Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

John Mense – Vice President of Finance & Investor Relations

Stephen B. Hughes – Chairman of the Board, Chief Executive Officer

Robert S. Gluck – Vice Chairman of the Board, Chief Operating Officer

Alan S. Gever – Executive Vice President & Chief Financial Officer

Analysts

Robert Labick – CJS Securities

Edward Einboden – WM Smith Securities

Gregory Badishkanian – Citigroup

Tony Brenner – Roth Capital Partners

Mark Argento – Craig-Hallum Capital

Chris Krueger – Northland Sec

Mitchell Pinheiro – Janney Montgomery Scott LLC

Ryan – William Blair & Company, LLC

Smart Balance, Inc. (SMBL) Q4 2008 Earnings Call February 26, 2009 9:30 AM ET

Operator

Good morning. My name is Lesley. And I will be your conference operator today. It is February 26 and I welcome you to the Smart Balance Incorporated 2008 fourth quarter earnings conference call and audio webcast. This call is being recorded for playback purposes and will be available beginning two hours after the conclusion of today's call. The playback will be available through March 26, 2009. The conference ID number for the replay is 86651187. The dial line number is 800-642-1687 or 706-645-9291 for International callers.

You may also listen to a rebroadcast by logging on to www.smartbalance.com and in the Investor Center clicking on the link. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Statements made on this conference that are not historical facts including statements about the company’s plans, strategies, beliefs and expectations are forward looking and subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from such forward-looking statements for a number of reasons including those risks and uncertainties set forth in the company’s filings with the SEC and the company’s ability to raise prices as fast as commodity cost increase, introduce and expand distribution of new products, meet marketing and infrastructure needs, meet long-term debt covenants, and continue to grow net sales. Please refer to our earnings release for the full statement.

And now I will turn the call over to John Mense, Smart Balance’s Vice President of Finance and Investor Relations.

John Mense

Thank you, Lesley. Good morning. With me today are Steve Hughes, our Chairman and CEO; Bob Gluck, our Vice Chairman and COO, and Al Gever, our CFO. This morning we released our earnings results for the fourth quarter of 2008. If you have not seen the earnings release it is available in the Investor Center of our website, www.smartbalance.com under Company News. For the call today Steve will startup by highlighting our results and discussing marketplace developments for our products. Bob will review and provide some perspective on our major accomplishments in 2008 and Al will provide additional details about our financial results for the quarter. Finally, Steve will come back to discuss our outlook for 2009. After his remarks all of us will be available for your questions.

Because we acquired GFA brands during the second quarter of 2007, our reported financial results are not comparable to prior years. During the course of today’s call, we may refer to prior year's results on an operating basis, which includes the results of Smart Balance since the acquisition and the results of GFA prior to the acquisition. We believe this will improve comparisons for prior periods because it reflects the performance and expenses of the operating entity. Please refer to our earnings release for a reconciliation of operating basis results to GAAP results. The operating results should not be viewed in isolation or as a substitute for reported GAAP results.

I will now turn the call over to Steve.

Stephen B. Hughes

Thank you, John and good morning everyone. I’m pleased to report to you on the excellent progress we made on our growth plans and strategies in the fourth quarter and for the year 2008. Let me highlight a couple of the key items from fourth quarter. Net sales grew 29% in the fourth quarter of 2008 versus 2007. We had a record number of cases shipped with November and December being our best months ever. Key drivers during the holidays were sales of our new 50/50 butter blend sticks.

Second half sales growth for 2008 was 31% within our 25% to 35% outlook and since our low point in June each month grew sales in cases versus the prior year. Operating income of $1.7 million in the quarter was up $14.3 million versus the prior year in which there was a large one-time expense related to our capital structure. Operating income excluding non-cash charges decreased $1.8 million to $6.9 million. And our earnings per share was a $0.04 loss, compared to $1.27 loss in 2007. Of the $0.04 loss $0.03 is attributed to the adjustment to the value of our interest rate swap, a non-cash charge. We reduced debt by $15 million in the quarter and debt is down to $70 million from the $116 million at the time of the acquisition just 19 months ago, we're very pleased with the debt pay down.

Bob and Al will take you through additional financial highlights in 2008 business accomplishments a bit later. In the marketplace, estimated consumer purchases of our products from checkout scanner data rose 33% in the quarter '08 versus '07. We had solid growth in our grocery channel, but we continue to see double the growth rate in channels outside of grocery. The company achieved its 28th consecutive quarter of growth in market share and spreads in the spreads category according to IRI. The fourth quarter market share was 13.4% up a full point from last year primarily from the butter blend sticks. For the year market share was 13.6 up 1 point from 2007.

For 2009, we've recently launched our HeartRight spreads, which use plant sterols that may help reduce cholesterol, we think this is a great product to compare against products like Benecol and Promise Activ, we will also be targeting the key holiday baking season starting with Easter, with our 50/50 butter blend sticks and have introduced a virgin flavor with extra virgin olive oil. Importantly on January 26, we launched a new consumer campaign to highlight the differences in trans fat between leading competitor brands in this spreads category. We are calling this new campaign Zero Isn't Zero. As you may know, the FDA the Food and Drug Administration labeling requirements allow claims of zero trans fats for serving at levels less than 0.5 grams.

Independent testing has conformed that leading competitive brands of spreads have significant levels of trans fat that are just below this threshold. Consumers are buying some products claiming zero trans fats that may in fact have more trans fats in their diet than they realize and beyond the American Heart Associations recommended daily limit. Smart Balance Buttery Spreads are naturally blended and protected by patent, we do not use partially hydrogenate oil. So, we do not create trans fat in the first place. Smart Balance's Buttery Spreads have essentially trace levels of 0.07 grams of naturally occurring trans fats.

Our research indicates that the consumers find this point of difference surprising and important and we encourage everyone to go to our website, we have a new microsite called theTruthAboutTransFat.com for more information on this topic and this will be an important initiative for 2009. Another category is cooking oil continues to grow in sales, units and market share, while all other major brands have lost sales and share to private-label. For 2009, we plan to expanding distribution of sizes as well as increase in penetration of our cooking sprays.

