B&G Foods Inc (BGS) 2015 Q2 法說會逐字稿

Good day, and welcome to the B&G Foods second-quarter 2015 financial results conference call. Today's conference is being recorded. You can access detailed financial information on the quarter in the Company's earnings release issued today, which is available at bgfoods.com.

Before the Company begins its formal remarks, I need to remind everybody 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 the Company's most recent annual report on form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact the Company's 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.

The Company will also be making references on today's call to the non-GAAP financial measures adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted diluting earnings -- shares, base business net sales, and comparable base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release.

Tom Crimmins, the Company's CFO, will start the call by discussing the Company's financial results for the quarter. Next, Bob Cantwell, the Company's CEO, will discuss various factors that affect the Company's results, selected business highlights, and his thoughts concerning the remainder of 2015.

Now I'd like to turn the call over to Tom Crimmins, CFO. Tom.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Net sales for the second quarter of 2015 decreased 4.6% to $193.6 million compared to $202.9 million for the second quarter of 2014, with almost two-thirds of the net sale decrease attributable to Rickland Orchards. Net sales of the Rickland Orchards brand decreased $6.1 million compared to the second quarter of 2014, a continuation of the weakness that caused us to impair the brand's trademark and customer relationship intangible assets in 2014.

Partly offsetting the Rickland Orchards shortfall was an extra two weeks of sales from specialty brands during the second quarter of 2015, as compared to the second quarter of 2014, which positively impacted net sales by $1 million.

Comparable base business net sales -- which excludes the impact of acquisitions, the Rickland Orchards shortfall, and the Ortega and Las Palmas recall announced in November of 2014 -- decreased 1.9%. The decrease was attributable to a 3.9% decrease in unit volume, partially offset by a 2% increase in net pricing due to increases in list prices and reduced promotional activity.

Net sales increased by 16.9% for Cream of Wheat, 6.7% for Specialty Brands for the comparable period of ownership, and 4.1% for Mrs. Dash, offset by a net sales decrease of 7.7% for Pirate Brands, 16.3% for New York Style, 9.7% for B&M, 9.1% for B&G, 22.5% for Don Pepino, and 16.8% for Emeril's. Net sales for all other brands in the aggregate decreased 1.1%.

Gross profit decreased 1.6% to $62 million in the second quarter as compared to $63 million for the second quarter of 2014. Gross profit expressed as a percentage of net sales increased 90 basis points to 32% for the second quarter of 2015 from 31.1% for the second quarter of 2014. The 90 basis point increase was primarily attributable to price increases and lower delivery costs, offset by minor net cost increases in commodities and packaging, and the negative impact of the Canadian exchange rate.

Selling, general, and administrative expenses decreased 24.1% to $19.2 million for the second quarter, as compared to $25.3 million for the second quarter of 2014. Expressed as a percentage of net sales, our selling, general, and administrative expenses decreased 260 basis points to 9.9% for the second quarter of 2015 from 12.5% for the second quarter of 2014. Net interest expense for the second quarter decreased 6.3% to $11.1 million from $11.8 million for the second quarter of 2014, which was primarily attributable to a decrease in our average debt outstanding.

For the second quarter of 2015, the Company's adjusted net income -- which excludes the after-tax impact of the loss on product recall and acquisition-related expenses -- was $19 million, or $0.34 per adjusted diluted share, compared to adjusted net income of $17.5 million, or $0.33 per adjusted diluted share a year ago, which also excludes the after-tax impact of a loss on extinguishment of debt during the second quarter of 2014.

Our adjusted EBITDA increased 2.8% to $47.4 million for the second quarter of 2015 compared to $46.1 million for the second quarter of 2014. Adjusted EBITDA as a percentage of net sales increased to 24.5% for the second quarter of 2015 from 22.7% for the second quarter of last year.

