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Executives

David L. Wenner - Chief Executive Officer, President and Director

Robert C. Cantwell - Chief Financial Officer, Chief Accounting Officer, Executive Vice President of Finance and Director

Analysts

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

Jared W. Madlin - Piper Jaffray Companies, Research Division

Karru Martinson - Deutsche Bank AG, Research Division

B&G Foods, Inc. (BGS) Q2 2013 Earnings Call July 18, 2013 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the B&G Foods Inc. Second Quarter 2013 Financial Results Conference Call. Today's call is being recorded. [Operator Instructions] Now I'd like to turn the conference over to Mr. David Wenner, Chief Executive Officer of B&G Foods. Please go ahead, sir.

David L. Wenner

Thank you. Good afternoon, everyone, and welcome to the B&G Foods Second Quarter 2013 Conference Call. You can access detailed financial information on the quarter in our earnings release issued today, which is available on our website at bgfoods.com.

Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance and, therefore, undue reliance should not be placed upon them. We refer all of you to our most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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

We'll start the call with our CFO, Bob Cantwell, discussing our financial results for the quarter. After Bob's remarks, I'll discuss the various factors that affected our results, selected business highlights and our thoughts concerning the remainder of 2013. Bob?

Robert C. Cantwell

Thank you, Dave. Net sales for the second quarter of 2013 increased $12.3 million or 8.3% to $160.9 million from $148.6 million for the second quarter of 2012. Net sales of the New York Style and Old London brands, which we acquired at the end of October 2012, contributed $10.9 million to the overall increase and net sales of the TrueNorth brand, which we acquired at the beginning of May of 2013, contributed $3.2 million to the overall increase.

Net sales for our base business decreased $1.8 million or 1.2%, of which $0.6 million was attributable to a net price decrease and $1.2 million was attributable to a unit volume decrease. Net sales increased by $1.1 million for Mrs. Dash and $0.6 million for Polaner. These increases were offset by a reduction in net sales for Maple Grove Farms of Vermont of $1 million, B&M of $0.9 million, B&G, $0.7 million and Underwood of $0.6 million. All other brands decreased $0.3 million in the aggregate.

Gross profit for the second quarter increased $3.9 million or 7.6% to $55.7 million from $51.8 million in the second quarter of 2012. Gross profit expressed as a percentage of net sales decreased 20 basis points to 34.6% for the second quarter from 34.8% for the second quarter of 2012. The decrease in gross profit as a percentage of net sales was primarily attributable to the effect of the New York Style and Old London acquisition and the TrueNorth acquisition and a net price decrease of $0.6 million, partially offset by a sales mix shift to higher-margin products.

Selling, general and administrative expenses increased $2.7 million or 18.4% to $17.3 million for the second quarter compared to $14.6 million for the second quarter of 2012. This increase is primarily due to increases in consumer marketing of $1.1 million, selling expenses of $0.6 million, acquisition-related transaction costs of $0.5 million and other expenses of $0.1 million. Expressed as a percentage of net sales, our selling, general and administrative expenses increased 100 basis points to 10.8% for the second quarter of 2013 from 9.8% in the second quarter of 2012.

Operating income increased 3.2% to $36.2 million for the second quarter from $35.1 million in the second quarter of 2012.

Net interest expense for the second quarter decreased approximately $1.8 million or 15.4% to $10 million from $11.9 million for the second quarter of 2012. The decrease was primarily attributable to the refinancing of our long-term debt, including our issuance of 4 5/8% senior notes and a repurchase of our 7 5/8% senior notes and our repayment of our tranche B term loans.

As a result of $18.7 million of after-tax charges relating to the refinancing and acquisition-related transaction costs, the company reported a net loss of $1.4 million or $0.03 a share for the second quarter of 2013. This compares to reported net income of $16 million or $0.33 per diluted share for the second quarter of 2012.

The company's adjusted net income for the second quarter of 2013, which excludes refinancing charges and acquisition-related transaction costs, was $17.3 million or $0.33 per adjusted diluted share. There were no adjustments to net income for the second quarter of 2012.

Our adjusted EBITDA, which excludes the impact of acquisition-related transaction costs, increased 7% to $42.4 million for the second quarter compared to $39.6 million in the second quarter of 2012. Adjusted EBITDA as a percentage of net sales decreased to 26.3% in the second quarter of 2013 from 26.6% for the second quarter of 2012.