Peanut butter sales and case shipments grew both in the fourth quarter and for the year, from solid gains of distribution. However, share was down a bit as Peter Pan came back into the marketplace to say as a recap. Now all of this was before the first quarter recall of product continuing ingredients from the Peanut Corporation of America. Peanut butter category sales are down 20% to 25% units so far this year based on the negative publicity.

Smart Balance and suppliers have not association with Peanut Butter Corporation of America in fact has not been attributed to any of the packaged brands of peanut butter. Now, peanut butter sales have faired better than the category, but there we expect a shortfall versus our expectation in the first quarter. We expect these trends to improve once the recall publicity fails. This has not altered our 2009 plans to grow our peanut butter line by targeting a larger demographic and competing more directly against some mainstream brands. We have introduced in Agave Nectar of suite in peanut butter, which has half the added sweetness of the [Olivian] brand. So, we are getting good reaction on that product and expect again to build our peanut butter sales in 2009 after, what we'll expect to be a slow start with the recall issues.

Popcorn sales were down for the quarter and year-to-date as the category remains heavily priced and promotion driven. In 2009, we will introduce a 4 Pack to replace our 3 pack to provide better value. Results of our Smart Balance milk continue to build, Wal-Mart tripled the number of super centers carrying our product in Florida in the fourth quarter we began shipping HeartRight version enhanced with plant sterols that may help people who want to reduce their cholesterol, as you know, we may as many of you know, we are expanding distribution of milk in the Northeast including Boston and New York, our strongest spread markets. The introduction has been very well received by the retailers and we recently started our consumer marketing plan program.

Finally, in November we distributed our first all company double page FSI or free-standing insert in some of the papers across America, we did that in early November to increase support of all of our categories, we are pleased with the response to that effort, and we distribute our second all company FSI earlier in the month of February, and we will continue that tactic through 2009. With that introductory background of our fourth quarter performance and a preview of 2009 let me now turn over to Bob Gluck to recap 2008 our first full year of reporting results of Smart Balance, Inc. Bob?

Robert S. Gluck

Thank you, Steve, and good morning everyone. I am very pleased to be with you here today to be able to highlight the many business accomplishments achieved by the Smart Balance organization during 2008. First off, we put together an another solid year of top line growth. On an operating basis, net sales for the year grew 26% on the strength of case shipment increases of 10% in the second half and 7% for the full year. And sales growth was near the top of the food industry for companies of our size and larger.

Importantly, all of the gains came from internal growth. Few brands in the food industry can boast the year-over-year growth that Smart Balance has achieved and needless to say, we believe we outperform all of our major competitors. This performance is particularly impressive considering that we had to navigate our aggressive growth plan in one of the worst commodity environments the food industry has seen in decades.

Fortunately, we were able to successfully follow competition in raising prices several times during the course of the year, in an attempt to soften the impact of higher input costs on margins. And we did this without suffering any significant erosion in our core user base. In fact, our performance actually strengthened in the second half of the year, after the final two price increases took place, which is strong testimony to the strength of this franchise, and validation of our strategy to continue to invest heavily behind the brand. As witnessed by Smart Balance's 40% plus increase in marketing spend to over $40 million in 2008.

Likewise, despite lower commodity impacted margins, we weathered through one of the worst credit markets in recent memory, as we simplified our capital structure, paid down a significant amount of debt and diligently met to all of our bank covenants. On the marketing side, our marketing team successfully launched a variety of new spreads products like butter blend sticks and new tub varieties with added Omegas as well as introducing new products in for the emerging enhanced milk segment of the Dairy Isle.

We also established a new and expanded long-term agreement with Brandeis University that we hope will provide us exclusive access to proprietary research that will benefit the company and our consumers for years to come. In the sales area, our sales team along with our partners at Acosta successfully established strategic partnerships with our leading customers. And as evidence of the success of this initiative, we significantly expanded distribution in all of our top accounts as well as many of our smaller accounts.

Our top 20 accounts, which account for approximately 70% of our total volume, gained an average of six items on shelf with our smaller accounts registering a net gain of four new items on shelf. Importantly, we now averaged 20 items on shelf nationally, and we will continue to build on this space in the months and years ahead. We also experienced pretty good success in our food service business in our inaugural year of marketing through our partner Ventura Foods. Over 80 million individual servings of Smart Balance buttery spread were distributed in 2008. Every one of which represents an additional opportunity to gain incremental product trial and usage that we can use to convert out of home users into potential new customers on the retail side of our business.

Of course, we all know that with rare exception the food service industry had a difficult year in 2008 and is projected to have another tough year in 2009. But we are working from a small base and have plans to continue to grow this business in 2009. Our export business is small, but also growing. We have a partnership with Magnolia Foods as they continue to focus on increasing shipments of the Smart Balance product line into international markets. Initial consumer response has been encouraging. We are also exploring additional foreign markets in 2009, however, the rate and pace of these efforts maybe impacted by the recent strength in the U.S. dollar as well as overall international economic conditions.

We also kicked off an important strategic cost savings initiative during the latter part of 2008 that we referred to as strategic productivity opportunities or SPOs for short. These programs, which are designed to identifying capture savings in almost all areas of the business are expected to generate meaningful savings to help fund incremental core business activities as well as support the continued development and introduction of new products. In 2008, we approached nearly $1 million of savings by virtue of this program and we plan to generate significantly more savings in 2009 as we realized the full year impact of the projects we implemented last year as well as the rollout of a number of new initiatives that we are working on as we speak.

Finally, on the administrative side of our shop, we began to successfully build the company infrastructure that will support a $500 million enterprise. And this effort was highlighted by the addition of a number of key new hires as well as the installation of a new ERP and trade funds management system that we believe will service well for the foreseeable feature. But that’s not to say that 2008 was a year without challenges and let me take a moment to mention a few. Our execution of the size change in our spreads line during the second quarter was a bit disappointing. As we clearly underestimated the degree of difficult of this project, a seemingly simple task that was made much more complex by the inventory situation at retail. But thankfully that’s all behind us and we can now look upon this experience as a valuable learning opportunity.