Moving on to the balance sheet, we finished the second quarter with $984.4 million in long-term debt. Our net leverage was approximately 4.4 times adjusted EBITDA. And our current dividend rate is $1.36 per share, per annum, or approximately $78.8 million in the aggregate based on our current shares outstanding.

Primarily to take into account the expected impact of the recently completed Mama Mary's acquisition, we are increasing our full-year fiscal 2015 guidance for adjusted EBITDA to a range of $199 million to $204 million, and net sales to a range of $875 million to $885 million. Largely because of the additional 4.2 million shares of common stock we issued in the second quarter of 2015, we are decreasing our adjusted diluted earnings per share guidance to a range of $1.44 to $1.50.

And now I would like to turn the call over to Bob for more details on the quarter and the remainder of 2015. Bob?

Thank you, Tom. Good afternoon, everyone. I will now review the second quarter in more detail, and then go over our expectations for the remainder of 2015.

The first item I would like to mention is our very successful equity offering in the second quarter, raising approximately $126 million, which reduced our net leverage below 4.5 times adjusted EBITDA and provided additional liquidity for acquisitions.

With a portion of the proceeds of the equity offering, and consistent with our continued commitment to pursue accretive acquisitions, we are pleased to have begun the third quarter by acquiring Mama Mary's, a leading brand of shelf-stable pizza crust that complements very well with our existing portfolio of products, including our Don Pepino pizza sauce. We expect the Mama Mary's brand, after it's fully integrated into B&G Foods, to generate, on an annualized basis, net sales of approximately $35 million, and adjusted EBITDA of approximately $7.5 million.

The acquisition is consistent with our long-standing strategy of acquiring brands with strong category positioning at accretive purchase price multiples. The acquisition, at approximately $50 million in cash, equates to a purchase price multiple approximately 6.7 times adjusted EBITDA.

During the second quarter we also announced our strategic partnership with DSC Logistics, a leading, innovative logistics and supply chain management company that has been in operation for over 50 years. DSC will provide all warehousing and distribution management services at our three primary distribution centers. We believe that the transition to DSC, which is beginning in the third quarter, will be completed by the end of the second quarter of 2016.

In addition to providing additional logistics expertise and improving our current state of operations, we believe that the partnership with DSC will provide us with the operational scalability required to continue to execute our growth strategy. After the transition to DSC is completed, we expect to achieve approximately $8 million per year in cost savings.

Now moving on to the second-quarter performance, there were many moving parts that I will review. The quarter saw continued growth in adjusted EBITDA and adjusted EBITDA margin. Adjusted EBITDA grew $1.3 million or 2.8% to $47.4 million in 2015 versus $46.1 million in 2014. More importantly, we continued our efforts to expand our adjusted EBITDA margin, already one of the industry leading margins, increasing our adjusted EBITDA margin 180 basis points to 24.5% in 2015 from 22.7% in 2014.

We accomplished this by decreasing our promotional spending; increasing our year-over-year pricing by $3.9 million; and reducing costs, including delivery costs, as we continue to see lower fuel surcharges.

Moving on to our sales results for the quarter, our comparable base business net sales were down $3.8 million or 1.9% for the quarter and are up $1.6 million or 0.4% year to date. With our quarter ending on the July 4 holiday, we were impacted by a shortage of common carrier availability at quarter end. We estimate that this accounted for a net sales shortfall of approximately $3 million to $4 million during the last week of the quarter. After the first two weeks of the third quarter, we have seen the benefit of this timing and are up approximately $3.5 million in comparable base business net sales versus the first two weeks of Q3 of 2014.

Our largest brand, Ortega, was up approximately 1% in net sales for the quarter and is up almost 9% year to date. The quarter included positive pricing of $0.9 million for the Ortega brand, partially offset by a $0.7 million volume decline. The volume decline is primarily related to the timing of marketing and promotional programs. We do, however, feel very strongly about the remainder of the year for Ortega.

