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Executives

David Wenner – President & CEO

Bob Cantwell - CFO

Analysts

Reza Vahabzadeh – Barclays Capital

Brian Hunt – Wells Fargo

Andrew Lazar – Barclays Capital

Ed Aaron – RBC Capital Markets

Andrew Kleinberg – Glickenhaus

Nick Edney – Adar Investment Management

B&G Foods, Inc. (BGS) Q2 2009 Earnings Call July 28, 2009 4:30 PM ET

Operator

Good afternoon ladies and gentlemen. Welcome to the B&G Foods, Inc. second quarter 2009 financial results conference call. (Operator Instructions) 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

Good afternoon everyone and welcome to the B&G Foods second quarter fiscal 2009 conference call. You can access detailed financial information on the quarter in our earnings release issued today available on our website at www.bgfoods.com and in our Quarterly Report on Form 10-Q that we have filed with the SEC today.

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 will also be making reference on today's call for the non-GAAP financial measure, net income as adjusted, earnings per share as adjusted, and EBITDA. Reconciliations to these measures to the most directly comparable GAAP measures are provided in today's press release.

We will start the call by having our CFO Bob Cantwell to discuss financial results for the quarter and then the amendment to our senior secured credit facility that we proposed to our lenders. After Bob’s remarks I’ll discuss the various factors that affected our quarterly results, selected business highlights, and our updated thoughts concerning the remainder of fiscal 2009.

Bob Cantwell

Thank you David, net sales increased $3.7 million or 3.1% to $122.9 million for the second quarter of 2009, compared to $119.2 million for the second quarter of 2008. Excluding net sales of Maple Grove Farms pure maple syrup products, net sales for the second quarter increased $4.3 million or 4%.

This $4.3 million increase was attributable to sales price increases of $8.5 million, partially offset by a decrease in unit volume of $4.2 million. Net sales of Maple Grove Farms pure maple syrup products decreased by $0.6 million consisting of a unit volume decline of $1.4 million partially offset by sales price increases of $0.8 million.

Our 10-Q has additional disclosure on individual brand performance during the second quarter. Gross profit increased $3.3 million or 9.9% to $36.9 million for the second quarter from $33.6 million for the second quarter of 2008. Gross profit expressed as a percentage of net sales increased 1.8 percentage points to 30% in the second quarter from 28.2% in the second quarter of 2008.

The increase in gross profit expressed as a percentage of net sales was primarily attributable to increased sales prices of $9.3 million partially offset by the increased costs for beans and packaging and an increased accrual for performance based compensation.

Sales, marketing and distribution expenses decreased $0.6 million or 4.6% to $10.9 million for the second quarter compared to $11.5 million for the second quarter of 2008. This decrease was primarily due to a decrease in consumer marketing and trade spending of $1.2 million, and selling expense of $0.1 million offset by an increase in warehousing expense of $0.4 million and an increased accrual for performance based compensation of $0.4 million.

Expressed as a percentage of net sales, sales, marketing and distribution expenses decreased to 8.9% in the second quarter from 9.6% in the second quarter of 2008. General and administrative expenses increased $0.6 million or 31.7% to $2.5 million for the second quarter compared to $1.9 million in the second quarter of 2008.

This increase resulted primarily from an increased accrual for performance based compensation of $0.8 million partially offset by decreases in other expenses. Operating income increased 17.4% to $21.8 million for the second quarter from $18.6 million in the second quarter of 2008.

Net interest expense decreased $0.8 million to $12.1 million for the second quarter from $12.9 million in the second quarter of 2008. Of this decrease $1.1 million consist of non-cash adjustments to net interest expense relating to our interest rate swap.

Excluding the impact of items effecting comparability relating to the interest rate swap, the company’s net income for the second quarter of 2009 was $5.4 million or $0.15 per share, a 52% increase as compared to net income for the second quarter of 2008 of $3.5 million or $0.10 per share.