We also had to delay the planned expansion of our milk products into new regions and proceed at a slower pace than we had originally hoped primarily, due to the uncertain commodity market in milk and the sizable cost of introduction. Given the economic times, our marketing mix also changed in the second half of 2008 reflecting a greater emphasis on promotion and couponing to protect our current user base and less advertising to generate trial from the customers. When its all set and done, I believe we had the kind of year in 2008 that most food companies can only dream of. But perhaps even more importantly for our team, we have established a sturdy foundation with which to continue to build our business upon in 2009.

That's all from my segment and with that I'd like to introduce Al Gever, our CFO who will take you through a more detailed review of our fourth quarter financial results. Al?

Alan S. Gever

Thanks Bob and good morning to all. As mentioned at the start of the call, in addition to our GAAP reported results, at times I'll be referring to our results on an operating basis, which include the results of Smart Balance since the date of acquisition in May of 2007 and the results of GFA brands prior to the acquisition all within an effort to provide you with more comparable statistics year-over-year. I'll also remind you that beginning in 2008, the company began accruing for certain trade incentives and marketing costs as prepaid expenses to better match the recognition of expense to revenue.

Now, this methodology is consistent with general practice in the consumer products industry and is a change from prior years, while this new methodology may create some timing differences between prior year quarters, it has no impact on fiscal full year results. So in accordance with Accounting Standard 154, we’ve applied a retrospective application of this change in the accounting principal and is reflected in our 2007 quarterly results both on a GAAP and an operating basis.

Because we are comparing to the fourth quarter of 2007, which represents operations following the acquisition, the differences between our GAAP results and the operating basis results in 2007 are not material. Now, for the full year operating basis results in 2007 will provide a fuller comparison of annual results versus our 2008 numbers. And you’ll find information regarding these items in the 10-K that will be issued shortly.

I also want to mention that I am very happy to report that this is the last earnings call that I will be, that I will need to provide these disclaimers as we will be covering or reporting ourselves comparison to full year operations beginning with our first quarter earnings call. So, I am very happy to report that as well. So, let’s begin with our fourth quarter GAAP results. In the fourth quarter, net sales were $65.6 million with operating income of $1.7 million and a net loss of $2.6 million, which translates to a loss of $0.04 per share for the quarter.

Included in the net loss is $5.9 million of non-cash expenses, which includes $1.8 million of a non-cash aftertax impact of the change in fair value of our interest rate swap, which is tied to our long-term debt. The swap adjustment represents $0.03 of the $0.04 per share loss in the quarter. As we said in the third quarter earnings call in November, with the continued turmoil in the financial markets and the expectation of a wide spread between LIBOR and our fixed rate obligation under the swap that we would see yet another unfavorable adjustment to its fair market value in the fourth quarter. Now, the outlook for the financial markets as we all know remains uncertain, and so we may again have to make further non-cash adjustments going forward. Should you desire more detailed explanation of the swap agreement, you can also refer to our 10-K.

Now looking a little deeper, net sales in the quarter increased 28.9% to $65.6 million from $50.9 million in 2007, primarily due to higher prices and a 6% increase in cases shipped. As you heard earlier, the company increased its prices on its products in August to cover rising costs and that followed similar pricing actions in February and June, and all of those were consistent with competitive actions in the industry.

The increase in cases shipped was due primarily to growth in the core category of spreads, higher sales of cooking oil and the performance of our milk in the Florida test market. The spreads case increase came from the expansion of our 50/50 butter blend sticks, while holding our tub business relatively flat during the run up in pricing. And that was on the strength of the success of our new varieties of extra virgin olive oil spreads and omega-3 enhanced spreads.

Gross profit increased $3.4 million to $27.1 million from $23.6 million in 2007 due to the impact of higher pricing and growth in case shipments partially offset by increases in input costs, primarily in commodity raw materials, coupled with higher coupon redemption expenses. Gross profit as a percent of net sales decreased however to 41.3% from 46.5% in the fourth quarter of 2007 as the rate of selling price increases lagged the rate of input cost increases, and in addition to that it was coupled with a higher coupon redemption expense. We expect the impact of lower prices on our key raw materials notably soybean oil, palm fruit oil and canola oil to start working their way into our cost of goods as early as the first quarter of 2009. And as a result, we believe these improving commodity cost trends will help bring back our gross margins closer to our target of 45 plus percent for the year of 2009.

Now, the other side of the margin calculation is the pricing of our products going forward. We planned to aggressively support the Smart Balance brand proposition of great taste and heart healthier alternatives in the categories we compete at prices appropriate for the product benefits that consumers in today's environment are willing to pay for. We will do this by protecting our core user base through communication and promotions that in general repeat purchases as well as attempting to attract new consumers through trial opportunities. As Steve outlined earlier, we will continue to bring out new or enhanced products that will further strengthen the Smart Balance value proposition.

In all cases, consumers will be the final arbiters as to whether our products are fairly priced in the marketplace. So, turning to operating income for the fourth quarter, operating income in the fourth quarter increased $14.4 million to $1.7 million from a loss in 2007 of $12.7 million and this is due primarily to the impact of lower non-cash charges in 2008. In the fourth quarter there was a one-time $18.5 million non-cash charge for performance based shares, which obviously affects the comparisons with the current year. Now, excluding the impact of all the non-cash charges, operating income declined $1.8 million, as the increase in gross profit was more than offset by higher general and administrative expenses from the expansion of the company's infrastructure and timing of certain legal expenses in the prior year as well as an increase in marketing investment of $1.5 million.

