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B&G Foods, Inc. (NYSE:BGS)

Q3 2008 Earnings Call Transcript

October 30, 2008 4:30 pm ET

Executives

David Wenner – President and CEO

Bob Cantwell – CFO and EVP of Finance

Analysts

Reza Vahabzadeh – Barclays Capital

Ed Aaron – RBC Capital Markets

Alton Stump – Longbow Research

Andrew Lazar – Barclays Capital

Thomas Share [ph] – Federated Investors

Nick Edney – Adar Investment Management

William Robertson – TM Capital Corp.

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the B&G Foods, Inc. third quarter 2008 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 your questions. I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over to David Wenner, Chief Executive Officer of B&G Foods. Please go ahead sir.

David Wenner

Thank you. Good afternoon everyone and welcome to the B&G Foods third quarter fiscal 2008 conference call. You can access detailed financial information on the quarter in our earnings release issued today available on our Web site at bgfoods.com and in our quarterly report on Form 10-Q that we have filed today with the SEC.

Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. We also will be making reference on today's call for 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 and is included in our 10-Q.

On today’s call, we will be referring to slides that are available on our Web site by going to www.bgfoods.com under the Investor Relations Company Overview section. We will refer to individual slides by number to help you follow our remarks.

As usual, we will start the call by having our CFO Bob Cantwell to discuss financial results for the quarter. After Bob’s remarks, I will discuss factors that affected our quarterly results, business highlights, and our current thoughts concerning the upcoming quarter and fiscal 2009. Bob?

Bob Cantwell

Thank you, Dave. If you go to slide 3 in the presentation, you will see that net sales decreased $0.5 million or 0.4% to $116.5 million for the third quarter of 2008 compared to $117 million for the third quarter of 2007. Price increases that were recently implemented improved net sales by $4.7 million during the third quarter of 2008. These pricing gains however were offset by a decrease in net sales of $5.2 million attributable to unit volume decline. A substantial portion of the unit volume decline was attributable to the poor maple syrup crop in Canada in 2008 that resulted in an industry wide shortfall of maple syrup and a management decision to eliminate unprofitable sales to certain customers of private label pickles and peppers. Net sales of our Maple Grove Farms pure maple syrup and our private label pickles and peppers declined in the third quarter of 2008 by $1.4 million and $0.2 million respectively. In the case of pure maple syrup, this decline was attributable to the unit volume decline partially offset by pricing gains. David Wenner will review the remaining increases and decreases in our brand sales in more detail in his business commentary.

Gross profit decreased $7.6 million for the third quarter of 2008 or 19.7% to $30.7 million from $38.3 million in the third quarter of 2007. Gross profit expressed as a percentage of net sales decreased 6.3% of net sales to 26.4% for the third quarter of 2008 from 32.7% in the third quarter of 2007. This decrease in gross profit expressed as a percentage of net sales was primarily due to increased costs of wheat, maple syrup, corn, packaging, transportation and sweeteners, partially offset by

$4.7 million in sales price increases.

Sales, marketing and distribution expenses decreased $2.3 million or 17.6% to $10.8 million for the third quarter of 2008 compared to $13.1 million for the third quarter of 2007. This decrease was primarily due to a decrease in consumer marketing of $1.3 million and a decrease in brokerage and employee compensation of $0.9 million. These expenses expressed as a percentage of net sales decreased to 9.3% in the third quarter of 2008 from 11.2% in the third quarter of 2007. General and administrative expenses decreased $1.3 million or 38.7% to $2.1 million for the third quarter of 2008 compared to $3.4 million in the third quarter of 2007. This decrease was primarily due to the result of a decrease in compensation expense and bonus accruals of $1.6 million partially offset by increase in professional fees of $0.2 million.

Operating income decreased 19.5% to $16.2 million for the third quarter of 2008 from $20.2 million in the third quarter of 2007. Net interest expense decreased $0.8 million or 6.6% to $11.6 million for the third quarter of 2008 from $12.4 million in the third quarter of 2007. Interest expense for the third quarter of 2008 includes a reduction of $1.5 million relating to the unrealized gain on our interest rate swap offset by a reclassification of $0.1 million of the amount recorded in cumulative other comprehensive loss relating to the swap and reduction in interest income and capitalized interest on qualifying assets based on our effective interest rate.