Including items effecting comparability, the company experienced net income for the second quarter of 2009 of $6 million or $0.17 per share. For the first two quarters of 2009 excluding the impact of items effecting comparability relating to the interest rate swap, the company’s net income was $12 million or $0.33 per share, a 51% increase as compared to net income for the first two quarters of 2008 of $7.9 million or $0.22 per share.

Our EBITDA increased 13.4% to $25.5 million for the second quarter compared to $22.4 million in the second quarter of 2008. EBITDA increased 15.3% to $52.8 million for the first two quarters of 2009 compared to $45.8 million for the first two quarters of 2008.

Moving on to the balance sheet we finished the second quarter with $29.6 million of cash compared to $24.1 million at the end of the second quarter of 2008. Our inventory at the end of the second quarter increased $11.7 million to $111 million compared to $99.3 million at the end of the second quarter of 2008.

The majority of this increase relates to the purchase of additional maple syrup this year due to the normalized crop. Cash interest expense for 2009 is projected to be $49.8 million. We expect to make capital expenditures of approximately $11 million in the aggregate during 2009, $5.6 million of which has already been made during the first half of the year.

In the second quarter the company used $1.4 million of cash to repurchase and retire 189,900 shares of Class A common stock. We finished the second quarter of 2009 with $535.8 million of long-term debt and $144.5 million of stockholders equity.

Our ongoing dividend rate is $0.68 per share or $24.4 million per year in the aggregate. Lastly I would like to discuss an amendment to our senior secured credit facility that we have proposed to our lenders.

The primary purpose of the proposed amendment is to give the company more de leveraging flexibility by opening up the company’s ability to retire the company’s 12% senior subordinated notes to 2016 prior to their maturity.

Among other things the proposed amendment would permit B&G Foods to do one or more of the following: repurchase or redeem senior subordinated notes for cash subject to restricted payments test in the company’s senior notes indenture; repurchase senior subordinated notes in exchange for Class A common stock; and refinance senior subordinated notes with senior unsecured indebtedness provided that our consolidated leverage is less than or equal to 4.5:1 after giving effect to the refinancing.

In addition the proposed amendment would substitute Credit Suisse for Lehman Commercial Paper Inc. as administrative agent under the credit facility and extend the maturity date of our existing undrawn $25 million revolving credit facility from January, 2011 to February. 2013 so that it will have the same maturity date as our existing $130 million term loan facility.

The proposed amendment requires the consent of a majority of the lenders under the credit facility and with respect to the extension of the revolving credit facility all of the revolving credit lenders. We cannot assure you that the proposed amendment will be consummated on the terms contemplated or at all.

Under the senior subordinated notes indenture we may not redeem the senior subordinated notes prior to October 30, 2009. However if the amendment is consummated, we may from time to time before or after October 30, 2009 seek to retire senior subordinated notes through cash repurchases of the EISs or separate senior subordinated notes and/or exchanges of EISs or separate senior subordinated notes for Class A common stock in open market purchases, private negotiated transactions or otherwise.

Any such repurchases or exchanges and the timing and amount thereof, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors.

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

David Wenner

Thank you Bob, as you can see from the financial results the second quarter of 2009 continued our trend of strong improvement over prior year. In general our results are following the track we laid out nine months ago and we currently see no reason that our expectations for the next six months will change.

The year over year improvement in the quarter again represents improved pricing, and reduced trade promotion spending, higher net pricing if you will, that more than offset year over year costs.

As Bob mentioned our net sales increase of $3.7 million came from a $9.3 million improvement in net pricing, with a mix of approximately 40% of that from lower trade spending and 60% from price increased put in place within the last 12 months.

Price gains were consistent with those seen in the first quarter. We expect to continue to see gains at this rate until September when we will begin to lap prior year pricing. In general meanwhile we have not seen pressure to reduce prices in any categories.