Net loss was lower by $8.1 million to $2.6 million in 2008, versus $10.7 million in 2007. Excluding the aftertax impact of non-cash charges, net income in 2008 was $3.3 million versus $5.4 million in 2007. For 2008, our effective tax rate was 28% for the fourth quarter and 33.8% for the full year. While we initially expected the full year rate to be about 39% and most of the difference resulted from a lower than expected state tax benefit of 4% for the year. For 2009, we again expect our effective tax rate to be approximately 39% based on a blended rate of 35% for federal and 4% for state. This is a forecast based on current information and could change as the year progresses.

Company headcount on December 31 of 2008 was 60, compared to 46, 12 months earlier. Now, as it relates to debt, we paid down another $50 million in our first lien loan in the fourth quarter, and now have a total debt level of $69.5 million and that's made up of $59.5 million in our first lien and $10 million in our second. In total, for 2008 we've paid down $50 million in debt and a total of $90 million out of our original $160 billion of debt since the acquisition 19 months earlier. This prepayment of debt in the fourth quarter also incurred a non-cash acceleration of deferred financing costs of $433,000, which is included in other expense. And finally we met all bank covenants as it relates to debt to earnings ratio and interest coverage ratio. So, with that I will turn it back over to Steve who will give us some perspective on the coming year. Steve.

Stephen B. Hughes

Thank you, Al. In May 2007, our Board of Directors' approved our strategic plan after the close of the acquisition of GFA brands. The highlights of that strategic plan were to build Smart Balance to a $1 billion brand. A five-year target of bringing a $500 million in revenues generating a $100 billion in cash operating income. We essentially have finished the first 18 months of that blueprint. Our plans for 2009 are in the next stage of that blueprint on top of the solid foundation we set in 2008. As I outlined earlier, we will innovate with new products across our portfolio we will increase loyalty with current user and attract new users and we will continue to offer consumers great tasty products to improve their balance of fats. A key strategy is to increase consumer awareness and loyalty.

We have essentially one brand Smart Balance to support and we will focus our resources in building that franchise. Our consumer market investment resources will top $50 million in 2009 following over $40 million in 2008 and $30 million in 2007. With the target of investing a $175 million to $200 million in consumer brand building over the next several years, we believe our Zero Isn't Zero campaign about trans fats will have a wide reach and impact with consumers and customers and we will support the milk expansion with a campaign that should not only drive trial of our milk products, but create interest for the broader Smart Balance line.

We will develop products in new categories to expand Smart Balance brand, we hope to start a test market on a new category in the third quarter depending on how development efforts of the economy and the marketplace unfold. We will become more efficient in our trade spending, purchasing, and supply chain cost with any benefits going back to drive our growth strategy. And finally we will continue to generate operating cash flow and pay down debt in 2009. I am optimistic about our plans, but we need to place the outlook for 2009 in a larger context. The economy and consumer spending clearly deteriorated since our last earnings call. There is considerable uncertainty about consumer behavior going forward. And while we have reinforced loyalty of our current consumers and attracted new consumers with innovation and proactive marketing.

The ability to get trial on our premium priced products will be more challenging in this environment. Several trends are working in our favor there is a consumer-spending shift from the grocery channel to super centers and club stores, where we believe we are well positioned. Consumers are also reducing their away-from-home food spending and increasing at-home meal preparation, which should favor our categories. Given the uncertainty at this point, we are eliminating our outlook to the first quarter 2009. We expect first half percentage growth in net revenue and net sales versus 2008 to be in the high-teens to mid-20s. We believe our 2009 plan is the next step towards our longer-term goals, but economic issues will have some effect on the speed with which we can build a trial. We will update you on our progress as appropriate.

To reiterate we build a strong foundation in 2008 despite many challenges, we will add the next floor to our strategy in 2009. In my past I was involved with the start of a healthy choice in the turnaround of Tropicana and Celestial Seasonings. Based on my experience the highest risk was in the first 18 months; a new strategy, a new category, assembling the team, upgrading the infrastructure and launching the first wave of innovation. While our first 18 months at Smart Balance is now on the books and we believe we have a strategy to create the $1 billion brand.

We have increased revenue by 50% from 2006 to 2008. And starting to transition the business from an emerging spreads brand to an innovation platform that can reach across multiple categories. We have launched the first wave of the new products, which have been successful in the marketplace building creditability with our partners and our customers and we are investing at high levels in marketing to build, awareness, loyalty and trial on the brand and the cumulative effect of that will be considerable over the next several years. Perhaps most importantly, we've build a team of 60 dedicated professionals, so I believe are doing the best work of their careers. I'm confident we are well on our way to the $500 million in revenue and $100 million in cash operating income goal, we have set for 2012. And with that I would like to open up for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Bob Labick. Your line is open.

Robert Labick – CJS Securities

Good morning. Congratulations on a strong quarter. Can you hear me?

Stephen B. Hughes

Yes.

Robert Labick – CJS Securities

Okay. Great good morning.

Robert S. Gluck

Thanks Bob.

Stephen B. Hughes

Thank you.

Robert Labick – CJS Securities

First question I want to ask, if you could maybe expand just a little bit on your guidance for the first half, as it relates to the volume growth versus pricing and in that explanation if you could you also just remind us the explanation differentiation between above the line marketing, and below the line marketing. So, it's clear where price comes in, volume comes in, and then the change in your couponing, which is above the line versus other marketing, which maybe below the line. If you could kind of tile that together for the first half as it relates to first half guidance it could be helpful?

Stephen B. Hughes

Well I think, starting with the differential on pricing versus unit growth. We're going to be lapping the price increase in February, and lapping one in June, and so we are going to have probably about we would say about a 15-point differential.

Robert S. Gluck

Yeah in pricing.

Stephen B. Hughes

In pricing between dollars and units. We obviously feel good about the unit trends we saw in the second half, and then coming out of the year, we feel we have got some good unit good momentum, but clearly we will begin to have those price increases relative to our marketing spend.

Robert S. Gluck

Yeah. I will take the question on the splits. So, Bob as it relates to what’s above the line essentially between our gross and net sales, we have all our trade spending and importantly from a consumer-marketing standpoint, we also have our coupon redemption costs. So, that's above the line, and below the line marketing essentially is our media, our other operating costs as it relates to insertion cost for marketing, market research.