We finished the second quarter with cash of $202.4 million and $864.6 million in long-term debt. Our net leverage was 3.6x pro forma adjusted EBITDA as of June 29, 2013, and following the Pirates Brands acquisition, is currently 4.3x pro forma adjusted EBITDA.

Our current dividend rate is $1.16 per share per annum or approximately $61.3 million per annum in the aggregate based on our current share count.

The first 6 months of interest expense included $17.5 million of cash interest and $2.3 million for deferred debt financing and OID amortization. Expected interest expense for the second half of 2013 includes cash interest of $19.2 million and deferred debt financing and OID amortization of $2.1 million.

The first 6 months of depreciation expense was $6.8 million. Expected depreciation expense for the second half of 2013 is $7.4 million. The first 6 months of amortization expense was $4.2 million, and the expected amortization for the second half of 2013 is $5.4 million.

B&G's effective tax rate for the first 6 months of 2013 was 35.4%. The expected tax rate for the second half of 2013 is also 35.4%. Our expected capital expenditures for 2013 are between $13 million and $14 million.

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

David L. Wenner

Thank you, Bob. Good afternoon again, everyone. Second quarter was a very active quarter for our company. We reached agreements to purchase 2 snack businesses and closed on one in the second quarter and the other early in the third quarter. Together with the acquisition completed last October, these 2 new acquisitions, TrueNorth in early May and Pirate Brands in early July, have built our snacking brands to an estimated annualized total net sales of $140 million to $150 million, an estimated annualized EBITDA of roughly $28 million to $30 million. That's an important critical mass that allows us to support a dedicated retail sales force and a marketing team aimed at innovation and growth in these brands.

I'll go into the color behind each brand in more detail in a few moments, but I wanted to highlight what we consider a very important progress in our business in the quarter.

Second quarter was also a good quarter in terms of the overall performance of our business. As Bob said, net sales grew by 8.3% for the quarter, adjusted EBITDA by 7% to $42.4 million and adjusted net income by 8%. We have also raised our guidance on 2013 adjusted EBITDA for the second time this year, this time by 3.8% at the mid-point of guidance to $187 million to $191 million for the full year.

Turning to the sales results. While all of the increase in net sales was accounted for by acquisitions, there were very encouraging signs in the base business results. In the glass half-empty, glass half-full scenario, I would describe the second quarter as the glass 3/4 full. I say that because even though base business sales were down 1.2%, 2/3 of which was volume, the declines were very isolated.

Looking at sales by channel, our supermarket business was flat overall. We continue to have issues, though to a lesser degree, with several retailers in the Northeast whose businesses continue to struggle. That was offset by growth with their competitors and growth in the rest of the country. And as we entered the second half, the outlook continues to improve. We have significant new product distribution coming on in a variety of brands that should accelerate positive trends in this channel.

The Crock-Pot seasoning mixes and Mrs. Dash seasoning and dip mixes are expected to expand distribution significantly in the second half. Our new Ortega Fiesta Flat taco shells, an innovation in the shell business, will also go into distribution in thousands of new locations, as will our Ortega skillet sauces, a third quarter product introduction into that new emerging category of products.

We are rolling out the new bananas and cream flavor of Instant Cream of Wheat as well. These distribution gains should go a long way towards making supermarket sales positive in the second half.

We continue to do well in mass merchants as well, with sales up 5.6% in the second quarter. Much of this is a continuation of the distribution gains we have steadily achieved with important retailers like Wal-Mart and Target. We expect that trend to continue in the second half as we bring further innovation to these outlets.

Drug and dollar sales were actually down slightly for the first time in the second quarter due to a comparison to closeout sales we did on obsolete Mrs. Dash products in second quarter of 2012. These were the typical excess inventories you have as UPCs are converted on packages during a transition after an acquisition. The continuing base business with these outlets remains very solid, and we should see new distribution of Crock-Pot items, for instance, that have been specifically formatted for dollar stores.

Food service sales were flat for the quarter, with strengthened brands such as Ortega and Trappey, offsetting weaknesses in the B&G and Don Pepino Sclafani food service sales. These brands have traditionally sold to smaller food service distributors in the New York/New Jersey area. That business has been weak ever since Hurricane Sandy hit the region.

Our Maple Grove sales in this channel were also weak due to timing of orders. That brand has very good prospects in the channel due to our new co-branded cereal syrup product in partnership with Golden Corral.