The improvement in trade spending continued to come from the elimination of unproductive promotional programs, usually associated with major holidays. In the case of the second quarter this coincided with the July 4th holiday.

Eliminating these programs does not come without some pain. In the case of the second quarter we saw a decrease in sales volume to retailers of $6.7 million over a two week period near the end of the quarter.

While its too soon to know the consumer impact this will have in the third quarter based on our experience from the fourth quarter of 2008 and first quarter of 2009 we anticipate that there will be little or no negative effect on consumer sales.

In the second quarter we lowered trade spending by 3.2% of sales through this effort, and by 2.1% of sales in the first six months of 2009. In effect we have structurally changed our level of trade spending by a meaningful amount.

Second quarter sales volume was also negatively affected by maple syrup even though the crop was a very good one. The maple syrup crop is usually completed by late April but there was a lag in refilling pipelines and recovering accounts lost due to sales allocations in the past 12 months.

Those pipelines are not anticipated to recover completely until August at which time we expect our sales of maple syrup to switch from being a negative to a positive factor. Price pressure has been minimal so far because cost did not drop as much as anticipated. The rush to refill pipelines throughout the industry kept prices higher than they would have been in a more normal situation.

Our maple syrup volume losses of $1.4 million combined with $300,000 less in sales in private label pickles and peppers were a one-time drag on the sales line which we do not expect to repeat in the third quarter.

On the positive side we continued to see strength in our Ortega brand which grew in net sales by 3.1% in the second quarter matching its first quarter performance. Ortega as with other brands such as Las Palmas, B&M, Joan of Arc and Emerill, is benefiting from the trend towards cooking at home economically.

In some cases these brands are growing overall despite softness on the food service side of the business. Ortega food service sales were down 13% for the quarter for instance. Our retail, the much larger part of the brand sales were up 19%.

We expect this trend to continue for the remainder of 2009 although we are working to improve both sides of the business as much as possible. The trend in private label sales in the second quarter was consistent with what we described in the first quarter and our effect on sales again appeared to be minimal.

As we’ve said before many of our brands such as Ortega, B&M, Underwood, Ac’cent, Grandma’s, and Brer Rabbit, have little or no private label competition. Where we are seeing competition the outcome varies by category. Joan of Arc competing in a category where private label is fully half of the sales, was up 26% in units and dollars for the quarter primarily because category sales are generally very strong lifting all players.

Cream of Wheat continues to show share gains even as private label takes share in the hot cereal category. Here our new products and expanded distribution have built share despite the positive private label trend. We reported a sales decline on Cream of Wheat for the first six months of the year but this is primarily related to lower sales to retailers associated with reduced trade promotions.

Net sales growth prospects will improve in the third quarter as we rollout new products and recover maple syrup volume. As I mentioned earlier maple syrup should turn from a year over year drag on sales to a positive. We are reinstating several products and recovering accounts that were lost when syrup was put on allocation.

In addition we expect new distribution of the two Cream of Wheat instant whole grain products to contribute to net sales growth as the hot cereal season begins in September. They are joined by the new Sponge Bob Squarepants Cream of Wheat product that is also entering distribution for fall sales.

We have also very recently launched an improvement in our Polaner sugar free preserves adding fiber to all the flavors in that line. This is now a completely unique product line in the preserve category and is being very well received by our trade customers expanding distribution of our sugar free preserve line.

These products now provide three grams of fiber per serving, 12% of the recommended daily allowance and have enhanced their prior positioning as a healthy product line that is an alternative to preserves sweetened with high fructose corn syrup.

Our net Ortega whole grain taco shells round out the most recent new product introductions and are also being very well received as a product that is in tune with health conscious consumers seeking flavorful food.

These exciting new products encourage us about top line growth going forward but the consumer of course has the final vote. As I mentioned earlier we are still experiencing higher costs compared to prior year although the trend is easing.