Our EBITDA decreased 16.3% to $20.1 million for the third quarter of 2008 compared to $24 million in the third quarter of 2007. Earnings per share of Class A common stock was $0.08 for the third quarter of 2008 as compared to $0.13 in the third quarter of 2007. Capital expenditures for the third quarter of 2008 were $0.8 million and are $9.8 million year to date. During the fourth quarter of 2008, we expect to incur an additional $1.2 million in capital expenditures for a total of $11 million. As detailed on slide 4, we expect our xx cash flow before dividends for 2008 to be approximately $31.2 million. This projection is based on our projective EBITDA for 2008 of between $90 million and $91 million which includes the impact of estimated severance and termination charges of $0.8 million we expect to incur in the fourth quarter of 2008. For purposes of calculating excess cash flow before dividends, we start with our projected EBITDA and subtract our projected cash interest expense of $48.1 million, cash taxes of $0.7 million, capital expenditures of $11 million and add back an accrual for long time equity incentive compensation awards of $0.7 million. At the new intended dividend rate of $0.68 per share per annum that we announced last week, we expect our dividend payments in 2009 to be $25 million in the aggregate.

Turning to slide 5 in our balance sheet, we finished the third quarter of 2008 with $31.9 million of cash compared to $34.6 million at the end of the third quarter of 2007. We project that we will have $33 million of cash at the end of our 2008 year and an undrawn revolver of $21.9 million. We finished the third quarter of 2008 with $535.8 million in long-term debt and $161.6 million in stockholders’ equity. Net debt to EBITDA is expected to be at 5.6 times for the year ended 2008.

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

David Wenner

Thank you, Bob. As you can see in our numbers the third quarter was a difficult quarter for us with the same industry issues that affected us in the second quarter, price and cost only with greater effect. Before I get into the details of the quarter, I would like to stress that we view this quarter as an anomaly in our usual steady performance and an anomaly caused by a very few specific cost issues that we are confident are now behind us. We have issued guidance in our earnings release for the first time ever to put numbers behind that belief and to demonstrate our confidence and improve future results.

Third quarter net sales declined slightly to $116.5 million versus third quarter 2007. As you can see on slide 6, absent the decline in sales of pure maple syrup products to retail customers, our net sales would have increased for the quarter. The crop failure this past spring caused us to take three actions in response, raise price wherever possible to reflect the almost 50% increase in cost, discontinue roughly 75 maple syrup products to conserve limited supplies and allocate supplies of what we were able to buy to our customers. The discontinued products and the allocation caused a net sales decline of $2.9 million of maple syrup sales in the third quarter before pricing. Price gains added back $1.5 million making the third quarter net sales decline $1.4 million. On a unit basis, overall third quarter volume was down 1%. Retail maple syrup unit volume was down 54%. Unit volume in the quarter would have been up slightly without this decline and overall net sales would have been up roughly 1%. Another modest factor in the sales decline was our decision to exit several unprofitable private label pickle and pepper arrangements. This affected net sales by only a couple of hundred thousand dollars in the third quarter since we continued to sell down inventory. But it is worth mentioning because it will impact fourth quarter sales by approximately $1 million and 2009 net sales by over $3 million. On the positive side our profit margins and working capital will both improve once we have fully exited these private label arrangements.

Third quarter net sales were aided by price increases of approximately $4.7 million which included the $1.5 million gain on maple syrups to which I just referred. Although this was much better than the modest gains we saw in the first half of the year, it was still below our projections for the fourth quarter. Momentum on pricing built as the third quarter progressed and broadened across the entire line of products. September for instance experienced almost two-thirds of the quarterly gains and where maple syrup represented almost one-third of the total quarterly gain, it was roughly 20% of the September pricing gains. This performance makes us much more confident that pricing will have its full effect in the fourth quarter and that price increases will improve over third quarter by roughly 40%.

