability, reflects the fact that our sales decline was a lot in B&G, which is a Tier III brand and has lower margins than Tier I and Tier II. So, you have sold less of the lower-margin brand and more of the higher-margin brands, be they Tier I or II.

Okay. As a follow-up, thinking about Q4, you do typically have seasonally lower margins, Q4, Q3; but looking back, you seem to be lower by the magnitude that the guidance implies. Is there anything unusual that might rake against you in Q4 versus a typical year?

The only factor that's different in Q4 is we do have a number of marketing programs laden with couponing and things like that, that will raise marketing spending in Q4, better part of $3 million. To the extent those drive the sales number, that's great, and it may not be dilutive to the margins. But, if they don't drive a commensurate sales number immediately, then that may be a factor.

That is $3 million of an increase on a year over year basis?

That is correct, yes.

Great, thanks.

Robert Moskow, Credit Suisse.

Maybe you can help me on the last point, the $3 million incremental, how much of that is above net sales? And, how much of it is within SG&A?

Pretty much one-third of it is in net sales and couponing, and two-thirds would be in SG&A.

Okay. Then, when I am trying to model out SG&A for fourth quarter, you will probably have a stub from New York Style and Old London. Let's say it closes in the middle of the year -- well, I guess as an ongoing basis, how much SG&A should we add on an annual basis for that acquisition? Then, I'm also going to ask about what does it do to gross margins?

The EBITDA margin on that business is around 20%. The gross profit margin on that business is lower than our typical gross profit. It's around 25%. There is not much in between the gross profit and the EBITDA margin, so it's about -- it's a little over 5% SG&A.

Okay, got it. Thank you for that. Okay, I guess that solves that. So, you're not going to comment on your interest in peanut butter, today. But I will say, peanut butter and bagel chips, fantastic snack.

(Multiple speakers) peanut butter and Polaner preserves.

Don't forget that. That leads to my last question, then. You mentioned you have a sales force, now, that is focused on getting it into the deli section. Is there anything else that they can sell, within your portfolio, to that deli section? Pickles or peanut butter or jelly?

They're really isn't. We sell Polaner spices into the deli section of the supermarket, or produce section of the supermarket, depending on the retailer. We do that today, and they may be able to bring a little leverage to that. But, no, there's not a whole lot else that is appropriate to sell into that section of the supermarket.

Okay, got it. Thank you very much.

Phil Terpolilli, Longbow Research.

Thanks for all the color, today. Two quick questions at the end here. With Cream of Wheat, it still seemed pretty weak in the quarter. I know this is out of the peak season, but there was some distribution gains, so trying to see what's going on there? If you've seen any recovery so far in 4Q? And, what you think about the brand, going forward?

The weakness in Cream of Wheat really was not in the grocery retail, per se, part of the business. A good portion of it was timing of rotational events at dollar stores. We had some events last year in that quarter that did not repeat in the third quarter. And, I believe a number of them are going to happen in the fourth quarter, instead. Another big piece of that was export business, where we reformatted the export product that we ship into Mexico, and we changed the distribution in Canada. And, both of those pieces of business were a little soft as a result.

Okay, that's helpful. One follow-up, if I could. We talked a lot about distribution gains, pretty impressive today. With the Chipita acquisition coming up, is there a potential for distribution gains there?

No, it's really a different part of the supermarket, and we don't see a lot of opportunity there. There's -- it's funny, there is a sensitivity -- supermarkets, and managers within supermarkets, tend to be pretty territorial about putting a grocery product in produce, but the grocery guy still get the ring and the credit for the sale and vice versa. So, there isn't a lot of cross roughing of the products.

Okay, that's helpful. I appreciate it, thank you.

Katya Voronchuk, Sidoti.

Quick question. I understand packaging costs are up a little bit. Will that have a visible impact on your gross margins in the coming year?

No, there is a slight increase in glass costs. Everything else seems to be fairly stable. All of that is comprehended in the comments that I made about overall costs, which we expect to be flat. Right now -- and, I'm hedging a little there because, right now, they are slightly favorable.

Okay. Can you comment about potential cost synergies from your latest acquisition?

There may be some distribution advantages. As we add volume into our system, we tend to see some cost dilution; but by and large, this is a pretty self-contained business, unique manufacturing, unique sales. Not a lot of synergies with the existing business, but all of those costs self-contained in the P&L we're buying.

Okay. And, last question. Have you observed any price increases among your direct competitors so far? And if yes, in which categories?

Really haven't seen anything in terms of price increases in the last six months, at least.

Okay, thanks for taking my questions.

Sean Naughton, Piper Jaffray.

Quick question for you on Mrs. Dash. Sounds like there's some new products coming here. How has that been performing, to your expectations? I know that was a nice brand inside of the Culver acquisition.

It actually performed very well. We saw that the business had a little bit of a downdraft throughout the Culver portfolio as we were buying it. So, for it to snap back to -- actually, sales in the first half were up a little bit and fairly flat in the third quarter. For it to snap back like that, usually it takes us a good six months to stop a decline in a business, so we were very pleased at that. We see opportunity in, really, every brand in the portfolio we bought, except for CleanGuard, which is literally $200,000 in sales and not getting a whole lot of our attention. It is pretty exciting. We have over 30 products launching over the other 5 brands; and now, we will see how well they perform as they get out there.

On that front, on the -- I think you said 10 different -- 10 new products, essentially, coming out from Mrs. Dash. Where can we expect to see some of those? Where are those going to be trialed, initially?

We usually are very successful in quickly getting them into some mass merchants and getting them into places like Wakefern, which is close to home. I know HEB is another one of the retailers that's already accepted some of the line extensions. Frankly, we're out there presenting them right now, and I can't tell you a lot of other specific retailers, right now.

That's fair. Lastly on Stacy's, how has that particular brand -- I know the deal is not closed yet, but how has the product been performing over the last couple of years, given the increased competition that it has been up against in the category?

I'm not sure which product you mean.

Primarily, the bagel chips that are out there and inside of the Chipita products (multiple speakers) New York Style.

There's been a little bit of (multiple speakers), but the distribution is very solid, still. They have maintained a lot -- if you go into grocery stores and go to the deli section, I have commonly seen the bagel chips there. They are still there. What you need to do is execute on display activity in this particular part of the business, though.

The deli section is all about the captive audience that's there buying the prepared foods or the cold cuts or whatever you are ordering and putting product in front of that captive audience for them to buy. Stacy's and Snack Factory have done a very good job on executing that. This business, not so much, and that is part of the opportunity we see. This business has a pita chip; Stacy's has a pita chip. Stacy's out sells them, probably 50 to 1, because they really haven't made it a point of emphasis. We need to take this business, and fish where the fish are. And, execute well at retail, and we think we can have an impact here.

Fair enough. Lastly, Bob, I don't know if you updated the CapEx and cash taxes for the full year?

I said in the remarks where our cash taxes will be, which is $21 million for the year. And, CapEx is $11 million to $12 million. The acquisition adds about $1 million of cash taxes and upwards of $1 million -- because it's a large facility, well capitalized. We're going to spend probably upwards of $1 million more in CapEx on an annual basis. New CapEx will be $12 million, $13 million annually, but cash taxes only moved up $1 million. So, it is very cash accretive to us.

Got it. Thanks for taking the questions, and best of luck in Q4.

That concludes our question-and-answer session. I would like to turn things back over to Mr. Wenner for any closing or additional remarks.

Thank you, Erin.

Thank you for joining us. We appreciate the interest in the Company.

We're certainly looking forward to the fourth quarter. There's a great deal of promise out there, and it's nice to see volumes increasing in the industry. We never saw the decreases everyone else saw. But, we do expect to see the increases as they occur; continue to execute on the Culver Brand; and bring this new acquisition in, integrate it, and execute on that acquisition.

We have great prospects for the Business in the fourth quarter and going into 2013 and look forward to making them happen. Thank you.

Once again, that concludes our conference. Thank you all for your participation.