While maple syrup and wheat costs came down in the quarter our more seasonal crop costs such as beans, cucumbers, and peppers remain higher and will stay there until at least this fall. Some packaging costs have eased recently, can manufacturers for instance recently announced a price decrease.

But that decrease was only one third of the increase that was implemented in January. Glass costs remain higher except for energy surcharges which have eased. Fuel surcharges for shipping are significantly lower. Distribution costs in the second quarter were one-half a percent of sales lower for the quarter.

The combination of higher sales, price increases, lower trade spending, and lower distribution costs together increased gross profit by $3.3 million and 1.8% of sales for the quarter. We expect costs to continue to ease as the year goes forward and barring unforeseen events to be more or less neutral by year end net of our cost reduction efforts. The gross profit improvement dropped almost entirely to EBITDA which was up $3 million, 13.4% for the quarter.

Our efforts to reduce trade spending have also yielded a reduction in advertising money spent with customers. This savings in operating expenses helped to offset higher G&A expenses associated with accruals for incentive compensation, and higher spending in warehousing.

The warehousing expense was connected with a new distribution center that we have opened in eastern Pennsylvania that will ultimately consolidate several existing distribution centers. At the moment we are spending additional monies to bring this facility on line but by next year we anticipate the new warehouse will yield savings of over $1 million per year.

The Maryland facility distribution center was already shut down and others will be shut down within the next two years. As Bob mentioned our balance sheet remains solid. Cash improved over $5 million versus second quarter 2008 despite monies used to increase inventories of maple syrup and certain finished goods to protect ourselves against the then anticipated bankruptcy of one of our co-packers.

Going forward we have moved production of some of those products in house and have found alternative sources for others. We have thus successfully avoided any interruption in supply and expect inventory levels for these products to return to more normal levels by year end.

In addition our inventory of syrup has peaked for the year. We expect inventory to decline for the remainder of 2009. We believe that the consistent meaningful improvement in our financial results and slow but steady improvement in financial and debt markets, may create an opportunity for us to delever and thus improve our capital structure.

The proposed amendment to our credit facility that Bob discussed earlier and the universal shelf registration statement that we filed in July are aimed at expanding our options and positioning ourselves to be ready to take advantage quickly of opportunities should they present themselves.

I should stress however that in making any decision to adjust our capital structure we would carefully consider effects on free cash flow and earnings per share. The optimal solution would leave both unimpaired while improving our ability to grow our business organically and through acquisitions.

Any action will depend on market conditions and other factors. In the meantime our priority is to continue to perform well. Our year over year improvement in the first two quarters of 2009 and our full year guidance are clearly steps in that direction.

We remain confident that B&G Foods will reach an EBITDA of between $99 and $102 million this year. Higher pricing, the introduction of exciting new products, the attainment of new points of distribution and an improving cost outlook only reinforce that confidence.

At this point we’d like to open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Reza Vahabzadeh – Barclays Capital

Reza Vahabzadeh – Barclays Capital

Thanks for the wealth of information, disclosure is always helpful. Just starting on the inventory front, did you give a reason for the inventory rising here in the second quarter and then coming down, is it the maple syrup crop or something else.

David Wenner

Well we did talk about that, the majority of it’s the maple syrup and the fact that the crop was very strong so we bought a lot more this year then we did last year. That’s the majority of the increase. The rest of the increase is, we had a co-packer who was packing virtually all of the Las Palmas products and the pepper portion of the Ortega products.

We were very afraid that co-packer was going to file bankruptcy as they eventually did, so we pulled inventory in very quickly so we would not get involved in that bankruptcy and protected our source of supply if you will.

That was about 40% of the increase where the rest was the maple syrup. So the conditions, its disappointing that it went up as much as it did but we thought it was prudent given the conditions that we were faced with.

Reza Vahabzadeh – Barclays Capital

So I guess your comment regarding inventory for the year is if you’re just going to be using it for the rest of the year.