During the second quarter we launched five new, innovative Ortega products, including two Ortega Street Taco Kits, Ortega 6-inch flour and whole-wheat tortillas, and Ortega smoky chipotle taco sauce. These new products have been widely accepted by retailers, and we look forward to updating you on their progress during our third-quarter call.

Second, Pirate's brands, although up 2.7% in net sales year-to-date, was down 7.7% for the quarter. The decrease in the quarter was primarily due to two factors. First, during the second quarter of 2014, we ran promotional activity in alternative channels that did not repeat in the second quarter of 2015. We expect this timing issue to be reversed as we have additional promotional programs lined up for the second half of this year that we did not have in the second half of last year.

Second, we launched three new Pirate's brand products in 2014: Pirate's Booty Crunchy Treasures, Pirate's Booty Fruity Booty, and Pirate's Booty Mac & Cheese.

Perhaps more significantly during 2014, we developed and launched Non-GMO Project Verified variations of Pirate's Booty Smart Puffs and Original Tings for sale exclusively in the natural channel. Pipeline distribution gains during the second quarter of 2014 on the new Pirate Brand products and new Non-GMO Project Verified variations of certain Pirate Brands products make it difficult to compare current-year second quarter results for Pirate's brands to that of last year.

Our sale of Pirate Brand products in the retail channel continue to be strong. This is largely the result of our retail activation teams. We have numerous programs set up with key retailers in the second half of 2015; and, on a full-year basis, expect to deliver solid year-over-year growth from this key brand.

So the bottom line with Ortega and Pirate's brands is that the two brands remain very solid, and we expect that they will finish 2015 with a strong second half, and with full year net sales results in line with our expectations when the year began.

New York Style was down 16% in net sales for the quarter. Much of this decline was attributable to our selling off of product with old packaging in 2014, which we have now cycled through, as well as our discontinuing a portion of our Canadian New York Style business that was not profitable.

The good news is that we believe the base supermarket deli business has stabilized. In addition, we have recently re-launched our New York Style pita chips with new recipes in six flavors, and an improved crunch with less crumble that are just getting into distribution. We expect the New York Style brand to be relatively flat for the rest of the year.

We also eliminated or reduced the majority of our aggressive promotions for our lower-margin Northeast brands, such as B&G, B&M, and Don Pepino, which helped improve our margins and profitability on these brands during the quarter, but negatively impacted volume, which Tom talked about earlier. In general, we continue not to see aggressive promotional activity by our competitors other than in the Northeast, and expect to deliver approximately $10 million to $12 million in incremental pricing for the full-year 2015.

Moving on to some bright spots during the quarter, Cream of Wheat was up 17% in net sales. In 2014 we ran aggressive promotions on Cream of Wheat that increased volume but reduced profits. We pulled back on those deals in 2015 and saw positive pricing of approximately $0.8 million, and positive volume of $0.9 million. We expect the rest of the year to continue to improve. And, in addition, we -- in the third quarter we are launching five new items of Cream of Wheat instant cups to appeal to the on-the-go consumer. These new Cream of Wheat products have been broadly accepted by a number of key retailers.

Mrs. Dash continued its growth trend during the second quarter, up over 4% on both positive pricing and volume. The Specialty Brands acquisition continues to exceed our expectations, with second-quarter net sales for the business up 6.7% versus comparable 2014 net sales. In the late summer, we will be launching four flavors of Bear Creek Hearty Soup Bowl mixes, which are a new alternative for consumers who are looking for an easy, on-the-go, single-serve option. We also see additional opportunities to expand distribution of the brand's core dry soup mix items.

As we turn to cost, we expect our overall commodity, packaging, and ingredient costs to remain relatively flat as compared to 2014. Increases in nut prices are expected to negatively impact costs for our TrueNorth brand by over $2.5 million for the full year. We have taken substantial price increases at retail for the TrueNorth brand to offset this substantial cost increase, which seems to have been accepted by customers.