Stephen B. Hughes

Agency fees.

Robert S. Gluck

Demos, agency fees and so on and so forth.

Robert Labick - CJS Securities

Great. Very helpful. And then just moving on to a bigger picture question. As it relates to the sale of spreads, obviously you said you've recently launched milk up in New York and Boston. How has the spreads sales fared in those markets versus the other markets where you haven’t expanded milk. Could you talk about any early indications of sale synergies from this marketing?

Stephen B. Hughes

It's still too early to tell in the milk, we just actually broke the marketing plan, first marketing activity on milk in the last couple of weeks. We were encouraged in Florida though when we saw higher growth on spreads in Florida than any place else in the country last year. We are not building that into our plan that's kind of data point that we would like to confirm again in year two. But I think that based upon my experience on Healthy Choice and what we have seen in Florida. We think that there is potential for a synergistic effect. When you get the combined marketing support between the milk and the spreads happening again. We got one 12-month window in Florida good data point, we want to go out and confirm that and expanded markets in year two on milk. So, but we are very pleased I mean just from a tray reaction standpoint, which obviously is not a parameter of consumer success, but is reflective the selling of milk in the Northeast and I have been involved in about $2 billion of new product launches was about as well received by the customer basis any new product introduction. So, we just hope the consumer is enthusiastic and we will find that out in the coming quarters.

Robert Labick - CJS Securities

Great. And then last question, I will get back in queue, but as it relates to that selling how are retailers taking the new product, do you have to give up other SKUs as a result or are you gaining share in the stores that are taking on the milk?

Stephen B. Hughes

The milk is that’s purely incremental. I mean its obviously a new section for us we don’t have any, but I think about this brand is we don’t have anything to lose, and we introduced into a new category it’s not like we have a current brand or current set of products. So, no I think they really, we are talking about New York and Boston where we have some of our best shares and some of our best accounts in the country. They love the idea of us taking Smart Balance to other categories, and they're obviously supporting us well out of the gate and we hope the consumer validates that support in the coming quarters.

Robert Labick - CJS Securities

Great. Thanks very much I will get back in queue

Operator

Thank you. Our next question comes from the line of Ed Einboden. Your line is open.

Edward Einboden – WM Smith Securities

Good afternoon everybody.

Stephen B. Hughes

Hi Ed.

Edward Einboden – WM Smith Securities

I was just wondering maybe you guys could talk about some of the discussions you have had with inventory levels at retail, their comfort and order rates and their outlooks?

Stephen B. Hughes

We have obviously seen a lot of the conversions from other to sort of packaged goods companies. A lot that's been related to categories in the dry section of the shelf stable products. The inventory pipeline is pretty tight in the dairy section, and while we saw, we see in any quarter we will see a couple of point difference sometimes between what is sold out of store and what we shift in that tends to bounce around. So, we at this point we have not seen a material shift in inventories. I do think there is a pretty aggressive effort by customers going against branded item rationalization, I mean I think there is a tendency by the retailers in this market to say, we are going to take fewer items and try to increase the velocities on fewer items in the category. So, yeah obviously that’s one of the things we have to do on our toes from an innovation standpoint so that we continue to bring plenty of new ideas and energy to our categories, but from an inventory adjustment standpoint in the dairy case, we’ve not really seen anything and our businesses aren’t of such scale in the dry grocery category that we it’s material impact for us.

Edward Einboden – WM Smith Securities

Do you feel that some of the retailers are looking at new products is being a way to stay fresh on the shelves, and while pulling back some inventory, and other products new inventory and new products keeps things fresh?

Stephen B. Hughes

I think in this environment people are trying to, every brand, every consumer packaged goods brand is, I think will be wise to be very aggressive in innovation to keep increasing the value proposition, we are fortunate that in our core category spreads private-label is not a big share propositions in the mid single-digits we are in a lot of categories you will see private-label 30 shares. So, I think that we are, I think we have a very full and robust innovation program. We basically are doing something significantly new in everyone of our categories, and we want to be at the table of the dialog about how we're going to increase the business in this tough environment from. We're all, retailers are way wrestling with unit growth and I think we will continue to be very aggressive on core and future categories.

Edward Einboden – WM Smith Securities

I guess and then also on the gross profit side you guys are talking about 45% gross margin in 2009 kind of gravitating to that rate, is that exiting the year on kind of a run rate or is that something that you think is achievable throughout the mid part of the year?

Robert S. Gluck

We think it's achievable for a good portion of the year.

Stephen B. Hughes

Yeah.

Robert S. Gluck

And we anticipate again some of the lowering cost of goods to begin showing their faces, perhaps late in the first quarter, but certainly starting it in Q2.

Edward Einboden – WM Smith Securities

Okay. Thank you very much.

Stephen B. Hughes

Thanks.

Robert S. Gluck

Thanks Ed.

Operator

Thank you. Our next question comes from the line of Greg Badishkanian. Your line is open.

Gregory Badishkanian – Citigroup

Great. Thank you and good job in growing your business this quarter, and as you kind of look out to 2009 of your major new product initiatives like milk and others, what do you think has the biggest potential for benefiting sales?

Stephen B. Hughes

Well, as I put them in the hierarchy I mean we are looking forward to see what happens with Zero Isn’t Zero as campaigning is our core business. Obviously, we’ve done a lot of research on that, and we will see how that plays out, but that's interesting level of growth that has get some good traction with the consumer, we have a lot of focus on grocery this year. We have new initiatives in peanut butter, we will have them in cooking oil, we've done the re-stage on popcorn. So, we are hoping to see some nice traction on those in those categories, and we are just trying to integrate them more between the family FSIs, the on-pack coupon and then such. Obviously, we are going to continue build butter blends, which has been a nice incremental business for us a new usage. And then I think we're the impact of milk we have milk now on 20% of the U.S., but it covers 25% of our spreads business. So, again we saw some interesting encouraging impact of milk on our Florida business one, the non-milk part of the portfolio, we are not really carrying on that for 2009, but that's a possibility. So, that and then we are going to be working on getting a new category ready for launch and test for the third quarter. So, again if you look at this in context I mean it’s, we are basically just executing our plan and so far the consumer environment has not really disrupted those efforts I mean we will continue to execute, we obviously want to be cautious to bid here as we look at the New Year because we just working on and [drive those] from a consumer standpoint, but we basically have our A strategy fully funded aggressively executed, and we will see how it unfolds as we go through the year.