David Wenner

Yes, we’ll work that down for the rest of the year.

Reza Vahabzadeh – Barclays Capital

And so your cost expectations, cost inflation expectations for maple syrup on a 12 month go forward basis, is it I guess, is there a chance for some kind of deflation or lower inflation in that cost.

David Wenner

No it is what it is for the next nine months. We’ve bought as I said the great majority of our requirements and when we look forward to next year we have no idea what the costs will be because its totally dependent on the crop and exchange rates and I don’t have my crystal ball out for the exchange rates either.

So every year is a unique event.

Reza Vahabzadeh – Barclays Capital

Are there any product lines or brands that you were particularly pleased with or not thrilled with the performance or that aside from Joan of Arc that you’re at least alarmed or concerned as far as competition is concerned.

David Wenner

There’s no brand that we’re concerned about. Where we’ve seen soft if you will sales on several brands its related to this trade promotion pull back and not consumer trends. So we’re not from a consumer point of view, we’re very happy with where the business is going. We are taking some hits with sales to our trade customers as we pull back these promotions but they very quickly recover in the next period once we do that.

So that says to me that the consumer pull is there. As we said in the script we’ve very, very happy with Ortega. Ortega continues to do double-digit growth and is just looks like its just totally in line with what consumers want to buy these days and how they’re eating these days.

Reza Vahabzadeh – Barclays Capital

And then when you were talking about the trade spending, you said that was down 320 basis points.

David Wenner

Correct.

Reza Vahabzadeh – Barclays Capital

Okay so the rest of the change in gross margin year over year was that just pricing and then how much were costs up.

David Wenner

Costs were up about 100 basis points, a little less then that. Cost of manufacturing, you had pricing offsetting that, you had lower distribution costs offsetting that.

Operator

Your next question comes from the line of Brian Hunt – Wells Fargo

Brian Hunt – Wells Fargo

You all mentioned in the last conference call you were going to launch about 30 new products this year, could you talk about your relative successes so far on product launches and maybe what those 30 new products contributed to the top line in Q2.

David Wenner

The new products that we’re launching this year are still going out into distribution so the contribution to the top line really isn’t going to come until the fall and part of that is because a number of the products are related to hot cereal. We’re looking to get those products in distribution so that when September rolls around and the season starts on hot cereal they’ll be there.

So we have two whole grain instant products there, we have the Sponge Bob product there. We have a good number of products that we’ve launched in the Ortega line with the, actually several whole grain tortillas, long shelf life tortillas, a whole grain taco shell, and a number of other products in Ortega. So we’re pushing forward there.

In Polaner, the sugar free line we’ve added fiber to that line. That’s six products that we’ve put out as new products with fiber. Again as I’ve said in the script totally unique to the preserve category and fiber is like a magic word with trade and consumers in all the testing we’ve done.

And we’re getting very good acceptance there but an awful lot of these products are rolling out into distribution and I would say the top line you’re probably only talking between $1 and $2 million contribution so far.

Brian Hunt – Wells Fargo

I had better add fiber to my research, more people might read it.

David Wenner

Okay. Or eat it maybe.

Brian Hunt – Wells Fargo

You were pushing Las Palmas from regional to national footprint earlier this year, could you talk about how many doors you’re in now and how you view that success.

David Wenner

Its not national per say, we are following pockets if you will so that Las Palmas now is in Chicago, its in Denver, actually its in some places, its expanded distribution in Wal-Mart. So it might, I would say your gain may be a tenth of the US supermarket distribution more than you had a couple of years ago.

Brian Hunt – Wells Fargo

And did the bankruptcy of that co-packer kind of restrain your ability to grow that business and have you found another co-packer already.

David Wenner

We’ve actually moved one segment of the business in house, we’ll start manufacturing this fall. And the rest we’ve found several other sources, so no, there’s no constraints on that business.