There were only a few brands with sales issues in the quarter and none of those issues were large. The B&M brand was down $400,000 as our everyday low-price customers quickly stop promotions after the summer selling season. The brand remains up year to date and is actually having a very good year (inaudible) is the only other negative of consequence down $0.5 million due to the competitive issues in the Mid West. We are addressing these customer-specific issues with that brand. On the positive side, our Ortega brand grew by over 2% despite weakness in the food service segment of that business. We are seeing general softness in food service across most of our brands sold into that channel usually offset by increased sales on the retail side. The Emeril brand had a good quarter growing almost 9% on strong sales of cooking stocks, pasta sauces, and mustards. Focus on key segments of the Emeril business had helped that brand recover from first half 2008 declines. Our B&G, Joan of Arc, Trappey and Molasses brands all posted solid gains as well and most of the other brands in the portfolio were stable for the quarter. Cream of Wheat was essentially flat with not quite 1% growth but here again softness on the food service side where we saw declines was offset by a 7% gain on the retail side of the business. Beyond the shift from food service to retail we continued sales move from traditional grocery customers to mass merchants. Net sales to Wal-Mart for instance grew by 18% in the third quarter. While some of that gain was due to new distribution, we also saw brands with stable distribution growth in some cases by as much as 30%. Since our margins with mass merchants are similar to grocery, this movement is a neutral event except that we typically have lower selling and distribution costs with mass merchants.

Cost was a significant factor in the third quarter as it has been for all of 2008. Our cost of goods sold was up $6.3 million for the quarter or 4.2% of net sales. Distribution costs were up $800,000 or six tenth of a percent of net sales. These increases were too large for our price increases to match. As I said at the beginning of our remarks, there were two cost factors that affected our results disproportionately in the third quarter, wheat and maple syrup. In the case of wheat, we suffered through extraordinarily high wheat costs for virtually all of the quarter which was far longer than we anticipated. These costs fell by 40% at the beginning of the fourth quarter and we have locked in favorable wheat cost beyond the middle of 2009. In the case of maple syrup, we were able to raise price at retail to compensate for higher costs but we were locked into unfavorable prices on the food service side throughout the quarter. That situation also changed as the quarter ended and in the fourth quarter our food service maple syrup sales will be modestly profitable. These two factors lowered third quarter EBITDA by approximately $3.8 million, virtually all of the decline we experienced in the quarter. Their elimination is one of the reasons we are confident that the fourth quarter will be more stable.

Operating expenses remain under excellent control and we are $3.6 million lower than the prior year in the third quarter. That gain comes from a variety of factors which include lower management incentive compensation, lower selling cost and the impact of cost savings. In addition our marketing spending which was front-end loaded this year was lower in the third quarter of 2008 than in the third quarter of 2007. Our balance sheet remained strong as Bob indicated and cash is only a few million dollars lower than this time last year. Inventories are flat versus last year primarily because we are carrying more maple syrup inventory than last year. Thanks to focus and hard work, we have reduced finished goods inventory by $6.4 million versus last year. But that positive will be masked until we work the maple syrup inventory down. We expect however to generate further cash from our inventory by year end.

Looking forward to the fourth quarter, we have reversed the position that we have held in the past and decided to forecast EBITDA for the quarter. This forecast can be seen on slide 7 of the presentation. We have done this because we feel the third quarter was an anomaly in our business caused by two unusual circumstances as I have discussed and pricing that came more slowly than anticipated. Given the fact that we saw much better pricing in September that we are seeing encouraging trends early in the fourth quarter and that we are seeing a softening in some of our costs, we feel confident that the fourth quarter EBITDA will at least match the $24.3 million achieved in fourth quarter 2007. This forecast assumes lower wheat cost, which we have locked in and new pricing arrangement in our maple syrup food service business which is also in place. It also assumes pricing gains approximately 40% to 50% higher than in the third quarter but lower proportionately than the gains we saw in September. Sales net of pricing are assumed down slightly due to maples syrup product allocation and our exiting private label pickle and pepper accounts.

We have also given guidance for the full year 2009 and forecasted EBITDA for 2009 will fall between $95 million and $98 million. This guidance assumes price increases of over $15 million and further material cost increases of roughly $11.5 million. Slide 8 shows the major component to that cost increase and as you can see the increase is largely due to packaging. There are pluses and minuses in commodities but on the whole we expect that they will cancel out. So while wheat costs are locked in at a lower cost than 2009, we know that bean costs will be higher because we had the contract at higher prices in 2008 to get farmers to plant. We expect distribution costs to be lower in 2009 saving us approximately $1 million. Our recently announced headcount reduction will net nearly $3 million in savings in 2009 and we expect other cost reduction efforts in the company to contribute several million dollars as well. All of this of course assumes that the current trends on cost did not reverse dramatically. We are selectively locking in costs wherever possible to guard against that which will protect us but will also limit our ability to take advantage of further cost decreases. I should also note that this guidance does not consider potential gains from lower maple syrup costs. History tells us the competition will limit any gains we may see from a normal crop and/or favorable exchange rates.

We have also taken several additional actions to reassure our investors that our business is sound and that their investment is sound as well. On October 24, we declared our 17th consecutive quarterly dividend. This was done a few weeks earlier than normal to address speculation that we were about to cancel our dividends. As you can see on slides 9 and 10, we reduced the dividend by 20% to $0.17 per share versus $0.2120 per share to increase investor confidence that the dividend is sustainable for the long term. Our previous dividend rate resulted in nearly all of our free cash flow being distributed to shareholders. The new dividend rates distribute the great majority of excess cash to shareholders but does retain some of that cash flow in the business. We remain committed to our dividend policy which states that we will distribute a substantial portion of our free cash available to pay dividends to our investors.

Our press release today also announced that the Board of Directors has authorized the stock and the debt repurchase program to buy back up to $10 million of the company’s Class A common stock and/or 8% notes over the next 12 months. This decision reflects the feeling of the Board that our common stock is trading at an unusually low price given the current dividend rate and company performance. Our senior notes are also trading at a discount. If we are able to buy them back at this discount, it would be a deleveraging event for the company. While the new dividend rate was not announced with the repurchase program in mind, it does potentially provide some of the cash to be used in that program. If we are able to reduce inventories as planned in the fourth quarter and in 2009, this would provide additional cash for the repurchase program. The timing and amount of such repurchases if any will be at the discretion of management and will depend on available cash, market conditions and other conditions.

We obviously face further challenges as we proceed through the fourth quarter and into 2009 but I am confident that we have weathered the worst of the cost storm and are well prepared for the next 14 months. Pricing is in place to offset existing cost increases and we have announced a further price increase effective January 1. Cost increases are expected to be at a much lower rate than has been seen in 2008. If that is correct, we will have caught up with cost and should be recovering margins throughout our P&L. While M&A activity is severely constrained given today’s financing markets, we believe that it will recover modestly in 2009. It is our job to be well positioned whenever it does recover. Our actions in the past few weeks have been aimed at maintaining the health of the business and the soundness of our shareholders’ investment in B&G Foods. We believe that we are on the right track for the fourth quarter of 2008 and fiscal 2009 to achieve those goals.

At this point, I would like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir (Operator instructions) Our first question comes from Reza Vahabzadeh with Barclays Capital.

Reza Vahabzadeh – Barclays Capital

Good afternoon.

David Wenner

Good afternoon Reza.

Reza Vahabzadeh – Barclays Capital

On the EBITDA decline Dave you said that almost all the decline was due to maple syrup, wheat cost and what was the other component of that?

David Wenner

Pricing did not come as quickly as we thought it would.

Reza Vahabzadeh – Barclays Capital

Okay. So looking into the fourth quarter the reason that the EBITDA could be nearly flat or better would be because of the pricing change and maple syrup on the food service side more pricing in general and then wheat costs coming down just to be clear on the stuff.

David Wenner

Wheat cost is down in the fourth quarter 40% from where it was in the third quarter. Our maple syrup food service business has been reset to new pricing with new products so that it is modestly profitable where it was losing money on every sale we made in the third quarter and our pricing momentum definitely showed in September and early returns in the fourth quarter are positive as well.

Reza Vahabzadeh – Barclays Capital

Okay and away from maple syrup and the lower margin pickles business, it looks like sales were not really holding out, is that your expectation for the fourth quarter as well?

David Wenner

Yes we are forecasting that sales are flat to down slightly and it will be down slightly because the private label business effect will be larger and the maple syrup effect will still be fairly pronounced. You are talking again probably very similar to third quarter a loss of almost $3 million in sales before pricing with pricing making up not quite half of that. In fact, it will not be quite that because the food service component is at a lower price now and so you will see some sales loss if you will from that too although unit volume will be steady.

Reza Vahabzadeh – Barclays Capital

Inventories came off nicely in this third quarter, should we expect more of the same in the fourth quarter as they usually have that come with experience?

David Wenner

We will pull down inventories more in the fourth quarter because we are always cyclically we are pulling down maple syrup products and we are pulling down B&G products in the fourth quarter. But we go into the fourth quarter with a much lower finished goods inventory than prior year and much higher maple syrup raw inventory if you will. That will come down and I think we will nice inventory gains in the fourth quarter.

Reza Vahabzadeh – Barclays Capital

Right. And then you have the commodity cost increase for 2009 in (inaudible) is that moderated in the last four to eight weeks and do you have good visibility on these costs going into 2009?

David Wenner

We have good visibility and some of the costs have moderated but as I said as we have locked in some costs we are not able to take full advantage of some of the collapses if you will that you have seen in wheat and corn. We thought it was prudent at the time to lock in a decent proportion of our supply at a profitable level compared to 2008. So we limited our upside if you will but we are protected on the down side. Some of the other increases you see in packaging are still being negotiated and there is a little bit more softness there than had been when this was prepared but there is nothing firm. We think this is a worst case scenario on the packaging side I guess is the best way to put it.

Reza Vahabzadeh – Barclays Capital

Right. In conjunction with your dividend you talked about potential acquisitions, is that just an opportunistic approach or do you have something specific in mind?

Bob Cantwell

There is nothing specific in mind. We think though that as the markets start to revive which hopefully will happen sometime in 2009 that the activity will pick up and we may or may not be able to do something depending on where interest rates go, where expectations are from a seller point of view and all the factors that make us decide whether to do something or not.

Reza Vahabzadeh – Barclays Capital

Thank you very much.

Bob Cantwell

Yes, you are welcome.

Operator

Your next question comes from Ed Aaron with RBC Capital Markets.

Ed Aaron – RBC Capital Markets

Hi guys, thanks for taking my questions. First of all on the gain on wheat, did you see that you had a 7% on the retail but less than 1% for overall and if so I guess I was not under the impression that the food service was that big of a piece of that business, can you just maybe clarify that a little bit?

Bob Cantwell

Food service is a decent proportion of the business. So a decline on food service can certainly have an effect on the overall performance.

Ed Aaron – RBC Capital Markets

Did you say how much was food service down on a percentage basis?

Bob Cantwell

It was double digits.

Ed Aaron – RBC Capital Markets

Okay.

Bob Cantwell

I don’t have the number in front of me but I know it was over 10%.

Ed Aaron – RBC Capital Markets

Okay and then you announced the buyback authorization, how do you think about the trade-off between using any excess cash or to buy back stock versus buy back debt, when you compare it to, the stock maybe is more attractive there is arguably some benefit delivering the balance sheet in light of future refinancing risk and uncertain credit markets, could you just give some color on that please?

Bob Cantwell

I think you are right, there will be a deleveraging but buying back $10 million of debt at a discount depending on how big the discount is, is not a huge delivering event where you could argue that if the stock stays at its present level, I am improving my cash flow in the business significantly by buying back stock but those are the kind of considerations we will have to look at depending on where the market goes, what the discount is on the debt versus what kind of cash flow we can get out of buying stock back. Obviously it is pretty interesting, it is a compelling thing to look at when you look at a stock that is yielding over 20% on the dividend and I do not get a tax deduction on that dividend that makes a very good argument for buying the stock back.

Ed Aaron – RBC Capital Markets

Sure. And then lastly, could you talk a little bit about the factors that might have changed since you last reported the full year, I think last quarter you mentioned that you thought you could still be flattish with last year on an EBITDA basis the full year looks to be a little bit below that, it sounds like the main issue there probably is pricing which you mentioned was different from your expectations but partly it is the commodity issue but I was under the impression that commodities even for these key commodities that you sited really trended in a worse direction from when you last reported and fell through the end of the quarter and so I am just trying to get my head around that a little bit.

Bob Cantwell

I don’t know if they trended worse, there is definitely a peak in cost on wheat in the third quarter and we experienced that for longer than we hoped we would. We were buying $50 wheat there in the third quarter and not enjoying it very much and it went on for longer than planned originally. The same with the food service maple syrup, we thought we could transition that to a more profitable scenario faster, as it turned out we had to create new products, get those products approved through the channels that we sell through and that was time consuming, so we didn’t get the relief as quickly as we thought. Then the third element of pricing, pricing just did not come as fast as we hoped it would in the third quarter although as we said we are very encouraged by what we saw in September and frankly the third quarter was not a terrible quarter for pricing certainly compared to the first half and it is very encouraging going into the fourth quarter. So, the first two are resolved and the pricing looks like it has great momentum so we are looking forward to a very good fourth quarter and really the effect for the year, when you look at the decline year to year, it is all in the third quarter.

Ed Aaron – RBC Capital Markets

Fair enough, thank you.

Operator

Your next question comes from Alton Stump with Longbow Research.

Alton Stump – Longbow Research

Thank you good morning or I should have said good afternoon.

David Wenner

From where you are good afternoon or good morning.

Alton Stump – Longbow Research

Just a couple of good questions. First off, very good news on the cost front (inaudible) manageable next year, just on the pricing area obviously you are looking for I think $3.5 million more than what you expect cost to be, what gives you confidence that you can get to that level of pricing above and beyond cost pass-through?

David Wenner

Because it is in place already and we are already seeing in the second quarter – we saw almost $5 million in pricing that we didn’t see in the first half of the year. If you just put that into the first six months of 2009 you can say you are going to get about $10 million in pricing gains and then we think there is more momentum than that in the pricing going in 2009 and we have announced another price increase on a decent number of products for January 1, 2009.

Alton Stump – Longbow Research

Okay, thank you for that. One other question, with the recent dividend cut announcement, how much of that was truly in response to the market conditions being very weak versus wanting to just add maybe a bit of extra cash around for other usages like you have talked about already, is that (inaudible) with your announcement?

David Wenner

It wasn’t about having more cash around because obviously with the stock repurchases we are saying we can use some of this cash and still be comfortable on our balance sheet. We have never used our revolvers so we generate enough cash in this business to operate the business on a day-to-day basis. The stock repurchase, this announcement was aimed at taking advantage of what we perceive as a condition where our stock is depressed. Our stock, we think, is depressed because there was no confidence about the dividend. People were looking at cash flow and saying the dividend was not sustainable, so we cut the dividend enough to give us a cash cushion if you will that people will perceive that the dividend was sustainable and we think there was a concern that – there was certainly talk of the dividend being eliminated that was never our intention and we wanted to put out that announcement about the dividend early to stop that conversation very quickly.

Alton Stump – Longbow Research

Okay I guess what I am trying to get out here is with the cut announcement this was not a case of you had to do it or you are going to major issues in a quarter or two, it is more of like to have that cash available to give back in other ways to shareholders.

David Wenner

Absolutely. We did not do it because we needed the cash. We don’t need the cash and I think the fact that we are announcing a program of taking $10 million in cash and buying back stock or bonds is evidence for that.

Alton Stump – Longbow Research

Great thanks guys.

Operator

We will now hear from Andrew Lazar with Barclays Capital

Andrew Lazar – Barclays Capital

Good afternoon.

Bob Cantwell

Good afternoon Andrew.

Andrew Lazar – Barclays Capital

Just a couple of things, one just with respect to the incremental price increase that you talked about that will start taking place Jan 1, it is interesting because there is so much rhetoric out there now that with some of the recent slide in key commodities over the last month or so that the pricing window if you will is more effectively closed at this point meaning retailers had a lot of pricing through and it was justified but now it is going to be a whole sort of different ball game in getting that through. Did you understand if you have a greater level of push back on this recent round of pricing or did it go through do you see like the rest?

Bob Cantwell

There has been some pushback more than before but I would not call it a remarkable amount more and we are able to answer that very specifically because what we are taking pricing on are brands that are still seeing cost increases and the great example when you look at the cost increases we are showing on this slide B&M backed beans, the bean costs are going to up $2.3 million and this includes some of our other products but there is a big increase there and there is a big increase on steel cans. That is the pricing is warranted in that context where you are seeing those kinds of increases still going. There is wonderful relief on wheat although wheat is still higher than it was a year ago. There is some relief on distribution although if you look at fuel surcharges as of this week, they are still higher than they were a year ago because diesel has not backed down as much as gas has. So everybody is talking about cost decreases, we are not seeing that and we are able to justify the further price increases on select brands not on everything.

Andrew Lazar – Barclays Capital

Where you sort of started to sort of lock in some of your commodity needs as you go, I think you said through kind of mid ’09 and like others I think you are in a situation where lot of other food companies have been doing the same, I guess trading off product ability for the chance of kind of beating the market at some point. Are there categories that you have and if so how many of them do you think there are, what percentage of sales or you are maybe more at risk though for having locked in some things where maybe some competitors are not as skilled at doing that or private label that may not hedge as much or much more tied to the spot market and therefore can take advantage of that move more quickly and might be whatever advantageous on pricing at some point where you are still locked in at a higher level?

Bob Cantwell

I really don’t think we have that kind of exposure. I think when you look at what are our major costs, maple syrup is one of the major costs, you can’t lock that in, it is a point in time cost we think it is going to go down. The currency exchange rate is favorable right now compared to where it was last year but we are no more or less able to take advantage of that than our competition is. We believe we have locked in at a reasonable level and I think we are in a good competitive position there. When you look at beans, everybody was in the same boat. If you wanted beans and you wanted the farmers to plant beans, you had the contract at the kind of prices we are paying right now and I don’t think had any special magic there to avoid that and I think the can pricing is going to apply to everybody when it comes in unless somebody has a very powerful multiyear contract. But the feedback I get from our suppliers is everybody is in the same boat on the can business as well. So those are our major cost elements, everything else is fairly minor and I don’t think it gives anybody a real powerful plus or minus versus us.

Andrew Lazar – Barclays Capital

Last thing, when you get the shift that you have from your food service business into retail, is that a favorable sort of margin mix for you, so is that favorable but just everything else was obviously much more negative?

Bob Cantwell

In general yes.

Andrew Lazar – Barclays Capital

Okay, thanks very much.

Bob Cantwell

You are welcome.

Operator

Our next question comes from Thomas Share [ph] with Federated Investors.

Thomas Share – Federated Investors

Hi. How much were you maple syrup costs up year over year?

David Wenner

We are looking at about $7.5 million and that is with buying half of our normal annual needs. So, it was a substantial cost increase year over year.

Thomas Share – Federated Investors

So on a percentage basis?

Bob Cantwell

Up 50%.

David Wenner

Up over 50% yes, and everybody was up, everybody paid pretty much basically the same price. It is controlled at Canada.

Thomas Share – Federated Investors

On the EBITDA perspective, I think you had broken down maple syrup and wheat to what $3.8 million, can you break that down between wheat and maple syrup?

David Wenner

The maple syrup had really related to the food service piece and in the quarter that was about $1.7 million and wheat was a little over $2 million.

Thomas Share – Federated Investors

I think you mentioned that I think from a wheat perspective you feel like you are hedged at a competitive level, what about corn? Obviously that is my only concern where you are hedged within that range could be interesting.

David Wenner

We think we are pretty good there. We kind of had rolling contracts here as we bought in through the majority of 2009, we have been buying in as a drop but we are not a big corn user, it is used in our shelves for Ortega, we don’t actually spend a lot of dollars on corn at all.

Thomas Share – Federated Investors

Just kind of taking a look at the consumer at this point, obviously you have commented about seeing the shift from food service to retail, within your products are there certain categories that seem to be performing better than others, there are certain categories we are seeing considerably more kind of price competition from competitors.

David Wenner

We are not seeing a lot of price competition from competitors but we are seeing categories that are all about eating at home and recipes and things like that doing very well. Ortega for instance is doing very well and we are having a lot of dinner kits and things like that that are selling well. Our recipe beans Joan of Arc for instance, those are the kind of things that sales are just zooming at Wal-Mart for those I presume people are making chilly at home and things like that. And B&M is another one that did very well this summer, we had a remarkable summer. So it tends to be more – what you read seems to be true, people are eating out less and cooking at home more and anything that takes you right there seems to be doing very well.

Thomas Share – Federated Investors

To the extent that pricing came through slower than you would have figured in the third quarter what kind of drove that?

Bob Cantwell

What we have seen this year is a big effect from EDLP customers and getting pricing implemented with them a lot of times it is not – you can’t just announce the price increase with an EDLP customer, you have set periods that you have committed to that pricing level with the customers, so it staggers in over time if you will and we saw some of that continue to happen in the third quarter. We now fully understand that. So when we look at what we are going to do with the price, we know that it is going to take effect but it really has been a revelation of how much of certain parts of our business are with what we would call EDLP customers and what effect that has on price increases.

Thomas Share – Federated Investors

Okay and you think you have just a better understanding kind of how that is going to work going forward.

Bob Cantwell

Yes, it is kind of very granular level now.

Thomas Share – Federated Investors

Okay just as you had not needed to as much to this point you were not as familiar is that a fair statement?

Bob Cantwell

Well it is two things, we haven’t – we are still learning how to do price increases up until say the middle of the year and two of the EDLP customers have proliferated tremendously. We are in a lot of grocery change doing that in the past that trend has grown significantly.

Thomas Share – Federated Investors

Okay.

Operator

(Operator instructions) We will hear from Nick Edney with Adar Investment Management.

Nick Edney – Adar Investment Management

Hi, you have answered most of our questions but I did want to address one about the capital structure decision on the dividend and I guess it is apparent that even after cutting your dividend the stock is still yielding almost 24% the market does not seem to have reacted or seem to care much about the dividend and so I am wondering why you would not consider cutting it even more, maybe a lot more and using the proceeds to buy back debt or even stock, your debt is trading around $0.80 and the stock is obviously very cheap, why not just use the cash to purchase your securities if the market is not responding to your dividends?

David Wenner

We are not sure that the market won’t respond to the dividend going forward. I think there is a certain element of people waiting for the earnings release to come out before they made a decision whether to get back into this company or not but when we look at what goes on in the market with our stock, we have a very stable shareholder base that is the vast majority of the shares in this business and those shares don’t move. Those shareholders are the shareholders we sold the stock to when we went IPO, some of them have increased their holdings in this stock and they are in this stock for the dividend and they believe as do we that if we run our business well and if we show that we are reliable and that this is a short return on your investment, the stock price will take care of itself over time. So we are committed to those shareholders, we are committed to the proposition we went IPO with is that we will distribute our free cash flow to our shareholders and provide them with a very good dividend return. The stock does what it does, we are going to stick to our strategy and I guess you could make an argument that given that very large stable shareholder base were we to go away from our strategy we might become an orphan. We would lose the shareholders who understand the proposition and have stuck with us and I am not sure what attracts new shareholders. For now and for the foreseeable future, I think we are going to stick to our strategy.

Nick Edney – Adar Investment Management

Okay thank you.

Operator

Our next question comes from William Robertson with TM Capital Corp.

William Robertson – TM Capital Corp.

Thank you. I guess the last question came from someone who is more interested in the debt than the stock because (inaudible) the management on your confidence, regaining the confidence of the public stockholders. The cut in the dividend looks like it is about a little over $6.5 million a year and yet we have all seen market value has impacted a lot of people who bought this stock on a yield basis, it is the main reason they bought it given the stability of the product and the history of the company, so I would encourage management to stay with the current dividend. In fact I realize that the savings from cutting the dividend is not going to make a big difference than the capital structure if your bad debt in or equity. But being mindful of the fact that people bought this as a yield investment the stock as well as the enhanced income securities and that is most important. We are not running this company for the debt holders primarily it is for the stockholders. So in our product management it appears that the results of the quarter and your outlook for the year certainly should give confidence to people and I hope we will regain some of the market value that has been lost when people feel the confidence that you can’t maintain the current dividend. At any case, I look at the cut in the dividend and with your outlook I still wonder whether that was the right thing to do. So I really ask the question is there something that we are not seeing or that you are talking about that I have missed with regard to your ability to make the debt payments and your confidence in refinancing in 2009 when that is going to come up.

David Wenner

First of all, let me quickly address what you just said, we are not placing any refinancing in 2009. The earliest part of our debt comes due in 2011. So we don’t place any refinancing activity for at least two years. But secondly, we could have made the full dividend payment, the cash flow is pretty much right there in terms of doing that. What we were getting from a lot of conversations with a lot of people was that there wasn’t confidence that we could continue to do that when we were essentially using all of our cash flow to service debt and pay the dividend. So in that context we felt that if we gave ourselves a modest buffer on the cash flow that people would have confidence that the dividend was sustainable and we believe that that is a very important issue that people have that full confidence that we are going to pay this dividend every quarter. So, that is why we took the action. The action is not something that is chiseled in granite as far as what we will pay going forward that can be adjusted by the board on a quarterly basis. We adjusted it down in this case but there is nothing to say we can’t adjust it back up as our results improve and we remain committed to the policy that says we will pay out a very substantial portion of our free cash flow. So I would hope that would encourage you in that context.

Operator

We have no further questions at this time. I will turn the call back over to our speakers for any closing comments.

David Wenner

Thank you all very much for participating in the call. I think it sounds like message came across very clearly in terms of the results for the quarter and our projections for 2009 and the fourth quarter of 2008. We are very confident that the business will recover to its normal levels in 2009 and we are certainly working hard to make sure that happens but thank you once again.

Operator

Once again that does conclude today's conference. We appreciate your participation and wish you all a great day.

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Source: B&G Foods, Inc. Q3 2008 Earnings Call Transcript
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