Gregory Badishkanian – Citigroup

Great. Good to hear. Finally, just with commodity costs coming down, just based on your history in the business, very long history, when commodity cost are coming down what’s the lag effect in terms of when it starts benefitting margins in terms of when retailers might wanting maybe some price to benefits to the consumer, how does that kind of work with the lead and lag times there?

Robert S. Gluck

Depending on the commodity Greg this Bob Gluck by the way, it could be anywhere from 3 to 6 months, okay until we actually kind of catchup, and I think a lot of manufactures we have read of a lot of manufactures trying to hold their prices and what have you telling to trade that we still haven’t recouped what we lost last year so I think there is a bunch of folks who were digging in and which is a good thing because we need to restore our profitability and what have you. So, we are looking forward to an improving trend in that particular area in our business. I think the scenario is really different depending on how prevalent private-labels in the category. The nice thing about our spreads business is that it’s got a lower portion of private-label and private-label really does not interact with us it really interacts with one of the value brand. So, I think again the most important thing we can do and I was very encouraged by the unit momentum and dollar momentum on the business in the second half is that we continue to attract users and sustain our royalty. I was also encouraged on the cooking oil business, which is a category with a high level of private-label. But we are premium priced where we have continued to see both strong unit in dollar terms. So, again part of this is as we move through this, and we are now spending at pretty significant levels, and have we will be sustaining those levels on the marketing side as can we kind of lift ourselves and ensure ourselves to be set at a price point that we can command regardless what happens around those. Again, ultimately as Al said the consumer will decide it for price rate, but so far we are encouraged by what we are seeing.

Gregory Badishkanian – Citigroup

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Tony Brenner. Your line is open.

Tony Brenner – Roth Capital Partners

Thank you. If I could stand forward to the second half of the year, technology and some of the initiatives that you just talked about, by early August you will have lapped all of last years price increase, and for the last four or five months of '09 it seems that in order to achieve sales growth close to what your long-term objective is you going to have to depend to a large degree on new products, and your initiatives in food service and international and I'm wondering if there is enough traction in those three areas at this point to produce meaningful second half growth?

Stephen B. Hughes

I think that, clearly that's our plan, and we've got we obviously have milk and we have some major new initiatives relative to our core businesses that we think will when grocery will increase and as well as hopefully with some of the things we are doing with the spreads business as well, but we will need new categories and we will need new channels, we obviously are well established at Costco, at Sam's and Wal-Mart we are opportune at Costco. So, we basically look at this and we know as you look at the lapping of pricing, ultimately units and dollar growth are going to be one in the same and that will be driven by significant new categories whether it's milk or futures and we're very focused on that.

Robert S. Gluck

Right. And Tony this is Bob Gluck as regarding food service and international, we were going to begin to have some contribution starting in the second half of this year. And we still will, we are anticipating that but as I indicated before we could be delayed a little bit from kind of our original prognosis a couple of year ago given kind of the economic condition, the impact on the food service business, working with partners overseas, we are still moving ahead in those areas, but their economic conditions are just as bad if not worse, some parts of Western Europe. So, they are trying to tend to their core business. So, we continue to work with them in developing new opportunities. But they're looking at risk the same way we look at risk here in the States. So, could that delay things a little bit but it is going to have a significant strategic impact on the business, absolutely not.

Tony Brenner – Roth Capital Partners

Will milk be an significantly larger portion of the country, currently 20% by the end of 2009?

Robert S. Gluck

I think that's too early to say I mean we obviously are working on other initiatives around milk other categories and other things so that we can sequence milk appropriately. Obviously, we are encouraged by what's happened to commodity cost on milk, we are encouraged by the first year impact not only the milk in Florida. But also it seems like milk has impacted the balance of the portfolio. Yeah we get we better get through to confirm that year or two though and in broader geography, if we get green lights on that I mean if we see not only strong performance on milk, but see its impacting our spreads business in a very favorable way I mean then that's going to be factored into the calculation, but as you look at building up the $500 million, milk is going to be sequenced and given the volatility of the commodity cost we see over the several years, we are going to be very careful that as we don’t get milk out so far that commodity cost changes direction or so we end up having to make some hard bad decisions again supporting our core business. So, we also know I think have a pretty interesting shine here to see some renewed unit growth on our spreads business and grocery. I mean that's one of the key obviously objectives of Zero Isn’t Zero. We are going to set the way to see if that performs. So, a lot of as I look at this and again I think the 18-month hurdle is a good one to note because there is a lot of moving parts and lot of great work that's been done and there is a lot of risk in that first 18 months. We are now in a nice, we are now executing our plan, and we are doing it across all categories doing across all channels, and I think we have got a strong portfolio not only to have a strong first half, but also have a strong second half as well.

Tony Brenner – Roth Capital Partners

Thank you very much.

Operator

Thank you. Our next question comes from the line of Mark Argento. Your line is open.

Mark Argento – Craig-Hallum Capital

Hey good morning.

Stephen B. Hughes

Hi, Mark.

Mark Argento – Craig-Hallum Capital

Shifting back to talking a little bit more about the marketing I know and I think for the full year on the income statement should you guys spend about $33 million on the marketing line. And I think you referred to spending about $40 or it should be $40 million in terms of the overall marketing spend compared to when you guys are targeting about $50 million this year. Can you break-down a little bit for me just so I can understand where that incremental say $7 million or $8 million is this year, is that up between the net in the gross revenue, then a little bit more color on, kind of your marketing spend it really sounds like it’s focused on building the brand kind of the breakdown between TV, print, and any initiatives you might have online?