As I said earlier, the issues in the base business were very specific, and they focused on warehouse clubs, where we saw a continuation of the losses and seasoning rotations that we saw last quarter. Net sales in this channel were down $1.6 million, essentially all of the overall net sales decline for our business in the second quarter. We are going back to the clubs with innovation on a number of brands and in an attempt to offset this loss, but I cannot report any successes at this point.

The other smaller decline in the business came in export, where Cream of Wheat sales to Mexico were down almost $700,000 due to low-priced competition. As always, we will respond to this as necessary to maintain the brand.

Second quarter sales trends within our tier-based strategy tracked trends for the first half. And here, the good news is that we are growing the brands we would most like to grow. For the first half, Tier 1 brands net sales were up 1.6% for our base business, with every brand in the tier increasing in net sales, led by Cream of Wheat with a 3.5% increase. Tier 2 brand net sales were up 1%, with solid performance throughout the brands in that tier. The declines that led us -- that bring us to the slight overall sales gain seen in the first 6 months, came in our Tier 3 brands, and specifically in brands such as B&G and B&M, which are essentially northeastern U.S. regional brands.

As Bob noted, we did see a slight overall net price decline in the quarter, and that reflects the increased promotional spending we have done on very specific brands. Some portions of the Ortega brand, Maple Grove Farms Pure Maple Syrup, B&M and Cream of Wheat instant cereals have seen heightened trade activity and with generally good results. We expect this to continue for the foreseeable future as competition has not shown any sign of decreasing their efforts in these areas.

I would note, as I did on the last call, that this affects less than 10% of our business, and that our year-to-date, net pricing is down only $0.5 million. Since we've had no formal price increases for over a year, I would contend that this shows very good overall price discipline on our part.

The snack brands that we acquired last October and in early May contributed $14.1 million of sales to the quarter, $10.9 million and $3.2 million, respectively. The $22.2 million in net sales for the first half attributed to the New York Style and Old London acquisition is in line with the low end of our annual projection for those brands.

We have completed and are ready to launch a total rework of the New York Style packaging and have created rack and shipper displays for the line in anticipation of the late summer relaunch into deli and a very much heightened competitive push in the fall and holiday season. Similar work is underway for the Old London brand.

In the case of TrueNorth, the $3.2 million in net sales in the first 8 weeks of our ownership is very encouraging, but was somewhat inflated by pipeline volume associated with increased warehouse club distribution. Of course, that event in and of itself is encouraging as well.

Our efforts with these brands are now expanding to accommodate the Pirate Brands acquisition completed on July 8. As we previously announced, we expect this business to add $80 million to $90 million in net sales to our business on an annualized basis, and once we completely integrate the business, adjusted EBITDA of $18 million to $20 million.

Unlike the other stack brands we have purchased, this brand has been growing at a double-digit rate for the past few years, and we are very excited about the prospects for continued growth at an above average rate. The brand identity as an all-natural, better-for-you snack is an exciting proposition perfectly in line with consumer eating trends and nutritional concerns. We believe that the brand is extendable into other snacking and meal products, and we'll be working hard to take advantage of those opportunities.

But even as we talk about the growth prospects for the brand, I would emphasize that this acquisition is very consistent with our acquisition model. It has a very healthy EBITDA margin, and we project that free cash flow from the brand will be over 70% of adjusted EBITDA.

Unlike other acquisitions, we did buy an ongoing business here, not just a brand. So it will be close to year-end before we complete the integration work and see the full benefit of the acquisition. Our revised adjusted EBITDA guidance comprehends that ramp-up of its contribution.

Cost remains largely a nonevent in the business, essentially playing out as we have predicted for the last 12 months. Our overall cost outlook for 2013 is unchanged, net of cost savings we anticipate a slight, on the order of $1 million decrease in manufacturing costs for the year.

Our commodity outlook for 2014 is modestly positive, with costs next year down less than 1% of sales and more than offsetting modest cost increases we predict in packaging. Our purchase commitments on meaningful commodities are set through at least the first half of next year and in some cases, through the full year, giving us a very clear picture on costs in 2014.

Moving on to our single largest purchase, the 2013 maple syrup crop set production records in both the United States and Canada. But since Canadian syrup is the large majority of the crop, prices have not gone down. The small increase in the regulated price in Canada was largely offset by an improved exchange rate, leading to a fairly neutral outcome on maple syrup for us in the next 12 months.

