B&G Foods Inc (BGS) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to the B&G Foods Incorporated first quarter 2013 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, and instructions will be provided at that time for you to queue up for questions. I would now like to turn the conference over to Mr. David Wenner, Chief Executive Officer of B&G Foods. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to the B&G Foods first quarter 2013 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 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 measure, EBITDA. A reconciliation of EBITDA to the most directly comparable GAAP financial measure is 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, selected business highlights, and our thoughts concerning the remainder of 2013. Bob?

Thank you, Dave. Net sales for the first quarter of 2013 increased $13.9 million or 8.8% to $171.2 million from $157.3 million for the first quarter of 2012. Net sales of the New York Style and Old London brands which we acquired at the end of October 2012 contributed $11.3 million to the overall increase. Net sales from our base business increased $2.6 million or 1.6%, of which $2.5 million was attributable to a unit volume increase, and $0.1 million was attributable to a net price increase. Net sales increased by $1.4 million for Maple Grove Farms of Vermont, $1.4 million for Ortega and $1.3 million for Cream of Wheat. These increases were offset by a reduction in net sales for Mrs. Dash of $0.9 million, Polaner of $0.8 million and B&G of $0.8 million. All other brands increased $0.9 million in the aggregate.

Gross profit increased $2 million or 3.5% for the first quarter to $58.8 million, from $56.8 million in the first quarter of 2012. Gross profit expressed as a percentage of net sales decreased 170 basis points to 34.4% for the first quarter, from 36.1% for the first quarter of 2012. The decrease in gross profit as a percentage of net sales was primarily attributed to the full quarter effect of the New York Style and Old London brands, accounting for 80 basis points of the decrease. Increased trade spending accounted for 30 basis points of the decline, and the remaining 60 basis points related to a sales mix shift to lower margin products.

Selling, general and administrative expenses decreased $0.1 million or 0.8% to $16.5 million for the first quarter, compared to $16.6 million for the first quarter of 2012. This decrease is primarily due to a decrease in consumer marketing of $1.3 million, offset by decreases in selling expenses of $1.1 million, and warehouse expenses of $0.1 million. Expressed as a percentage of net sales, our selling, general, and administrative expenses decreased 100 basis points to 9.6% for the first quarter of 2013, from 10.6% in the first quarter of 2012. Operating income increased 5.4% to $40.2 million for the first quarter, from $38.2 million in the first quarter of 2012. Net interest expense for the first quarter decreased $2.2 million or 18.5%, to $9.8 million from $12 million for the first quarter of 2012. The decrease was primarily due to our redemption of our $101.5 million principal amount of our outstanding senior notes in December 2012, a negotiated reduction in the interest rate on our tranche B term loans, and scheduled principal payments of our tranche A and tranche B term loans.

The Company's reported net income was $19.6 million for the first quarter, a17% increase as compared to reported net income for the first quarter of 2012 of $16.8 million. Diluted earnings per share for the first quarter of 2013 were $0.37, a 5.7% increase as compared to diluted earnings per share for the first quarter of 2012 of $0.35. Our EBITDA increased 7.2% to $45.7 million for the first quarter, compared to $42.6 million the first quarter of 2012. EBITDA as a percentage of net sales decreased to 26.7% in the first quarter of 2013, from 27.1% for the first quarter of 2012. We finished the first quarter with $631.1 million in long-term debt. Our leverage was 3.5 times the EBITDA at March 30, 2013. Our dividend rate is $1.16 per share per annum or approximately $61.3 million per annum in the aggregate based on our current share count. Our expected cash interest expense for 2013 is approximately $34.5 million. Our expected capital expenditures for 2013 are approximately $12 million. I will now turn the call back over to Dave for his remarks.

Thanks, Bob. Good afternoon, again, everyone. This was a very solid quarter for our Company, with a mix of organic growth and acquisition growth essentially in line with our expectations for the business, if not perfectly matching our hopes. As Bob cited, our base business excluding the acquisition done last October grew by 1.6%, almost all of that volume-related. The snack acquisition added an additional 7.2% of growth to bring the overall net sales increase to 8.8%.