The weakness in the Canadian dollar is expected to have a positive impact, and help reduce our maple syrup costs by approximately $5 million from July 2015 through June of 2016.

We are starting to experience lower delivery costs due to better operating efficiencies and lower fuel cost. We experienced an 80 basis point decrease in our delivery cost for the quarter. We expect to see continued lower year-over-year delivery cost in the second half.

To wrap up, there were a few bumps in the road during the second quarter as it relates to sales, but we continue to have great momentum on many initiatives as we move into the second half of 2015.

I am very pleased with our adjusted EBITDA margin improvement for the quarter and our improved year-to-date adjusted EBITDA margin of 23.7%. We are focused internally on making decisions that are margin accretive on existing product and new product initiatives. And we continue to work to reposition our existing brands and products to enhance their relevance for today's consumer. We are excited about the Mama Mary's acquisition, and expect it to be immediately accretive to our earnings.

As Tom mentioned, based largely on the expected contribution of Mama Mary's for the remainder of 2015, we are increasing our adjusted EBITDA guidance to a range of $199 million to $204 million. And after also taking into account our net sales shortfall in the second quarter, we are increasing our net sales guidance for the full year to a range of $875 million to $885 million. And largely due to the equity offering we completed in the second quarter, we are revising our (technical difficulty) diluted earnings per share guidance for a full year to a range of $1.44 to $1.50 per share.

With that, I would like to open up the call for questions. Thank you.

Operator?

(Operator Instructions). Bryan Hunt, Wells Fargo.

I was wondering, first of all, can you talk in general terms about the acquisition environment, maybe the opportunities you are seeing today? And then, two, I would tell you the multiple on the most recent acquisition has definitely caught our eye. It's a little lower than anything else we've seen recently. So that's really my first question, and I'll get another one to follow up.

Okay. Well, from acquisitions, and just your comment on the multiple, we have been a disciplined buyer for a long time. Our last acquisition prior, the Specialty Brands acquisition, was a multiple less than 7 times also. So we're very much a model that wants to make sure that our acquisitions are accretive to shareholders, day one. And the first step is the purchase price multiple.

We're always looking, so kind of a generic answer here. We're always looking. Certainly from big food companies who have -- big food companies have to put things on the market. Right now there's really nothing floating around, per se, from big food companies that would fit us. And there's a lot of smaller deals. Our last two deals were from private equity: SBA and Mama Mary's are private equity. So those are around.

It has to be right for us. Mama Mary's came up pretty quickly on us, and we're certainly an acquirer who would like to do more of those. It's just a matter of what might be on the market tomorrow.

And then my second question is, when you look at Mama Mary's, you really don't mention much about synergies. When I think about synergies here, are there distribution synergies as well as potentially manufacturing synergies in the future? Or how would you frame it?

Well, as we look at what we -- the business that we disclosed, around $35 million in sales and $7.5 million in EBITDA -- has some natural synergies in that from buying a company and not needing certain functions. Yes, long-term, as we get into it, this product will be just more lines on our invoices, and it's more product on our trucks. Hopefully there's some real synergies there. And as a small Company like Mama Mary's, their cost of distribution is going to be much higher than B&G's, just because most of their product does not go out full truckload, where most of our product is full truckload, so this is just more products on our trucks.

Just like SBA, we saw additional synergies after we owned it, and we expect more of those synergies to happen. It's a nice little tuck-in acquisition. The other synergy we don't talk -- we have a very strong, very good pizza sauce sold in the Northeast. We look at this as an opportunity to hopefully expand that pizza sauce. Because the Mama Mary's brand is in parts of this country, throughout, from East Coast to West Coast, and we see a real opportunity on our Don Pepino pizza sauce business and hopefully driving some sales, combining it with the Mama Mary's business.

And then lastly, looking at the breadth of your product portfolio -- whether it's snacking, meal preparation, bold flavors -- is there anything that you can decipher about maybe the change in consumption trends of the US consumer in the last couple of quarters from the velocities within your product portfolio? Thank you.

