B&G Foods Inc (BGS) 2014 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the B&G Foods Incorporated second-quarter 2014 financial results 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. Dave Wenner, Chief Executive Officer of B&G Foods. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to the B&G Foods second-quarter 2014 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 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 EBITDA, adjusted net income, and adjusted diluted earnings per share. Reconciliations of these financial 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, selected business highlights, and our thoughts concerning the remainder of 2014. Bob?

Thank you Dave. Net sales for the second quarter of 2014 increased $42 million or 26.1% to $202.9 million compared to $160.9 million for the second quarter of 2013. Net sales of Pirate's Brands, which we acquired in July of 2013, contributed $20.3 million to the overall increase. Net sales of specialty brands acquired in April 2014 contributed $11.5 million to the increase. Net sales of Rickland Orchards acquired in October 2013 contributed $7.1 million to the increase, and an additional month of net sales of TrueNorth acquired in May of 2013 contributed $1.4 million to the overall increase.

Net sales for our base business increased $1.7 million or 1.1% attributable to a unit volume increase of $4.4 million or 2.8%, partially offset by a net price decrease of $2.7 million or 1.7%. Net sales increased by $2.9 million or 9.1% for Ortega and $1 million or 5.3% for Maple Grove Farms of Vermont, and $0.8 million or 27.1% during the two months comparable period for TrueNorth, offset by a net sales decrease of $2.6 million or 20.9% for cream of wheat and $0.5 million or 5.3% for Polaner. All other brands increased $0.1 million in the aggregate.

Gross profit increased $7.3 million or 13.2% to $63 million for the second quarter of 2014 compared to $55.7 million for the second quarter of 2013. Gross profit expressed as a percentage of net sales decreased 350 basis points to 31.1% for the second quarter of 2014 from 34.6% for the second quarter of 2013, primarily attributable to an increase in distribution costs accounting for 110 basis points of the decrease. The base business net price decrease previously described accounted for 90 basis points of the decrease and a sales mix shift to lower margin products accounted for the remaining 150 basis point decrease.

Selling, general and administrative expenses increased $8 million or 46% to $25.3 million for the second quarter of 2014 compared to $17.3 million for the second quarter of 2013. This increase is primarily due to increases in acquisition related transaction costs of $4.1 million, selling expenses of $2.1 million, consumer marketing of $1.5 million, and warehousing expenses of $0.5 million, which were partially offset by a decrease in all other expenses of $0.2 million. Expressed as a percentage of net sales, our selling, general, and administrative expenses increased 170 basis points to 12.5% for the second quarter of 2014, driven by the increase in transaction costs incurred in the Specialty Brands acquisition from 10.8% in the second quarter of 2013.

Net interest expense for the second quarter of 2014 increased $1.8 million or 17.7% to $11.8 million from $10 million for the second quarter of 2013. The increase was primarily due to the increase in our average debt outstanding.

Reported net income under US GAAP was $16.1 million or $0.30 per diluted share for the second quarter of 2014 as compared to a net loss of $1.4 million or $0.03 per share for the second quarter of 2013. The Company's adjusted net income for the second quarter of 2014, which excludes the after-tax impact of refinancing charges, acquisition related transaction costs, and a non-cash gain relating to the Rickland Orchards earnout, was $17.5 million or $0.33 per adjusted diluted share. Adjusted net income for the second quarter of 2013, which excludes the after-tax impact of refinancing charges and acquisition related transaction costs, was $17.3 million or $0.33 per adjusted diluted share.

Our adjusted EBITDA, which excludes the impact of acquisition related transaction costs and the non-cash gain relating to the Rickland Orchards earnout, increased 8.8% to $46.1 million for the second quarter of 2014 compared to $42.4 million in the second quarter of 2013. Adjusted EBITDA as a percentage of net sales decreased to 22.7% in the second quarter of 2014 from 26.3% in the second quarter of 2013.

Moving onto the balance sheet, we finished the second quarter of 2014 with a little more than $1 billion in long-term debt. Our net leverage was 4.9 times pro forma adjusted EBITDA. Our current dividend rate is $1.36 per share per annum or approximately $73 million in the aggregate based on our current share count.

During the second quarter of 2014, we entered into a new senior secured credit agreement which includes a $500 million revolving credit facility with $46 million outstanding at the end of the second quarter and $300 million of a tranche A term loan. The new credit agreement reduced our effective interest rate on our senior secured debt by approximately 100 basis points.