Let me discuss each of those two elements in turn, and expand on the moving parts that produced our results. As mentioned, our base business growth was essentially all volume-driven. The very slight price gain we saw was incidental, and not the result of announced price increases. Although we aspire to slightly higher volume growth than we saw in the quarter, the return to volume growth of this magnitude is welcome. And that growth came essentially in line with the goals of our tier-based brand management. Tier 1 brands, which for comparison purposes now include Mrs. Dash, and represent nearly 50% of sales and roughly 60% of EBITDA, grew by 2.2%. Within this tier, Cream of Wheat had a very good quarter, growing by 7.2%, much of which came from higher sales at Kroger. We gained several SKUs here after several months of waiting for the hot cereal category review, and our patience was rewarded. Ortega also performed well, with a 3.9% increase. Mrs. Dash, unfortunately, saw a 5.1% decline in sales due to club rotations that did not repeat. Club sales negated gains that the brands saw in grocery and in dollar stores.

Tier 2 brand sales were up 4.2%, led by Maple Grove Farms with a 7.8% increase. This brand has grown consistently for us over a number of years, despite limited investment. The pure maple syrup and salad dressing portions of the business continue to grow modestly, but steadily for us. While sales were generally higher in most brands within Tier 2, the tier also benefited from our introduction of the Crock-Pot brand last year through a licensing arrangement. Sales of this entry into the meal packet section of the seasoning category grew nicely in the quarter, accelerating from the rate seen in the second half of 2012. We also introduced three new flavors into this line in the quarter, chili, savory herb chicken, and beef stroganoff. Tier 3 net sales declined by 3.8%, largely due to a tough comparison for the Polaner brand caused by a buy-in against the price increase last year, and continued pullback from food service on the B&G line. A seven point -- excuse me, a 7.6% increase in sales on the B&M line reflected increased promotional activity.

In that vein, not far into the quarter, we concluded that increased promotional spending was appropriate for some brands, and in some cases specific segments within brands to jumpstart base business volumes. Trade spending was up 50 basis points as a result of this decision, reflecting enhanced promotions on select pieces of business that are traditionally sensitive and responsive to promotions. In many cases, this was a response to competitive activity within the category. And as I say, it is important to note that this was a very focused effort. This effort resulted in a 50 basis point increase in trade spending as a percent of sales for our base business. That number represents a 3.7% overall increase in trade spending for the quarter. As you can infer from that percentage, the proportion of our total sales affected by this shift in tactics is relatively small.

We are funding this effort initially by shifting monies from advertising and marketing for the brands involved, and we will judge as the year progresses whether the effort is self-funding, or we need to make that shift a permanent one for the year. One thing this decision does indicate is that the volume environment is still challenging, but still more manageable than it was in 2012. Extraordinary events such as the challenges we saw in the Northeast in fourth quarter as a result of Hurricane Sandy appear to have passed, with the possible exception of continued effects on small food service operators in the New York/ New Jersey area. Our supermarket business in the Northeast was actually up for the quarter, despite the business challenges some of our customers in that area are experiencing.

That comment brings me to the dynamics of our sales by channel, which have been slowly shifting over the past few quarters. In the first quarter, our supermarket business, which is just over half of our sales, grew by over 2%. This was very welcome, as this has been the most challenged part of our business for some time. Food service and mass merchants, each roughly 20% of net sales, were also up over 2%. Although in the case of mass merchants, this represents a slowing of the growth trends we have seen in that channel in the past. At just over 2% of our net sales, dollar and drug net sales increased by nearly 18%. Again, good performance, but a slowing of the growth in that group. All of these gains were offset to some degree by losses in warehouse clubs, where as I mentioned earlier the Mrs. Dash brands showed losses versus the prior year. And I can't say whether these gains are long-term or short-term shifts. But obviously in the first quarter at least, we saw growth more evenly spread amongst most channels.