It's hard to say. We've seen some of the -- a little bit more of the in-home eating meal occasion brands, which would include snacking. Even though it's not a full meal occasion, it's kind of sometimes a meal replacement. We're seeing that piece of business pick up. Some of the other kind of products -- the more stable, commodity kind of things -- are still a little slower. We're seeing that even in the spice categories, for example. Not so much with our Mrs. Dash, but just the other spices we compete within those categories seem to be a little slower.

But the meal occasion businesses -- and we consider our Ortega brand certainly that, and certainly now Mama Mary's and certainly our snacking brands, along with a few others -- seem to have picked up a little bit. Still a little bit of struggle in the Northeast. It's a little tougher in the Northeast than the rest of this country. For some reason, the Northeast seems to be responding a little slower than the rest of this country has, and we're hoping that happens sooner than later in the Northeast.

All right. I'll get back in the queue. Thanks, Bob and Tom.

Karru Martinson, Deutsche Bank.

Just continuing on the acquisition, you guys certainly have been disciplined over the years. But is there any temptation of those larger targets that are out there?

Well, we are certainly capable of doing a much larger acquisition, but the multiple has to be right. At the end of the day, it does not make sense for us to buy something at what our multiple that we trade at, or even higher. Certainly we want to buy something that -- at turns of our multiple lower than where we trade; so shareholders get accretion, day one, and long-term that's a good investment for both B&G and shareholders.

So, we look at bigger things, when and if they show up. But typically the multiples -- certainly in this market in the last couple years -- have not made sense to B&G.

Okay. And when we look at the Albertsons-Safeway merger, Chapter 11 filing for A&P, are there any share of shelf considerations that we should be mindful of as the industry goes through some consolidation and changes?

Well, the Albertsons -- we actually look at the Albertsons-Safeway merger as a benefit to us. And we're getting additional distribution in the stores that weren't as fully distributed as some of the others in those chains. So they are kind of evening out our distribution, and that's a benefit to us.

The A&P bankruptcy is certainly going to be noise in the system. It's an initial negative, just because there's noise in the system as that change disperses into different ownership. Certainly when we -- now this is -- now we're a business that has some of those lower-margin Northeast brands I mentioned in my remarks that are all sitting in here in A&P, and the A&P chain is an important part of those brands, too.

Now, those brands will continue being sold to consumers, but there's going to be noise in the system as that chain is broken up into pieces. So there will be a little hiccup along the way, and hopefully it's not too long. What we know is our consumers want our products. We just have to make sure those distribution outlets are available for us to sell those products in.

All right. Thank you very much, guys. Appreciate it.

(Operator Instructions). Farha Aslam, Stephens.

Could we talk about the TrueNorth brand? You had highlighted that the retailers had accepted the prices. Could you share with us the volume trends? And importantly, how you think going into that holiday period -- that that brand and nuts overall are going to be featured, versus other options.

Well, at least initially, what we've seen is we had a tough first quarter on TrueNorth, as we actually held back on shipments, getting customers to agree to the price increases, because we needed the price increase to make any money based on what we were paying for the product. And we've seen a very flat -- so the good news is, we've seen a very flat second quarter.

And we're watching this very closely. It remains to be seen. The consumer trends out of the -- our largest customer of TrueNorth seems to be really good. It was good in the second quarter. Certainly your question is, this business does pick up in the second half of the year. And it is certainly the kind of product that is eaten occasionally, but it's also used for parties and things like that as you get into the fall holidays.

Right now we think it's okay, but it is something we have to watch very closely. But basically anybody selling almonds, pecans, certainly almonds, has taken major price increases to consumers. But there's always a consumer breaking point where you potentially lose some consumers just buying those products. But at least through the second quarter, we saw a flat second quarter, and we're very happy with that.