For reasons Dave will discuss shortly, we are decreasing our guidance for fiscal 2014 adjusted EBITDA approximately 2.4% to a range of $204 million to $209 million. And we are decreasing our full-year adjusted diluted EPS guidance approximately 3.1% to a range of $1.54 per share to $1.60 per share.

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

Thanks Bob. Good afternoon again everyone. As you can see for our net sales increase of over 26%, B&G Foods is currently going through a period of rapid expansion, the result of four acquisitions in a twelve-month period starting in May of 2013. Very frankly, we have stressed our systems in a variety of ways, the impact of which we underestimated when we did those acquisitions.

Having said that, we also recognize that M&A is the lumpy process. The right opportunities present themselves unpredictably, and you must decide whether or not to take advantage of those opportunities as they happen. We believe and still believe that we were right in doing just that even though the stress of doing so and the resulting impact on short-term costs and efficiencies is apparent in our second-quarter results.

In absolute numbers, our results for the second quarter are impressive. Net sales growth of 26.1% and adjusted EBITDA growth of 8.8%. Cash flow remains strong in the business as well.

But the issue of course is we are not performing to our own expectations for a number of reasons. The first of these reasons has nothing to do with acquisitions, but rather with the state of the shelf-stable food business in the United States. Our base business is very much a center of the store shelf-stable business. As most of you know, this has been a challenging segment for the food industry for the past several years and it has become commonplace for publicly traded food companies to report declining sales in this segment of their results. In that context, our base business volume growth of 2.8% was encouraging.

As referenced in last quarter's call, we did see benefit from volume moving out of Q1 into second quarter due to the late Easter holiday, but we also experienced growth beyond that effect. We saw important brands such as Ortega post a volume gain of over 10%. Our crockpot line of seasoning mixes, a relatively new line, grew by 100%. In fact, the only consequential loss in the base business was in the cream of wheat brand, which declined over 20% after gains in the first quarter.

Promotional activity in the first quarter moved volume into that quarter and out of second quarter. That shift and a significant number of new entries within the hot cereal section of the stores negatively affected our second quarter.

The volume gains we achieved in the overall portfolio came at a price. Promotional spending on certain brands, including Ortega, Polaner, and our B&G brand, reduced overall net pricing by 1.7% of net sales and reduced our overall increase in net sales for the quarter to a 1.1% gain. In some cases, the money was well spent and fueled increases such as we saw with Ortega. In other cases, we saw relatively little sales lift. As we go into the second half, this promotional spending activity will be curtailed significantly in the interest of stabilizing prices.

Pricing was also affected in a more subtle manner by the shift in sales to other classes of trade. And again I'm only discussing base business in these numbers.

Our supermarket business at just over 50% of base sales was down 1.2% while customers who are typically EDLP customers, such as mass merchants and dollar stores, which is 24% of base sales in total, were up over 4% and 10% respectively.

While the share of our business that is done in supermarkets continues to gradually decline, I should point out that we are growing at a good number of important chain accounts. And this continues to be a very important part of our business. We continue to work, however, at selling products in the other outlets as well as consumers broaden where they purchase packaged foods.

In the second half, we will rely on judicious promotional activity and new product introductions to keep the base business flat, if not up, in net sales. We expect successful new product such as our award-winning Ortega Fiesta Flats and our Ortega Taco Kit for Two, the expanded crockpot line and our three new cream of wheat products to help in these efforts.

Inefficiencies in several aspects of our operations are another significant reason for our lowered expectations. Costs continue to run above our expectations in our warehousing and distribution network due to several factors. The first is space constraints, the result of added volumes from snacks and volume that is often bulky. Limited spaces cost us to double and even triple handle goods in our warehouses, inflating costs. Similarly, we are finding bulky light snack products inefficient to ship. This was expected to some degree, but not to the degree we are experiencing. We are acting to resolve these issues. One of our three major warehouses has already been moved to a larger facility and a second move is scheduled for the fall. The third is adequate for our needs. We are also working with our customers to alter order and shipment patterns on snacks to prevent more direct shipments from a manufacturing point rather than combining products with our grocery products in B&G Foods' warehouses.

Beyond the base business gain, we saw $40.3 million in added net sales in the second quarter from acquisitions. We lapped the TrueNorth acquisition in May, which meant the brand's acquisition accounted for only an incremental $1.4 million in sales for the quarter. Pirate Brands added $20.3 million, Rickland Orchards $7.1 million, and Specialty Brands just acquired at the end of April, $11.5 million.