Brian Hunt – Wells Fargo

And it appears that in listening to several retailer calls that items that are on promotion, the velocity on those items is very good considering the direction you’re moving with promotion and what you’ve stated, is there, might you all reconsider promotional spending on some items as you move throughout the calendar or are you very happy with the performance of product velocity so far year to date.

David Wenner

We’re more than willing to spend promotional money when it has an effect on sales that’s positive and builds our business and builds the retailers’ business. What we’re pulling back is promotional monies that we have done studies on and said, you know this is not selling more product to consumers or the expense that we’re taking to sell product to consumers is very high for every incremental sale.

When we find more efficient ways to promote through the retailers we’re more than happy to do that. And that’s going to vary tremendously by category. Some categories such as baked beans sell the majority of their sales on promotion. Other categories such as seasonings the promotions don’t do much to increase sales.

People buy seasonings when they need the seasonings. Its not an impulse buy. Its not a fast turn product like a baked bean might be. So we’re just tuning up the promotions if you will to make them more efficient and where we see opportunities to promote and to promote effectively and economically, we’re more than happy to do that.

Operator

Your next question comes from the line of Andrew Lazar – Barclays Capital

Andrew Lazar – Barclays Capital

A couple of things on sort of volume even excluding the maple syrup piece that you talked about, I guess last quarter you had thought that potentially the volume hit from some of the trade reduction efforts might ease going into the second quarter and it looks like sequentially those volume reductions got a little bit worse and I realize its largely basically from some of the retailer reductions, not necessary the consumer. So I’m trying to get a sense of what change that you didn’t necessarily envision last quarter as you went into the second quarter.

David Wenner

I think we just got more aggressive, when you look at on the trade promotions, when you look at the difference in the first quarter and second quarter and how much more promotional money we pulled back it was significantly more in the second quarter than it was in the first quarter.

So for us to have a very, actually not that big pull back in the trade buy I think we would consider that a successful event. Its almost one for one in dollars. Every trade promotion dollar we pulled back we lost to retailer sale dollars.

That’s an extremely inefficient promotion spend. And that’s what I would put it to, is where we, as I said, you’re down 320 basis points for the quarter, 210 for the year, that illustrates how much more we did in the second quarter then the first.

Andrew Lazar – Barclays Capital

That’s a big number for sure, when you think I know you’re happy with sort of the consumer off take and more of this sort of at the retailer level, but with a lot of different companies getting some flexibility in the margin side from input costs that are sort of easing, you’re seeing some spend back, some additional monies on promotions to drive volume, even though you’re happy with your takeaway, are you seeing your market shares in your key categories hold up relative to where you’ve got a competitive side.

David Wenner

Yes we are because we’re not seeing in the categories we’re competing in, we’re not seeing people be super aggressive with promotions. We’re actually, there’s a number of categories where we’re lagging what our competitors are doing. They’re promoting at higher prices then we are and we’re trying to adjust to that higher level going forward.

These programs are set up minimum of six months ahead of time so its very hard to predict exactly where the pricing is going to fall between us and competition and it’s a bit of a guessing game but we’re on the right side of it if you will in that its up to us to take our pricing up to where it is, not bring it down to where it is.

Andrew Lazar – Barclays Capital

How good a visibility do you have into retailer inventories of a lot of your key items, in other words they’ve taken down their inventory levels in a couple of your more promotionally oriented items, are they at levels that are sort of below what you would deem where they need to be as an ongoing basis, or suggesting there’ll be kind of a snap back or do they just now operate from here at this lower level of inventory ongoing.

David Wenner

I think they’re at a normal turn level right now. I don’t think there’s going to be any, I think where you would have seen them buy in on promotions and then not buy for three weeks, they’re just buying turn business as we go forward on a regular basis.

Andrew Lazar – Barclays Capital

So its now the absence of more retailer draw down, inventory draw down going forward hopefully.

David Wenner

Correct.