That's helpful. And then just overall on your top line, adjusting for the fact that you had that the end-of-the-quarter shipping timing, generally you had anticipated volumes were going to be soft this quarter, because you were planning to take price. Was the volume in line, in terms of the volume weakness in line with your expectations -- greater, less?

If we had shipped to $3 million or $4 million at quarter-end, our volume would have been right where we thought it was going to be. Because we knew our major brands, what was going on with Ortega and Pirate's. And we knew that was a little bit more timing than not, and we'll get a lot more of those sales back in the second quarter.

A couple of the brands in the Northeast reacted heavier to us reducing promotions/raising prices than we expected. Because we actually got -- through this year and through the end of last year, we didn't see a lot of competitive pressure on pricing. But we saw some in the Northeast in our pickle category and our bean category; more than we expected as we went into the July 4 holiday.

So we're re-looking at our programs on those two brands, and may have to be a little bit more aggressive on those brands as we head into the rest of the year. But we have calculated that into our -- into what we've just said is our $10 million to $12 million of pricing for the full year.

Okay. And my final question -- sorry for the background noise -- D&A, interest, and taxes. Could you just share with us those modeling questions, what you expect D&A to be, interest, and taxes?

One second.

As Tom is just pulling that up, the taxes -- the tax rate that -- around 35.5%, we expect that for the rest of the year. So that's not going to change as a percentage.

Okay.

Interest expense is going to be somewhere in that, call it, $43 million to $45 million range.

For the whole year.

For the whole year.

Okay. $43 million to $45 million. And then your D&A?

Overall G&A --.

D&A.

D&A. I'll grab that, Farha, and then I'll --.

Farha, it should -- except for the Mama Mary's acquisition; that will add a little bit of amortization on customer relationships.

Yes, you're somewhere in that sort of $27 million to $29 million range for the year.

Okay. Perfect. That's exactly what I needed. Thank you so much.

Kevin Ziets, Citi.

I was just curious, on Mama Mary's, how the business has been performing in recent years or periods. Just what's its growth profile been, how well distributed is it, and if you see an opportunity to gain distribution under your ownership?

Well, certainly we see the opportunity, but business has been relatively flat, up a little bit. It is the leading brand of pizza crust. There's a competitor who is a very close second, so they kind of go neck and neck, but the business is pretty solid. It has some very good distribution to key retailers.

What we can certainly add to that is they didn't get everywhere, just because of the nature of their business and their size. Within our retail grocery organization, we should be able to get it in distribution where they are not. And we look at that as a real opportunity.

And we look at it riding -- having our pizza sauce ride along with it -- as a real opportunity in our pizza sauce business, too. So we think there's real opportunity on the upside. This is not going to be a business that's going to skyrocket in a big way. But certainly our national sales and distribution network can fill in distribution voids that they do not have. But they are in most major customers: they're in Walmart; they're in Kroger; they're in Safeway. They're in the key retailers in this country.

Okay, great. And then just following on Karru's question, I know it's a little bit early, but in terms of the Ahold and Delhaize merger, is there an opportunity there similar to what you're seeing with Albertsons and Safeway?

We'd hope so. Everybody -- all organizations think differently. We'll see how -- I think it's a little too early for us to understand how they think about managing what they own. And it varies. We've seen mergers where they understand, don't mess in certain areas with the store put ups, because that's what consumers want in those areas. And that tends to be what honestly has worked longer-term for most of these chains. We have to adjust, just like everybody else in this industry.

But again, our customers are consumers. These are the outlets that sell our consumers. And we just need to make sure we have the proper product put up to sell our consumers in all these customers.

Okay, great. Thank you.

Thank you. And with no additional questions in the queue, I'd like to turn the conference back over to Mr. Cantwell for any additional or closing remarks.

Thank you, operator, and thank you all for joining the call and your continued interest in the Company. We look forward to a very successful second half of 2015. Thank you again. Bye.

Thank you. And ladies and gentlemen, once again, that does conclude today's conference. Thank you all again for your participation.