Let me first speak to the snack brands and then to the Specialty Brands acquisition. Our experience with the four snack brands in the second quarter was varied with the brands performing well in a few cases and challenged in one.

The first acquisition which we did in fourth quarter of 2012 was the New York Style-Old London brands. Sales of these brands were down very slightly in the quarter, primarily due to a distribution loss at a single customer. The expansion of the New York Style RAC program continues with the goal of an additional 3000 RACs in place before the key holiday season.

We are also about to relaunch the Old London line with refreshed packaging and new, more contemporary flavors such as Ancient Grains. And we are generally happy with the performance of this acquisition.

The TrueNorth brand acquired in May of 2013 grew nicely in the quarter. We have expanded retail distribution of this line which was and still is primarily a warehouse club product, and are developing new products for launch later this year.

At just over $20 million in net sales, the Pirate Brands held their own for the quarter. There was considerable activity in this brand in the quarter as we launched three new product concepts -- Pirate's Booty Crunchy Treasures and Pirate's Fruity Booty in the stacking portion of the business, and Pirate's Booty mac & cheese in four flavors into grocery.

The mac & cheese is the first test of our ability to extend the Pirate's Booty name to other kids healthy snacking products. While the launch does include placement into a number of major retailers, it is not nationwide. We're trying this as a test as appropriate. In fact, it is a severe test given the amount of new entries into the mac & cheese category.

Perhaps most importantly, we also developed and launched non-GMO project verified variations of the Pirate's Booty, Smart Puffs and Original Tings base snack products for sale exclusively in the natural channel, including Whole Foods.

Finally, Rickland Orchards acquire last October added $7.1 million in net sales in the quarter. This result is below our expectations. The brand is having difficulty maintaining traction in retail distribution and has been underpriced by competition in warehouse club channels. We are working on new offerings and concepts for this brand to restore momentum in both channels.

In the context of the snack acquisitions that have been and continue to be challenging for the reasons stated above, the Specialty Brands acquisition feels like we are returning home, integrating a dry grocery business that fits our existing base business like a glove. We are very encouraged by the performance of this business in the first two months of ownership, and have nothing but the highest compliments for the previous management team.

The largest brand, Bear Creek Hearty dry soup mixes and side dishes, has significant momentum as we approach the beginning of the soup season and should enjoy benefits of distribution gains. The syrup brands fit perfectly into our existing syrup portfolio and are expected to offer manufacturing synergies in 2015.

And the minor brands in the portfolio look to be solid businesses with well-established customer bases. The business offers distribution efficiencies with more typical products and, in the case of maple syrup, high selling prices per case. We expect that this acquisition will comfortably exceed our estimates at the time of acquisition.

Our cost outlook for the full year 2014 remains as before, down slightly overall with the commodities that we do purchase declining in price into 2015. The maple syrup crop came in slightly larger than normal despite a delayed start to the crop year, resulting in flat pricing for the largest commodity purchase that B&G Foods makes. With the acquisition of Specialty Brands, our purchases of maple syrup for our own use, for the Maple Grove Farms brand, together with the purchases made by our co-packers for Specialty Brands, total approximately $45 million per year.

The early cost outlook for 2015 as a whole is not quite as positive. While true commodities should not increase in the first half, fruits and other smaller ingredients have significant price pressure on them, typically due to drought conditions in California.

Our initial outlook for the full year of 2015 is that we will see an overall cost increase, driven by both packaging costs and ingredient costs.

I've already alluded to a distribution cost. The increase here for the quarter was a full 100 basis points as a percent of sales. Even allowing for inefficiencies inherent in lower-priced bulky snack products, this was a meaningful factor in our shortfall for the quarter and year to date.

Operating expenses within the SG&A area were in line with expectations with the exception of incremental costs associated with the Specialty Brands acquisition. After this acquisition, our leverage is at 4.9 times pro forma adjusted EBITDA, toward the high end of our comfort zone in terms of doing the next acquisition.

Our ability to service our debt is comfortable with adjusted EBITDA interest coverage at just over 5 times. In that vein, the M&A market is relatively quiet right now with what few deals that are out there apparently going to private equity groups.

Cash flow in our business remains very healthy and we've reduced leverage to 4.6 times pro forma adjusted EBITDA by year-end if we do not do an acquisition before then. Our annual dividend, $1.36 per share at the current dividend rate, can be paid very comfortably with our current level of free cash flow.