Even energy, which has been a wildcard in the past years, appears to be benign for the immediate future. While fuel surcharges are currently up slightly compared to last year, we believe that second half costs will be roughly the same as they were in 2012. All of that means that margin shifts you may see in our gross profit are the result of shifts in sales mix and not cost.

SG&A expenses are also well under control. The increases seen were consistent with higher sales volumes and expected timing of marketing programs. Expenses in total dollars will, of course, increase to accommodate the recent acquisitions and should increase slightly as a percent of sales to reflect the higher proportion of marketing spending on those new brands.

Moving on to our balance sheet and capitalization. We were also active during the second quarter in refinancing our debt. We took advantage of market opportunities to complete a $700 million offering of 4 5/8% senior notes due 2021. This offering allowed us to retire our existing 7 5/8% senior notes and prepay all $222.2 million of our tranche B term loans.

Having $700 million of debt fixed at a very attractive interest rate for the next 8 years is a very positive shift in our overall capitalization. The remainder of the net proceeds from the senior notes offering remained on our balance sheet at quarter end and was subsequently used together with approximately $40 million revolver borrowings to fund the Pirate Brands acquisition.

As Bob mentioned earlier, following the completion of the Pirate Brands acquisition, our net leverage is roughly 4.3x adjusted EBITDA, leaving room for further M&A activity should the right acquisition become available. Although we are quite busy, having completed 3 acquisitions in the past 9 months, we have both the organizational ability and the financial ability to continue to pursue meaningful accretive acquisitions should the right opportunities arise.

In summary, we believe that the work we've done in the second quarter positions the business to perform very well in the second half. Between new product distribution gains, highly predictable costs, 2 new acquisitions and an improved capital structure, the business is poised to deliver double-digit top line growth and double-digit adjusted EBITDA growth at the midpoint of our revised adjusted EBITDA guidance. The latest acquisitions are immediately accretive, though their full benefit will phase in as the year proceeds. Our employees have a lot on their plates, but as we have proven in the past, this is what we do. And as we do it well, our company and our shareholders prosper.

At this point, we'd like to open up the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Bryan Hunt with Wells Fargo Securities.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

This is Kevin McClure standing in for Bryan. Can you just -- you said that the Pirate Brands -- that the integration will be completed by year end, is that correct?

David L. Wenner

Yes.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

And when would the New York Style and Old London brands be fully integrated?

David L. Wenner

Those are integrated. Those were co-packed, and we were buying brands, not businesses. In the case of Pirate Brands, we -- there's a full-fledged business behind that, and we need to make a lot of decisions on staffing and a lot of things. So it's a much more complicated process than the other 2 brands.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

Got it, okay. And last question for us. Robert, I believe you mentioned something about inventories. I didn't get it in my notes, but could you tell us maybe where the seasonal peak in inventories is likely to head given all the acquisitions lately?

Robert C. Cantwell

The seasonal peak is the third quarter. You have 2 types of inventories here that really peak. Maple Syrup is all done and all purchased, pretty much all in the second quarter numbers. And then you have our fresh packed, seasonal Pickle & Pepper business and tomato business that happens in the third quarter, which adds another kind of $10-ish million to inventory on top of where we were at the end of the second quarter. And then that inventory declines basically through the second quarter of 2014.

Kevin A. McClure - Wells Fargo Securities, LLC, Research Division

Okay. So it's fair to say that we could see inventories in the $115 million to $120 million range in Q3?

Robert C. Cantwell

Not quite $115 million, a little less than that.

Operator

And next from Piper Jaffrey, we'll hear from Sean Naughton.

Jared W. Madlin - Piper Jaffray Companies, Research Division

This is actually Jared Madlin on for Sean. I guess quickly, could you help us how we should think about the puts and takes on the gross margin and SG&A margin in the back half with Pirates in there?

David L. Wenner

Pirates, as we've modeled it, Pirates is going to be a -- eventually a 20% EBITDA margin business. It'll be a little bit less than that, and it's just a matter of how fast we ramp up the integration and shed whatever costs we're going to shed. I really -- perhaps Bob can tell you little bit more on that, but we still are in the process of making a lot of personnel decisions and things. And so we really can't give you a perfect answer on that.

Robert C. Cantwell

But I think from the gross profit percentage, the Pirates Brands that are about $80 million to $90 million in sales. What that does is from where we were at the end of the second quarter, kind of gross profit of 34.6%, it reduces the gross profit kind of 10, 20 basis points when you merge it all in. From an operating expense standpoint, except for what Dave talked about -- kind of this onetime over the next 3 to 6 months as we kind of merge their staffing into ours -- on an ongoing basis, operating expense is relatively consistent with what B&G currently spends as a percentage of sales.

Jared W. Madlin - Piper Jaffray Companies, Research Division

Great, very helpful. And I guess on the volume front, what changed since Q1? Was it all in the Northeast and they had a better Q1 and worse in Q2? Or kind of how did that change the volumes in Q2 from Q1?

David L. Wenner

Well, the Northeast is firming up. It wasn't -- the Northeast decline wasn't as bad as it was in the first quarter. We've gained a lot of momentum in where we're -- where we have businesses struggling or customers struggling, we're gaining momentum with their competitors, and we're doing a good job in the Eastern part of the country. That's not just the Northeast. So I'd say we're seeing firming trends everywhere. But there's still a significant drag from a few customers here in the Northeast.

Jared W. Madlin - Piper Jaffray Companies, Research Division

Got it. And it sounded like last quarter, you guys were doing some experimenting with more couponing at the store level and on the Internet. Any change in that strategy or any learnings there that you can help us better understand at this point?

David L. Wenner

No, I really don't have anything that -- we think it's more efficient to coupon the new way we're doing it. But there's nothing dramatic coming out of that, that I can -- that I could comment on.

Jared W. Madlin - Piper Jaffray Companies, Research Division

Okay. And just lastly here, it looks like a slight increase in the CapEx for the full year. Is that related to Pirate Brands? Or is there something else going on there?

David L. Wenner

Well, we certainly -- I misspoke earlier. New York Style is manufactured, and then we have capital associated with that. And we're going to have some capital expense associated with increased warehousing as we do that to accommodate the volume.

Operator

[Operator Instructions] We'll go next to Deutsche Bank's Karru Martinson.

Karru Martinson - Deutsche Bank AG, Research Division

With the 3 M&A transactions in the past 9 months, I certainly understand that you have the balance sheet here. But when you look at the portfolio that you have now, you -- are you still kind of looking to add new vehicles kind of like the snack category? Or are you looking more to kind of bolster some of the portfolio that you have?

David L. Wenner

Well, I would say there's certainly opportunities in snacks, and now that we've acquired 3 brands in 9 months, I think everybody who owns the snack business wants to sell us their snack business. Unfortunately, they're not very compelling propositions in the vast majority of cases. But I guess we're known as a buyer. But it would have to be an extremely compelling proposition for us to be interested in the snack business. Right now, we have a very full docket here, bringing 2 product lines back into a respectable growth mode and continuing what has been a very, very good trend in the Pirate Brands. So we have a lot to work on in the snacks right now as it is. And as I say, that doesn't mean we wouldn't move on a very compelling proposition, but it -- we're going to be extremely selective. Not so much on the grocery side. We're still very interested in buying things in grocery. But again, we're very selective in general, and it would have to be the right profile of business and fit the acquisition model that we've been executing for the last 15 years.

Karru Martinson - Deutsche Bank AG, Research Division

And in terms of that acquisition model, I mean, certainly in the food category, we've seen or heard the prices being asked by people have risen rather dramatically. What are you seeing out there when new guys are showing you these properties, whether they're compelling or not?

David L. Wenner

Well, I think a very -- a good, very good solid business with very good margins and very good cash flow is going to approach a double-digit multiple for a purchase price. And you're seeing those 9, 10x purchase prices and sometimes even beyond that for the right strategic buyer. That's fine as long as financing costs are low, and low financing allows you to expand the multiple and still get the same cash outcome. You have to be a little more cautious here as interest rates start inching up.

Operator

Gentlemen, no further questions at this time. I'll turn the conference back over to you for any additional or closing comments.

David L. Wenner

Thank you. And thank you for joining us, everyone. We think we've made great progress here in the quarter. Obviously, we've been very active on the M&A front, and we have a lot of work to do here. But we have some exciting properties, and we're really looking forward to making them perform. Thank you once again.

Operator

And that does conclude today's conference. Thank you for joining.

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