Alan S. Gever

I will answer the question relative to the numbers and I think Steve can take over relative to the strategies, but essentially the increase is really both above the line and below the line, its probably about half and half. Half of that’s being spend against coupons and the remainder being spend against media and other activities.

Stephen B. Hughes

Yeah. The plan for 2009, one of the things are most kind in intrigued by and potentially excited by is as we move to $50 million spend levels we are going to spend approximately 50% of that in mass market media and the thing about that which is encouraging in this environment it really is we found the media softness to be the media market to be very soft. So, the dollars we are going to spend this year I think are going a lot further into last year in kind of the brand building component in terms of the broad based TV advertising, we're getting much more focus and investing much more against the Internet I really encouragingly go on to theTruthAboutTransFat website, we are getting, we are right now running traffic on that website that's approaching one point at rate of 1.5 million visitors a year and that's a big part of our kind of intercepting people and giving a much more data on the brand and on the whole trans fat issue. And then we have got a fairly comprehensive couponing effort where we have these four major events that we, the two page events, we have already one of them, we run three more this year. We have some big trial events coming against milk in Florida and New York. Florida and the Northeast, we have big trial events coming against butter blends. And then we are using between catalina, the checkout coupon and on-pack coupon really looking to get people, who are buying our spreads into other categories. So, I think its really, the nice thing is that at the levels we are spending in a normal year, we're going to be a top tier marketer in for our CPG brand. And secondly, as you look at absolute the market we are buying everything. It’s just really a good timing to be a immediate buyer, we are getting a lot of bank for our buck and I think that's, just by that care for the balance year. So, our $50 million this year may actually spend like 55 or even better given the fact that we're talking about a fairly soft media market.

Mark Argento – Craig-Hallum Capital

And I assume you guys are already putting money behind the milk launch in the NorthEast?

Stephen B. Hughes

Exactly, we have started advertising I think the 15 of February in New York, and the 1st of, I think it starts this week, we are just starting in Boston. We are just, our retail distribution is coming up, you will see a lot of our trial activity here in the next 60 days.

Mark Argento – Craig-Hallum Capital

Thanks I appreciate that. And then just lastly in terms of Costco, I know you guys have been testing some products in Costco any idea when you might be able to expand that relationship?

Stephen B. Hughes

We are working on it. I mean we've got, we perfected a pack, we think that they like but that, there are one of those categories you have to sell in all nine regions and so we are kind of we are working that, but its obviously a clear priority for us this year. We have had good traction in other club outlets and so I think we've got a story to sell, but that's something that, will kind of come in chunks, not necessarily come in one national decision, it will come in region by region over the next 6 to 12 months.

Mark Argento – Craig-Hallum Capital

Great. Thanks.

Operator

Thank you. Our next question comes from the line of Chris Krueger. Your line is open.

Chris Krueger – Northland Sec

Following up on that last marketing question. You guys indicated, about a 25% increase this year in marketing spend. If I were to look more horn in more, even more visible on the first quarter, I know seasonally the fourth quarter is a higher spend for that, but with this new trans fat campaign, will the first quarter not drop off as much as you may be would think otherwise. I am just trying to get a handle on that?

Alan S. Gever

Well, this is Al again. I will remind you that our approach relative to how we book our market spending is based on matching revenues and expenses. So, we will be accruing on a fairly consistent basis during the course of the year for that marketing spend.

Stephen B. Hughes

Yeah. From a strategy standpoint and actually how we spend the dollars, between here and the end of April, when you have the Easter this year. Easter actually is in the second quarter not the first quarter of this year. Yeah. That's a big opportunity for us to drive trial and awareness, the summer is we will continue to support the business, but not at the same levels and then we will come back in the fall during peak season. So, we see really the first four months of the year is away to really drive awareness in trial, middle of the year is a little bit lower of seasonality and no big events like Easter or Thanksgiving and as you come back into September, we see our program ramp back up. So, we see kind of the first four months and second four months is really kind of where we really drive the business from a consumer trial standpoint.

Chris Krueger – Northland Sec

Okay. You guys indicated you now have 20 items per store shelf on average.

Stephen B. Hughes

Right.

Chris Krueger – Northland Sec

How many items are available Smart Balance items and how much do you see, how you see the growth there this year?

Stephen B. Hughes

Yeah. I think the one way to look at this, we have a set of accounts right now that are averaging between 33 and 35 items and we just finished the year where we did $222 million in revenue. Those accounts and there is one Florida there are a couple of them in the Northeast, couple in the west coast with their 32 to 35 items, are approaching $500 million in revenue. So, we think there is a pretty, the good news is we think we already have the products that can build out to this $500 million. We just had to build that distribution out. So, this year we have and, we're not necessarily have a big initiative like plus six this year, but we will make a significant step forward another step forward of the 20 items, because, quite actually one of the key variables that get from $220 million or $500 million is going to be building out from 20 to 32, 35 items and we will keep you posted on as we go through the year, but, yeah that's just a constant process and this year that focus will be more on grocery items than on their own spreads, I think our objective in spreads is that's a news there and kind of hold the big expanded sets we have got last year with the new energy really going towards peanut butter, cooking oils, with other categories.

Chris Krueger – Northland Sec

Okay. And then you indicated well potential new category, I know, you don't want to get too specific, do we see, if we do roll out a new one, do we see a similar situation like we did with milk or you maybe pick the Florida market and the same partners that tested and then see how that goes from there or?

Stephen B. Hughes

I think the option milk is a much more sequence name, because it's a pretty particularly recently the commodity cost has been pretty swung pretty well. So, we obviously are teaching that its kind of a unique product for us, other categories we are looking at will be ones that hopefully have, more stable commodities in like butter blends something we can test and enroll national. And so, our expectation would be we would take that into, we take that into probably Florida, we kind of used that as our greenhouse and then depending on how it goes then it might be a category that would go national before we complete the national expansion of let's say milk, I mean milk we think we will sequence that out regionally over the next several years, while we think there are other categories we can test and were very broadly one.