Finally, Bob's remarks on our press release referred to a change in our 2014 adjusted EBITDA guidance to $204 million to $209 million for the full year, a 2.4% decrease. At the midpoint of this guidance, our 2014 adjusted EBITDA would increase 12.2% from 2013, a positive result, but not what we had hoped. We take great pride in our ability to execute on acquisitions and hit projections, but this change is a difficult one. I've spoken to the factors that have caused it and I would like to reassure you that we are taking strong action to address those issues. As I said, we have ended most of the promotions that caused the net price decreases seen in the first and second quarter. We are moving into warehouse facilities that will permit improved efficiencies in that area, and we are working with co-packers, customers and carriers to improve our distribution costs. Beyond that, we will redouble our efforts to reduce costs throughout the organization.

As part of our continuous improvement process, we already have in place approximately $13 million in cost reduction projects that are intended to reduce existing costs and offset present and future cost increases. For example, we have increased capital expenditures significantly in 2014 to fund major cost reduction projects at several manufacturing facilities. An additional project was approved earlier this week which is expected to reduce costs by as much as $1 million next year. That would bring our expected annualized savings from 2014 capital projects to as much as $3 million beginning in 2015.

As we head towards 2015, we plan to put price increases in place in anticipation of the cost increases I spoke of earlier. And finally, the 2015 budget process will be conducted in a zero base mode with every expense fully justified before approval. We are fully committed to keeping B&G Foods at the top of the industry in terms of operating efficiency, margins and free cash flow.

At this point, I'd like to open the call for questions. Operator?

(Operator Instructions). Farha Aslam, Stephens.

Hi, good afternoon. A question about your plans to pull back promotional activity. I mean you did have positive volume growth in the quarter. Do you think that was a result of the promotional activity you put in, so how confident are you about volumes once you pull back on those price promotions?

We are certainly going to pull back price promotions in the brands where we did not see a response. The sales decrease that we mentioned on the Polaner brand for instance was all price. Volume was flat even though we promoted the brand heavily versus the normal promotions we would do. And we are really talking in a case like that of pulling back the enhancements on promotions that already exist, not stopping promotions altogether. So, it's really a mixed bag.

We had good results on some pieces of Ortega business, for instance, by doing these heavier promotions, arguably paying for themselves, and we would examine whether we would continue those specific promotions or not. But in the large majority of cases, the enhanced promotional activity was not a good economic decision, so we are going to stop doing those.

So essentially you're just going to become more efficient with your promotional activity.

We are always challenging ourselves in terms of efficiency, but we tried to be aggressive in some categories where we saw -- we perceived the need to be more aggressive, and it didn't work. And so we are undoing any plans to continue that in the second half.

Sure. And two quick follow-up questions. The first one is around your warehousing and distribution. This is the second quarter we've heard that. If you have to kind of put a benchmark of when it will be complete, kind of what percentage of the way is the business implemented in your mind?

It's the second quarter you've heard that because it's been an ongoing issue since we did the flurry of snack acquisitions in 2013. So it certainly had an impact in the first quarter and the second quarter.

Part of the solution on the warehousing side is to get to larger facilities that can accommodate the added volume. We've already accomplished that with our Houston warehouse and we are sorting through the last of that move. And Tennessee will happen this fall, and we will have done the two warehouses that really need that extra space. So, I expect to start seeing cost improvement in Houston very shortly as they settle down, and then Tennessee will come towards the end of the year.

On the distribution side, it's an ongoing process. As I said, we are really trying to move a decent amount of the snack volume to direct shipments from customers out of co-packers. That will help us tremendously in distribution and warehousing. And we need to just get more efficient in terms of negotiating with our carriers as well.

I mean part of our added cost is inescapable in that it's rate increases that carriers have put in place. There's little we can do about that in a lot of cases. But there is probably 60% to 75% of the increases we are seeing that we can manage down and are doing that now. I think you'll see gradual improvement as the rest of the year goes on.

All right. That's helpful. And my final question is around M&A. You highlighted that you don't have any deals -- or that M&A right now is quite in terms of the environment.

And then the second thing is that you highlighted that if you don't do a deal by the end of the year, so kind of B&G's appetite to do a transaction right now, given the potential management changes with your retirement, and where your organization is right now. If you could just share that, that would be helpful.

If the right deal comes along, we are going to be very interested in doing it. Having said that, we would be very selective. We try and be very selective all the time, but given our present circumstances that has nothing to do with my retirement, we would be very selective.

You could argue that we are not in very different circumstances than we were in when we did the Specialty Brands acquisition. And we were eager to do that acquisition because it was a very, very good fit with our existing business and something that we saw not only immediately accretive aspects to it, but also good potential down the road. Another acquisition like that comes along, and I think we're going to have appetite to look at that hard. And trust me, I am not the critical factor in executing those acquisitions.

Great. Thank you for the added color. Appreciate it.

Karru Martinson, Deutsche Bank.

Good afternoon. Just take us kind of a step back. You spent a ton on promotions, you didn't get quite the results across the brands that you thought. And we certainly have heard from others about the center of the store shelf-stable products being difficult. How do you change that consumer mindset? How do you get people back into those shelf-stable products?

You could make a lot of money have an answer to that question. It's really -- it's an unanswered question. And we've said in the past that part of it I think is there is an ongoing shift in eating habits and where people buy food and the kind of food they buy. And it's not a tidal wave. It's a steady creep as we change generations and people's habits change in terms of what they eat and how much food they cook at home, and all of those types of factors. I think you have to come up with concepts that make people want to use those kind of products. And that's why we like our Fiesta Flats, for instance. It's a great, convenient way to make tacos, and I would argue teenager-friendly in that you can put a heck of a lot more food on that flat than you can in a regular taco shell. The

Taco Kits for Two is designed to address a smaller taco meal for just a few people rather than the family size. There's nothing like that out there and one of the things we hear from consumers is it's great, your taco product are great and everything, but we always have leftovers and now I've got to package them somehow and all that. The kit -- that particular kit is aimed at that express consumer need.

So I think you have to try hard to understand what consumers are trying to do with their lives and their eating habits in the amount of time they have, and all those factors like that and design products to address those issues for them.

You guys have certainly broadened out into snacks with your acquisitions, but when you look at the M&A environment going forward, are there plans or thoughts here of chasing those eating habits, of moving outside of the center of the store?

Snacks have certainly taken us outside of the center of the store to some degree. And frankly, snacks was designed to help follow consumers in terms of everything you read that says people are eating more by snacking than they are by sitting down to a full meal. And people are buying food in other outlets beside supermarkets, and particularly places like warehouse clubs, which are very much about selling snack products. So, our snack acquisitions were intended to help us follow trends with consumers, and certainly hopefully we can accomplish that.

Okay. I'm sorry if you said this and I missed it, but in terms of the total CapEx outlook for 2014, in terms of the dollars and then kind of will there be additional catch-up investment needed in 2015 to kind of address the problems that you have in terms of the M&A -- integrating the M&A acquisitions here?

The capital we are spending is less about integrating the M&A. We're going to spend about $20 million in 2014. The majority of that is being spent in one facility to increase capacity, reduce cost, and it's going to be very helpful.

Going forward, as we look out to 2015 and thereafter, our CapEx will probably come down a couple million dollars to $17 million, $18 million a year. So we don't need to expand the capital spending. We will actually reduce it going forward.

I would just add to Bob's comment that our mindset is somewhat different in that we certainly are a bigger business with more resources. And to that extent, we are looking capital projects that give us very good cost savings harder and more aggressively than we have in the past. So to the extent we can identify those kind of things, we certainly will.

The latest addition to this year's CapEx was part of -- as a result of the acquisition of Specialty Brands, for instance, and gives us some opportunity to bring product in-house and save a considerable amount of money. So, we are open-minded about it, and we are challenging ourselves to justify, with very quick payback, additional capital projects.

Thank you very much guys, appreciate it.

David Palmer, RBC Capital Markets.

Good afternoon guys. A few questions, and I'll just rattle them off. The first one is you're not the first -- there's been a few lately that have been talking about the surprising lack of promotion response. And I know you've ruled out Ortega and perhaps set that side. But is there any sort of thread that connects that lack of response? Is there some types of promotions that seem to be not working? Have you determined ingredients for that, or is this a relatively new phenomenon? Any sort of color around that would be helpful, because it seems to be something that's not just B&G related.

And then secondly, are there any numbers you could put to the inefficiencies that you had related to your rapid growth in acquisitions lately so we can think about how much of this year's pain might be reversed in next year? Thank you.

As far as the first question goes, we're trying to figure out -- I think an awful lot of it is, as far as promotional efficiency goes, it really is performance at the retailer level in terms of getting those displays. Additional price promotion in and of itself is not as powerful as a price promotion with display activity. And to the extent we don't succeed in doing that at retail, I think you're just not going to get the performance and the multiplier effect out of the promotional money you want.

So, as everybody is trying to promote, it gets harder and harder to win those displays because there's only a finite amount of room for that display activity. That's something I am always looking for when we do promotions, is can we get a display? And if we can't get the display and it's just a promotion off of a shelf price, if it is successful, all you are going to have is an empty shelf. You won't have enough product to support the promotion. So it's a self-limiting thing in that sense. I think that's a factor and I think there's a great deal of competition for that display activity as people try and promote their way to higher volume.

Bob, do you want to speak to the second half?

Sure. When we look at our inefficiencies on these acquisitions, we are really talking about distribution, and distribution means both delivery and warehousing. And we are seeing most of that inefficiency here in the first half. We are going to see some of it in the second half, but not to the level we saw in the first half. So as we look at that number that we are going against and trying to reduce going forward, it's probably incrementally cost us a little over $1 million in our warehousing and about $2 million in our delivery cost. That's what we are trying -- I think we believe that the move of the two warehousing will get most of that back in 2015.

The distribution side is a little bit more challenging because we are going up against carriers who are pushing us harder and harder to increase rates. So that's one of the pieces that can offset that. As we get more efficient and eat into that $2 million of overspending that we will do on an annual basis this year, we've got to fight back on the rates that will eat away at some of those savings we will see next year.

But the warehousing should all happen. We should start really seeing the results in Houston here in the third quarter and then in the fourth quarter we won't see much of those results because that move will happen in the fourth quarter. But that should all be set for our Tennessee warehouse to be ready to go late fourth quarter, so we will see those results as we head into the new 2015 year.

Great. Thank you very much.

Bryan Hunt, Wells Fargo Securities.

Good afternoon. This is Kevin McClure standing in for Bryan. Thanks for taking our questions.

Two quick ones, one just drilling down on the guidance reduction for the remainder of the year. Thanks for all the color around the distribution challenges. I'm just hoping you can maybe bucket for us what percentage of that reduction -- it's about a $5 million reduction in the second-half guidance -- would you say is distribution related versus some of the other factors you've called out? Thanks.

I think as where we look at our guidance was and what I just said before is distribution related, which is warehouse and delivery, is about $3 million of that $5 million change.

As we looked at reducing guidance, we really just looked at our shortfall here in the first half of the year, especially the second quarter, and just felt we couldn't make that up in the second half of the year. It will be very close to the numbers that were out there in the second half. It's just that we are not going to make the shortfall we've seen through the first half of the year. But the majority of this shortfall is our distribution. And the other piece of the shortfall is our shortfall on sales of the Rickland Orchards brand. We did a little over $15 million on that brand in the first half of the year. We expected that to be substantially higher than that, and that has affected our EBITDA. Those are the two biggest pieces of our shortfall on an annual basis.

Got it, thanks. And maybe could you just provide some qualitative color on the battle for shelf space in the base business? I know you provide some in your text. But our thesis is as the small format stores kind of grow and gain market share, and as existing retailers reallocate square footage away from the center of the store, the competition for that shelf space should just continue to increase. And so are you seeing it becoming more expensive to gain distribution for your new products? And alternatively, has it become more difficult to maintain distribution for existing products that just may not be achieving the same sales philosophies? Thanks.

I wouldn't say it's more expensive. I would say it varies tremendously by category in terms of what's going on in the battle for shelf space. There are -- I think as I referenced entering the mac & cheese category is ambitious right now because it seems as if everybody who is selling packaged grocery products is launching a mac & cheese. So, that's an area where you are fighting for introductory space, and I'm sure if you're there already you are fighting very hard to keep the space you have given all the money and effort that's going against that particular section.

Hot cereal is another section that's very, very tough in terms of products coming into the section, both new hot cereal products in some cases, but products that really have nothing to do with hot cereal being put in that section. Some of these protein drinks and things like that for some reason are coming into the hot cereal sections.

So, it's challenging for us, and we are doing a decent job of it, but it's challenging for us to maintain the space we have. In some cases, we are not losing distribution but we are losing a facing as retailers are eager to put these new products in and take the money that's associated with them. Whether they succeed or not remains to be seen.

But then there are other categories where there's really not a lot of activity going on, and it's relatively calm, and our distribution is not pressured. And there are categories where, such as seasonings, where we are actually making very nice progress by introducing new Mrs. Dash seasoning packets, dips, and cooking seasonings, and the crockpot line as well.

So there's no simple answer. We are in a lot of different categories and every category has its own dynamics. Some are highly competitive with a lot of new products coming in, and some are fairly calm.

Got it, thanks. One final question for us. We talk a lot about acquisitions, and you guys have been very acquisitive of late. But I'm curious. Would you ever envision yourself as a seller of a brand, maybe something that generates solid cash flow but which may not fit as well as it did several years ago with where you want to take the Company? Would this be a good time to probably see what kind of valuation you could receive for those assets? Thank you.

The problem is, as we've discussed in prior calls, the problem with selling a brand for us is you would want to sell -- the brands you would sell, like a lot of this isn't performing up to the standards of all the other brands, you're not going to get a high multiple for those brands. But even a very good brand, we would have to get an extremely high multiple for it not to be a dilutive event for our company. I mean we are valued at north of 12 times EBITDA, and assuming we depreciated the tax basis in the brand a decent amount, we're going to have to sell a brand for the upper teens multiple in EBITDA to breakeven. So, it's very hard for us to look at selling a brand and saying this is a good idea and not dilutive to our shareholders.

Great, thank you for your time.

Andrew Lazar, Barclays.

Hi Dave and Bob. So Dave, just back to the industry question for a minute on promotional effectiveness. Have you seen I guess in your experience an environment around promotional effectiveness like this before? And if so, was it transitory, and what kind of got it moving in the right direction?

There's a lot of unique circumstances going on here right now. I think it's unusual. It's unusual. And I think the promotional phenomenon, if you will, I think is partly because you already promote the brands that are sensitive to promotion.

So, the question is how much additional promotion are you going to move the needle? How much are you going to move the needle by doing additional promotion on a brand that you already are putting a decent amount of money against? B&M for instance. It's a highly promotional category. I think upwards of 80% of the volume at certain times of the year sells on promotion. How much are you going to move the needle by doing even more promotion? So I think there's that factor.

And then putting promotional money against brands that aren't promotionally sensitive, you are obviously going to be very challenged to suddenly get a consumer response when you do the promotion. So, I don't know that it's a really good weapon in a lot of cases.

Yes, okay, diminishing returns on a lot of it so to speak.

Yes, exactly.

Okay. If we think about the second half and your discussion around a more judicial use of promotions, you also start to lap when pricing went negative in the year-ago period. Would you expect the change in pricing in the back half to be roughly stable instead of kind of down as it's been the last couple of quarters?

That would be a great outcome. I think that we should -- we hope to get there very quickly, and the only caveat being the mix of customers changing, but that's a fairly gradual change, so I wouldn't say that's a big factor.

Got it. And how about on the volume side? Volume improved this quarter obviously as you had hoped it would. With pricing and promotions being a little more judicious, is a good outcome for the back half to have volume that's also sort of flattish to up a little bit? Is that what you're looking for? Is that more hope than reality or is that something that's achievable?

I know you like catchphrases for your write-ups. My catchphrase on this is flat is the new up. Flat to slightly up with neutral pricing would be very good outcome, I think.

Okay, thanks. And then if we think about the M&A strategy, you talked about the Specialty acquisition, sort of feeling like it was coming home so to speak in terms of a lot of deals you did prior to the snack deals. Should we read that as that's more your comfort zone and therefore will be so going forward? The snack deals you've done you've done. It gave you a core there. You've got to get better and more efficient with them, but generally you're going to be looking more towards your center store going forward. Or is that -- would that be not the way to read it?

I think, if we perceive it's the right acquisition in either space, we would do the acquisition. Certainly, we are more comfortable in terms of understanding exactly what we have to do and what the effect will be doing a dry grocery acquisition. And this -- if we ever doubted that, we certainly got it illustrated to us by the Specialty Brands acquisition. But you know, you do an acquisition because you perceive it as the right acquisition. So, I think we would do it in either space if we perceive that it was the right acquisition.

Got it. Two more quick things. One, you made mention of zero-based budgeting. And is that something that you have done before? Or is that obviously a change in strategy because as you know that's a pretty -- can be a pretty serious shift in the way a company thinks about its cost structure. And typically really good systems also have been historically, in my experience anyway, required to be able to do ZBB in a way where it can be successful. So, I'm trying to get a sense there of how big a shift that is for you.

We've done it in the past occasionally, and when we ran into difficulties, I would -- the decision to do it at this point in time probably reflects the fact that we've had a very good run for a good number of years and had some very excellent results, and perhaps haven't challenged ourselves on the cost side as hard as we should have. And it's time to put ourselves up against the wall and ask some hard questions again.

The last thing would just be as you talked preliminarily about 2015, around inflation and pricing, is there a way to sort of start to help quantify that a little bit, even though we know it's preliminary, in terms of what type of overall sort cost of goods increase you might have and therefore what type of pricing we're talking about to try and pull (technical difficulty)

It's not a 1% of sales yet. Of course, that's a developing thing. We're at midyear 2014, so it's hard to project the full year 2015. Right now, we are looking at an increase that's below 1% of sales. What justifies taking price increases in that context is it falls hard in certain product lines and not so much in other product lines. So, to the extent that fruit prices are a driver of this, and fruit is a very important part of the Polaner line for instance, you have to look hard at what kind of pricing you're going to do in that particular category.

Got it. Great. Thanks very much.

Sean Naughton, Piper Jaffray.

Good afternoon. So, on Rickland, it seems like that was a brand that was a little bit more challenging in conjunction with some of the distribution issues you had in the quarter and the first half of the year. What specifically is happening there with that particular brand? Has it lost any shelf space or is it really more about losing out this volume to some other products, channels, that it sold?

It wasn't a significant retail brand, if you will, with a significant shelf space in grocery stores or in mass merchants. But having said that, the shelf space it had is being challenged hard and we are in some competitive categories, like the bars, where we're having to work hard to maintain our presence in supermarkets and places like that. The brand was, by and large, a warehouse club brand and still is, but it's core product line. The yogurt bars have been copied and underpriced significantly by others in the clubs, and that's put a dent in that business.

Now, we've been innovating and going beyond those bars with things like trail mixes, and we believe that we can still do a good job with that brand and, if you will, create a posture around the brand that is this is all about innovative snacking, on trend snacking with consumers, and especially quick to market and responsive to what warehouse club consumers want to see in terms of snacking. That's the role we see for the brand going forward right now. And to the extent we can build up the brand and get consumers used to the Rickland Orchards name, then you can successfully build a retail business as well.

Okay. And then just a quick question on the cash obligations for the year. Any changes on the interest expense or taxes that you outlined in the last call?

Tax rate, you see our effective tax rate for the first half of the year is 35.6%. That's what we're looking at for the full year. Interest will be down a little bit, trending down, just strictly because we've reduced our senior secured facility down 1 percentage point. But we've got a little less than $350 million outstanding at a 1 percentage point decrease in interest rate.

Okay.

We are reaping those benefits as we speak.

Okay. And on some of the stuff you talked about, Dave, I think we've done some stuff on the non-GMO side just within Pirate's, and then I also think the Polaner brand. Can you talk about how these initiatives were received by the consumer and any impact on cost on those initiatives as well?

The first audience we are doing this for isn't necessarily the consumer; it's the retailer with the Polaner brand, and with the snacks. We are trying to establish a point of difference with the Polaner brand to Smuckers preserves business. We actually tried to do this 10 years ago with the Polaner All Fruit line, and say it was a non-GMO line and got called out by the FDA and got a nasty letter telling us stop doing that. The world has changed, so now we are able to do it again.

Too early to tell what the consumer response is. That's rolled out into distribution, and we will see how consumers respond to that.

On the snacks side, we think we're going to have a much stronger and more immediate response simply because people like Whole Foods, as you may and you probably know, have put out the edict that product in Whole Foods will be non-GMO. And to the extent that Pirate's was not non-GMO pretty much as we were taking the business over, Whole Foods stopped supporting our promotional activity at Whole Foods until we transitioned to fully non-GMO products, which we have done as of the end of June. And we are running that product through the natural distribution channels now, and we would expect to get stronger promotional support from our natural food customers as a result of that and therefore do more consumer sales as a result of that.

So, we've done the good work in terms of making the Pirate's line fully non-GMO for the natural channel. We still have a regular product line that is out in supermarkets that is not fully non-GMO, but we've addressed the concern from the natural channel point of view.

Okay, that's helpful. Thank you.

That is all the time we have for questions today. Mr. Wenner, I will turn the conference back over to you for closing remarks.

Thank you. Thank you all for your interest in the Company. As you can see, we had a challenging quarter and have had to lower our expectations by a few percentage points. But as we said, we think there's nothing inherently broken here. We have issues that we have to address. We are addressing them as we speak. And as Bob said, we are hopeful that the second half will come in as predicted and we will be back on track. Thanks again.

This does conclude today's conference. Thank you for your participation.