Andrew Lazar – Barclays Capital

And the last thing would be if I think about the way your top line shapes up in the back half of the year in terms of year over year growth, I guess one impact, are we still likely to see from this more aggressive trade spending reduction or is a lot of that impact do you think given the retailer inventory reduction sort of passed you at this point and then you’ll still have net pricing through I think September before you start lapping things but then of course if you got some other things that I guess start working for you like the maple syrup piece turns to a positive. I’m trying to get a sense of what do you think, how do you things net out, do you see the top line actually accelerate in the back half of the year.

David Wenner

I think it will start going up some more. As you just went through there’s a lot of moving parts and one you didn’t mention was that we have a 14 week quarter in the fourth quarter this year, so that’s a detriment right there on the quarter. We don’t think that’s going to effect the EBITDA result but given where we are in terms of cost and all of that, but we are swimming upstream in the fourth quarter with one less week of sales.

Third quarter we’re going to pull back some Labor Day September promotions and I think we’ll see an effect there but you have some positives you don’t have in the others like maple syrup and like new products starting to hit so yes, I think you’ll see a higher level of growth in the third quarter than we did in the second quarter.

Fourth quarter we’re giving back one over 13 in terms of sales.

Andrew Lazar – Barclays Capital

And I would think the third quarter may be a bit more balanced in terms of contribution from volume and pricing given some of these dynamics as well.

David Wenner

Yes.

Operator

Your next question comes from the line of Ed Aaron – RBC Capital Markets

Ed Aaron – RBC Capital Markets

Couple of questions, I guess kind of dovetailing with the last question on the cadence of the quarters, it seems like the third quarter is going to be a pretty good quarter.

David Wenner

Well we hope so to match the numbers we did in the second quarter, it implies a lot more improvement because I think we were in the 20-something range in EBITDA last year so that’s a larger improvement if you will on a year over year basis.

Ed Aaron – RBC Capital Markets

So is Q3 is that going to be the best quarter of the year for you then.

David Wenner

From an EBITA point of view, no.

Bob Cantwell

But from a comparison to prior year, very possibly. Last year we had two major things that hit us, the high maple syrup costs which effected our, with a co-packer effected our profitability substantially and very high wheat costs. And we don’t have that going into the third quarter of this year.

And last year was our worst quarter year over year back in 2007, we were over $24 million in EBITDA and we kind of did just a little over last year in the third quarter. So we expect this third quarter to be very positive.

Ed Aaron – RBC Capital Markets

And when you look at kind of where you’re at with some of the grain commodities especially, how far out are you locked in or hedged on wheat into next year.

David Wenner

I believe we’re through the middle of next year on wheat.

Ed Aaron – RBC Capital Markets

And what about some of the other kind of key commodities.

David Wenner

We’re half way through 2010 with a lot of our commodities.

Ed Aaron – RBC Capital Markets

So do you expect then that sort of the, does that kind of extend the benefit that you get from lower commodities because I guess you’re locking in lower prices as we go along so do we end up with some benefit moving into next year on a lot of those commodities.

David Wenner

Yes very possibly, some of them are going to bleed down as we’ve been locking in, wheat has continued to bleed down so as the farther out we go the lower the price is to this point. And some of the others have done the same thing. We expect some of these more annual crops like beans to drop this next crop in the fall, all things being equal.

In the case, we would see some additional reductions as we roll into 2010, yes.

Ed Aaron – RBC Capital Markets

And you mentioned that Ortega was up, I think you said 3%, it sounds like the retail numbers are, I know the IRI data looks awesome, I guess when are we going to, what’s the disconnect there.

David Wenner

The disconnect between factory sales and IRI?

Ed Aaron – RBC Capital Markets

Well I guess I’m just curious, it sounded like you said that, you said the factory sales were up 3% for Ortega—

David Wenner

No, factory sales were up 13% for—

Ed Aaron – RBC Capital Markets

Sorry, okay, well that was my mistake.

Operator

Your next question comes from the line of Andrew Kleinberg – Glickenhaus

Andrew Kleinberg – Glickenhaus

My question regards the credit agreement and I would just like some clarification, without an amendment would you be able to purchase the subordinated notes after October 30 and whether you can or you can’t if you do get the agreement would your lenders require you to make some kind of payment to do so.

Bob Cantwell

Well the first answer is we will, unless we have an amendment we do not have the ability to purchase the 12% subordinated notes. We can always refinance them into another subordinated note but that’s all we’d be able to do.

Andrew Kleinberg – Glickenhaus

And are you anticipating having to make a payment or will you just let your senior lenders see the light of the, of why it would be better to purchase the subordinated notes.

Bob Cantwell

What we’re hoping is we look at kind of looking at our capital structure as if we have the ability to use some of our cash and/or equity issuances to take out some of the 12% notes, its credit enhancing and we’re hoping that the lenders all look at it the same way. And we’ll know where this amendment process is going in kind of the next week or so.

Andrew Kleinberg – Glickenhaus

And I’m not a food analyst per say, but I’ve seen just various mentions, I know Proctor and Gamble I don’t know if its food products that they’re looking to divest but I have seen some mentions of companies looking to divest, what are you seeing right now in the M&A space.

David Wenner

We’re not seeing anything specific right now from any of the large companies. There are a couple of small properties out there that are of minimal interest to us but the large companies seem to be musing about things but they’re not doing anything definitive yet.

Operator

Your next question is a follow-up from the line of Reza Vahabzadeh – Barclays Capital

Reza Vahabzadeh – Barclays Capital

Just to round out your comments on the cost side of equation, as far as the underlying cost inflation for the second half of 2009 is it fair to think that you’re facing moderating cost inflation versus first half of 2009 and certainly versus 2008.

David Wenner

Yes and I made the statement that some time in the second half we think it will go to a neutral position. But it has been moderating as the year goes on and it will continue to do so.

Operator

Your next question comes from the line of Nick Edney – Adar Investment Management

Nick Edney – Adar Investment Management

My question is about the announcement on the potential changes in the capital structure, now in the past wasn’t there more of a restriction from the senior notes that would stop me buying back anything in the subordinated notes, that seems to maybe not be the case now, is that correct.

Bob Cantwell

That is the case and that is really the amendment, the major piece of the amendment we’re looking to get is to allow us to either buy back some 12% notes, issue equity and/or refinancing some of those notes into a senior piece of paper.

Nick Edney – Adar Investment Management

So I guess I misunderstood then, so these, the amendments that you’re trying to get are not only for the bank loans and the revolvers, but also for the senior notes as well.

David Wenner

I think it’s the bank we’re trying to amend, not the senior—

Bob Cantwell

We’re trying to amend, I’m sorry, it’s the bank credit agreement we’re looking to amend. We have the ability in the senior indenture to do that. The bank credit agreement stops us and that’s what we’re trying to amend to allow us to deal with the 12%.

Nick Edney – Adar Investment Management

Okay so basically the senior notes, that sort of amendment kicks you up to seeing the credit agreement and as long as the credit agreements allow you to buy back the subordinated notes and the senior notes are fine with that.

Bob Cantwell

That’s correct, we have the ability based on certain baskets in the senior notes indentures to deal with buy backs.

Nick Edney – Adar Investment Management

For some reason I just thought that that wasn’t possible before.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

David Wenner

Thank you everyone for joining us on the call. As I said early on we’re very pleased with the performance of the quarter. We expect to continue this track for the rest of the year and we’re very confident about our guidance of somewhere between $99 and $102 million for 2009 which obviously is a very nice improvement on 2008.

So again thank you for listening in and we’ll be speaking with you in a few months.

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Source: B&G Foods, Inc. Q2 2009 Earnings Call Transcript
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