As we look at sales for the rest of year, we are encouraged by the pipeline of new products that will come to market this year, as well as products launched in late 2012 that are rolling into expanded distribution. Beyond the Crock-Pot products I mentioned earlier, we have nine new Mrs. Dash seasoning packet items going into the marketplace, and are also relaunching the Mrs. Dash Marinade line with improved flavors and packaging. The rest of the Culver product lines will launch 15 products this year, many of those this month. Cream of Wheat has three products in development. Ortega, three as well, and the Emeril line will follow up on its successful launch of white pasta sauces last year with additional offerings in 2013. While it is difficult to predict the ultimate performance of these products, we believe they represent the strongest new products pipeline we have had for several years.

Moving to the snack acquisition, the business performed to our expectations in the first full quarter of our ownership, recording $11.3 million in net sales and $2.5 million in EBITDA for the quarter. These are consistent with our forecast of $45 million to $50 million in net sales, and $8 million to $9 million in EBITDA for the year, especially considering the fact that Q1 is not a seasonally strong quarter. EBITDA was slightly higher in the business, because we are not quite ready to invest in it as planned. To that end, we are rapidly redoing packaging and reformulating some of the products in the line, as well as creating new display pieces for better compete in the deli section. While there is still some downward momentum in the business as far as year-to-year comparisons are concerned, we think that we understand that, and have comprehended it in our projections.

Our cost picture remains much the same as in previous calls. While the individual components of cost have moved up or down slightly, our outlook for 2013 is unchanged. Net of cost savings, we anticipate a slight, on the order of $1 million, decrease in manufacturing costs for the year. Our commodity costs, specifically wheat and corn, will increase in Q2 and Q3, due to the rolling 12 month forward coverage we have maintained for the past few years. But they will decline in Q4. The full-year 2013 average for these costs will be slightly lower than in 2012. We already have contracts in the first quarter of 2014 to purchase a number of commodities at costs favorable to 2013 levels. Looking out further, the encouraging news is that crop-related commodities in general are trending lower, as higher planting acreage is reported and improved growing conditions are anticipated. Our single largest purchase, which is maple syrup, looks fairly benign as well. The annual crop is coming in in Canada, but the crop is shaping up as above average, and any cost change should be minor. Distribution costs did increase as a percent of sales for the first quarter, partly due to higher fuel surcharges, and partly due to the snack acquisition. But prices are trending downward now, and we still expect this cost element to be relatively neutral for the full-year.

As Bob noted, our SG&A expenses were roughly flat for the quarter, and down as a percent of sales. We have deferred some marketing spending particularly in coupons, to fund increased promotional activity, but may spend the monies downstream depending on the success of the promotions and general market conditions. In some cases, we have shifted the coupon effort to internet or in-store tear pad coupons, in conjunction with display activity, versus the less efficient traditional method of couponing via freestanding inserts. And hopefully that will save costs, while still reaching the consumer.

Commenting briefly on our balance sheet and capitalization, it is worth noting again that we have reduced our leverage to 3.5 times EBITDA as of the end of the first quarter. This means that our business is very well-positioned to act on a potential acquisition of reasonable size, should the right acquisition appear. The general M&A market in the food industry is fairly quiet at the moment. But that could, of course, change very quickly given current financing costs and implied multiples. In the meantime, we are encouraged by the trends in our base business, and are working hard to invigorate our last acquisition. This has been the formula for success since the inception of this model over 15 years ago, and it has created tremendous value over the years.

As of yesterday's market close, our stock price today is 24% higher than it was at the end of first quarter 2012. At the current dividend rate, we will pay approximately $61.3 million in dividends in 2013, versus $50.2 million in 2012, a 22% increase. We have said many times that we are focused on creating shareholder value, and returning a meaningful amount of cash to shareholders as part of that commitment. And I believe we have delivered on that commitment in 2012. Based on first quarter, we are confident that our business can continue to perform at a high level in 2013. Our increase in EBITDA reflects that confidence. At this time, we would like to open the call up to questions. Justin?

Thank you.

(Operator Instructions)

The first question will come from Bryan Hunt with Wells Fargo Securities.

Bob and Dave, good afternoon.

Good afternoon.

I was wondering, one, one of the things you noted in your comments, Dave, was your gross margin, and how much it was driven down by mix. Do you believe this is a temporal change, in that 60% hit? Could you talk about that change a little bit more, in some terms that we might be able to rationalize in our models?

I don't know how temporary or permanent it is. I mean, to the extent we grow the higher-margin businesses within our portfolio or fail to grow them, or grow the lower margin businesses, the mix is going to shift. The one dramatic shift I would say in that context is the drop in Mrs. Dash, which is relatively temporary. Mrs. Dash is one of the higher-margin brands in the portfolio, so when that drops, and we are more successful in selling some of the promotion-based items which tend to be lower margin, then you are going to have a shift. So I wouldn't would say it is completely permanent. But definitely, if we get more of our growth from promotional items, there will be some mixing down of the margins.

Okay. And then, my next question is -- has to do with your snack acquisition. I mean, it sounds like you said it is performing in line with your expectation. But there is yet, a lot of changes that have to take place, and you are early in the process. Can you talk about -- your biggest competitor in that space has been aggressive in launching new flavors, as well as new packaging recently. I mean, how far behind are you, in your opinion, in terms of catching up to their recent movements?

Well, hopefully, not too far behind. I -- we really believe that a great deal of this business in the deli hinges on displays, and execution on displays. And from that point of view, this business has been a no-show for a while. When we came in, as a matter fact, there were really no display pieces to do that with. And that is what we are working on right now is, is we have engineered those pieces, and are getting ready to go to market with those pieces at the key times. And I think just showing up like that, is a great deal of the success potential in the business. Beyond that, as I said, we are reformulating some of the products. And really what we are doing is returning the products to all-natural. The prior owner had, rather than reformulate, had taken all-natural out of the equation. We think it is very important, and so we are in the process of doing that. And when we do that, we can redo the packaging with the right ingredient statements and go forward. So, I think we are positioning the business to be ready to compete in both of those contexts in the second half of the year. And certainly, in the key holiday period at the end of the year, when this business has, in the past, been traditionally seasonally strong.

And then my last question is, if I listen to all your comments, one, you are definitely more promotional this year than you were last year. And two, this is your largest launch of new products ever. How do you feel like you stack up against your peers? And what you feel like the industry is doing on both of those fronts? Are we more promotional, as well as more original, in terms of product launches?

Well, again, as I tried to say in the call, it is selective in terms of where the promotions are happening. I mean, there is a good number of brands in our portfolio that -- we could spend money on promotion. But frankly, the brands are such that, and the categories are such that you are not going to get the bang for your buck. I mean, seasonings is a great example of a category where you are just wasting your money. Or at least we have proven to ourselves over the years, you are wasting your money trying to get a lot of impulse sales to consumers, because you are doing a promotion. That is not the nature of the category. In contrast, our major competitor in taco shells, and I will use that as a great example, because I don't think anybody would be surprised to hear that our major competitor there has been doing 10 for $10 on taco shells for quite a while. And we have judged that it is important to respond to that effort on their part, and so we are responding. Now that is one segment of the entire Ortega business, where we feel it is important to compete with promotions.

Several of the other segments, we are not going to compete with promotions. We don't think it is appropriate. We don't think it is necessary. And when you tote up -- I went through an exercise of toting up the sales that are involved in where we are really enhancing promotions. And it is about 10% of our total sales, where we are taking brands or segments of brands and doing this kind of activity. And it is parts of our business, where it will respond to that activity, because that is the nature of the beast. So part of it, a lot of it is to respond to competition. And I think that people are getting more competitive in the areas where that is important, to be promotionally competitive. I think that is happening.

And the other thing I would say from a new products point of view, is we are definitely seeing in some categories that the larger food companies are flexing their muscles, in terms of putting out new products, spending money to launch the products. And so, we are seeing more of that phenomenon as branded food companies try and increase sales. Certainly, we don't compete in it. But when you look at the ready-to-eat cereal, cold cereal category, the new product launches are just staggering, an incredible number of new product launches. And I think certain categories that we compete in, you are seeing the same kind of increasing activity in new products, and we are trying to respond.

I appreciate your time. I will get back in the queue.

Next will be Andrew Lazar with Barclays.

Good afternoon, Dave, Bob.

Good afternoon.

Just a couple of things from me. First off, in the improved volume that you saw in the quarter, would you say any of that, or a percentage of it was due to any buy-in for some of these new products that you are coming out with? Or would you say that volume number was pretty clean, if you will?

It is pretty clean. There is not a lot of pipeline in it.

Okay. And then, you mentioned a brand like the Ortega taco shells where you are being a bit more promotional competitively, because of obviously, a competitive environment. Are there any other more sizable or notable brands or particular categories, where you have had to become more promotional? I am just trying to get a sense of which those are.

Well, as I said, it is the -- I mean, if you went down the list of our brands and which ones respond to promotion and which ones don't, you are going to find the usual suspects. I mean the B&M beans --

Yes, right.

Baked beans is a category that on a normal year, it sells the majority of the sales on promotion. This year is going to be a little bit more of a dogfight, from that point of view. So those are the kind of categories where you are seeing that.

Okay. The -- and I can appreciate obviously the focused or targeted nature of some of those promotional moves. It is interesting that we have heard, the very same language, I would say, from most food companies out there of late. Hey, in this category, being real focused, in that specific area. And I guess I am trying to get a sense, why wouldn't that -- do you think, why wouldn't that or shouldn't that worry investors more significantly, if everyone is saying somewhat the same thing?

Now that is -- (Laughter). Yes, well.

You see what I am getting at --

Yes. And you know that I have been trying to be virtuous, and say that we will respond if needed, and not try and initiate these kind of things. But it has come to the point, where in a number of cases, we need to respond. Now to the extent that this increases consumer takeaway, and that the volume -- if you do this right, you can be self-funding, because you will increase consumer takeaway and consumption to the point where you will have a bottom line that is larger as well as a top line that is larger. And that is something to be judged as we go down the road. Are we -- is this a productive activity or not? And between everybody involved, are we growing the category, so that it is rational from a profitability point of view? That remains to be seen.

Got it. The 80 basis point hit just because of the margin of the acquired business, would you say that was about the same on a proportionate level as you saw for the two months that you owned it in the fourth quarter? I am trying to get a sense if there is any change, either better or worse in the impact that it had on your overall corporate margin for any reason?

Well, certainly, it only had two months, versus three in the first quarter. But the 80 basis points, as you look at -- the last year number as we go forward, that 80 basis points will hit us, give or take, every quarter.

Okay.

It will be around that 80 basis points.

Got it. And then in terms of the guidance for the year. I know you are saying that you are obviously more confident. I would say that it seems like the numbers from an EBITDA standpoint, essentially matched where, I think the Street was looking for. So your confidence going forward is a bit better than you were, perhaps last quarter at this time. Is it that the top line is coming through a bit better than you would have expected? Some of the SG&A leverage? I am trying to get a sense of maybe what the key element is to your improved confidence, and for raising guidance for the year?

Well, I think it is that -- as you had pointed out, we had a number of quarters that we were not growing volume. So the return to some volume growth makes us more confident, that that is here. We don't have to wait for it any longer. And a better understanding of the snack business, and exactly where it is, and a more known solutions there, also makes us more confident.

Thanks. And quick last thing, then. Why aren't -- what is the holdup in the deal environment do you think? Because you have said and others have stated, this would seem like a fairly awesome time to be a seller of an asset, if is there were things that folks wanted to divest? And so just, I guess, trying to get a sense of why, maybe you think we haven't seen a greater level of assets out there?

I think it is all about volume growth. I think it is -- people are still trying to get to a reasonable number on organic volume growth, and to the extent that you sell something that doesn't help you get there.

Got it. Okay. Thanks very much. I appreciate it.

Yes.

(Operator Instructions).

Next is Sean Naughton with Piper Jaffray.

Thanks. This is actually Jared Madlin on for Sean. Most of my questions have been answered. But I guess quickly with the club buy-in for Mrs. Dash that is not recurring in Q1. I know you alluded it was temporary, but is there any overlap again into Q2 here, or is that behind us?

It is pretty much behind us, to a great degree. It is a rotational event, so those happen once a year or so, and when they don't repeat, they hurt. Nice when you get them, and it hurts when you don't get them.

Okay, got it. And with Cream of Wheat, obviously nice growth in the quarter there. Were you able to attribute any of that to the cold weather? And should we expect that to continue into Q2 here at least April, given the climate in the Midwest and Northeast has still been pretty chilly.

Yes, I don't -- the cold weather didn't hurt. It is very hard to define how much you go up or down based on the weather, except a couple of years ago where it was extraordinarily warm in the first quarter. I really think it is more of the expanded distribution than it is the weather though. And to that extent, it is repeatable.

Okay, got you. And I guess, any exposure to Fresh and Easy? And if so, is it material, or just not really meaningful there?

Zero exposure.

Okay, got it. All right, thank you.

You're welcome.

Next will be Katja Jancic with Sidoti.

Good afternoon. A question on Ortega. Obviously, the brand has performed very well over the recent quarters. And I am wondering if it has been performing in line or better than the category? And also, if you could give us any specific numbers regarding Ortega's current market share?

Well, that is not an easy number to tell you, because Ortega really competes in six or seven different segments within what you would call Mexican food.

Right.

And the share has varied tremendously. Seasonings, for instance, is a very fragmented piece of business that has players in it that are like McCormick that you wouldn't say, that is not a Mexican food company. Well, they sell seasonings, and they happen to sell a lot of taco seasoning. So our share in that, as is most people's is relatively small. Taco sauce, we have a very large leading share in taco sauce. We are number two in things like kits and shells and things like that, but, refried beans, we are relatively small. I mean, there is about six or seven different segments within this business, and there are shares that are unique to each of those. So giving you an overall share is very, very difficult.

Okay. And just to confirm, by my estimates, Ortega counts for approximately 20% to 21% of your total sales. Is that number about correct?

Yes, it is.

Okay, okay. And a question on your acquisition strategy. Looking at the performance of personal care brand that you acquired as part of your Culver brand acquisition, Static Guard, are you satisfied with the performance of this brand? And does this foray into personal care space inspire you to look for additional acquisitions in household or personal care space? Or are you purely looking at package foods brands in terms of acquisitions?

We are very happy with Static Guard. It has been a great brand for us. It is having a good sales year. It had a better winter than it had the winter before where it was warmer. And that is a brand that does seem to respond to hot or cold winters. We just launched a line extension on Static Guard called Shed Guard, which is aimed at pet hair, and removal of pet hair from your clothes or your furniture or whatever. And that is going to be an interesting proposition for us. But we are very happy with the household products we own. We are looking at other possible acquisitions as things go by. But we really like the fact that there is an awful lot of things in household that you are up against the very big guys like Procter & Gamble. And that is not the kind of things we are interested in. We love the fact that Static Guard is fairly insulated. And to the extent that we could find things like Static Guard, we'd be delighted to look at purchasing them.

Okay, and last question, what percentage of your sales came from Canada during the quarter? And maybe you can give us some -- an update on how your efforts in penetrating that market are going up to date?

Canada, well, our export business is between 4% of 5% of sales now, and Canada is the large majority of that. Puerto Rico is another important part. So maybe 3% or so of sales would be Canada. We actually had a tough quarter in Canada, because there was a -- basically we sold all the old inventory with old codes into the retailers last year in the first quarter. This year we did not do that, so the year-to-year comps in Canada don't look good this quarter. But next quarter, we think the export business in Canada is going to do much better. Having said that, Canada is very tough to penetrate. I mean, we are creating products, and we are creating variants of some of the new products that we have got, and we are taking them up to Canada. The jury is still out on how well we will do in terms of penetrating Canada, though.

Okay. That is really helpful. Thanks. That is all I have.

And that does conclude the question and answer session. I will now turn the conference back over to management.

Thank you. And thank you everyone, for your interest in the Company. We are very encouraged by this quarter. We have returned to organic growth in our base business, which is a very welcome event. And we are excited to continue that as the year goes on. And as I said, we think we are doing a lot of good work around the snack acquisition, and have great hopes for that as the year progresses. So we are looking forward to delivering yet another very good year for B&G Foods. Thank you.

Thank you. And that does conclude today's conference. We do thank you for your participation today.