Chris Krueger – Northland Sec

Okay. Last question CapEx for the quarter?

Stephen B. Hughes

For the quarter?

Chris Krueger – Northland Sec

Yeah.

Alan S. Gever

The fourth quarter?

Chris Krueger – Northland Sec

Yes.

Alan S. Gever

It's less than $1 million.

Chris Krueger – Northland Sec

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Mitchell Pinheiro. Your line is open.

Mitchell Pinheiro – Janney Montgomery Scott LLC

Good morning.

Stephen B. Hughes

Hi Mitch.

Mitchell Pinheiro – Janney Montgomery Scott LLC

Hey. So, just getting back to sort of plus six and, you're talking about Steve with a 32 to 35 items kind of customers. So, if plus six was aimed to get to about 18 SKUs a store?

Stephen B. Hughes

Right.

Mitchell Pinheiro – Janney Montgomery Scott LLC

Well how many of your customers either a number or percentages are still below that 18 where you can use that drive them higher?

Stephen B. Hughes

Yeah. I mean they really are that 30% of the accounts that, would be on the lower end of that curve. I mean we did get on average six items in to the top 20 accounts or 70% of our business. So, and we are working to develop and clean up and pickup all those accounts I think the key will be, we are now on the second year of our customer partnership program. We have an program called ABP, Account Business Planning where we really do full year planning and strategy planning with our customers. And I think we are going see some nice traction there. I mean we made obviously some great progress with a couple of accounts last year we're targeting those other major accounts and maybe took a step with us last year, but not the full step. So, as we look out now at the footprint build out of the distribution clearly over the next three years, we're looking to how we add 12 items nationally.

Mitchell Pinheiro – Janney Montgomery Scott LLC

So, given the consumer acceptance of your brand, what's the hold back on those they are just non-believers, they're just, they're in demographic areas that are harder hit by economic issues, I mean, it seem like, it would be a pretty easy job to be a salesman for Smart Balance these days?

Stephen B. Hughes

Well I don't let our sales team hear you…

Robert S. Gluck

No, actually I think it is a little bit of just developing those relationships, I think we have found accounts that maybe weren't that behind us even accounts that aren't that demographically ideally suited for us. The sooner we are doing and they're going to lean in, this way I think it happens it takes time I am probably the most inpatient person about it when we are going to look and try to build out this footprint on the business. But, it's going to take us three years and three cycles to build this out and the nice thing is we have I think our team has done a fabulous job getting customers to really see the benefit of the brand, the role of the brand in terms of being a healthy premium play particularly in dairy. They can really attract the right kind of consumer into their stores. And I think, I mean we have I think every customers as a function of degree, but they're looking to work with us as part of it. So, again I just think it takes time and a little bit of it is, the steady horse wins the race often.

Mitchell Pinheiro – Janney Montgomery Scott LLC

Right.

Robert S. Gluck

We want to build quarter-on-quarter, year-on-year and build some strength, the worst thing we can do is take a false step and burn up a lot of energy, happening to fix something. So, again I look at this over a 36 month build out, and I feel very confident we have the tools and the team and the products that, we can replicate those results we are seeing in those lead accounts.

Mitchell Pinheiro – Janney Montgomery Scott LLC

Okay. So, can you give us.

Operator

I apologize we do need to proceed to our final question, Jon Andersen. Your line is open.

Ryan – William Blair & Company, LLC

Hi guys its actually Ryan phone in for Jon here.

Stephen B. Hughes

Hi Ryan.

Ryan – William Blair & Company, LLC

Hey. Just a quick question here on the kind of the advertising mix, how quickly can you guys adjust that and then, if you want to do more coupon in or more TV and then I have the second question after that?

Stephen B. Hughes

Yes. I mean we have within 30, 45 days it's really we are setup the way we are buying media, the way, I mean the longer lead time items would be things like coupons, but it's and we manage it very carefully. I mean we watch this business obviously weekly, daily, monthly and we are going to listen to the consumer and if we think that we need more coupon, we will turn that dial we think that the Zero Isn't Zero is working effectively, we can turn that dial. So, the nice thing is we are starting from a big, from a very material budget of over $50 million. I mean I'd really want to see never had that amount of money that drive a brand in this kind of consistent way. So, I think we are going to see some interesting benefits we will continue to optimize it. We are actually going on a lot too about how effectively we can be at the Internet with this, I mean this is a high content sale, we start getting 4,000 to 5,000 visitors a day to our websites spending two or three minutes with us looking at four or five pages, I mean that's a pretty effective communication from a brand loyalty standpoint.

Ryan – William Blair & Company, LLC

Okay. And can you guys, is there a way to kind of track what like that to leads from the theTruthAboutTransFat stuff that like that can you track how much, attention that's given you towards your website?

Stephen B. Hughes

Yeah. I mean we have got I mean it’s amazing the data you've got off of the website, we get a report everyday that basically is a dashboard of what happened that day, where people came from, did they come from the TV ad, did they come from other awards we have bought, I mean right now if you type in trans fats, theTruthAboutTransFat.com will pop up as a lead site for they click to enter our site. So, again, we are also learning, I mean this is 18 months in and I think, we have made a great progress on our marketing plan on a score of 1 to 10, last year we were at 7. This year I think we are at 8.5, next year we will be at 9 and the year after that will be 9.5, we made smarter about the brand, smarter about those consumer and I think we will continually to refine how we spend our money and against what we spend our money on.

Ryan – William Blair & Company, LLC

Okay. Great. Thanks guys.

Stephen B. Hughes

Okay. Good. With that I think, I had this final question apparently. First of all I appreciate all your time and we look forward to keeping you posted on our progress as we move through 2009. Again thanks for your time and have a great day.

Operator

Thank you. And this concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Smart Balance, Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts