B&G Foods (BGS) began the year with a solid, if unspectacular, first quarter, highlighted by strong results from its recent acquisition of the Culver Specialty Brand (CSB) products. The earnings release on April 19th was greeted by the market with a yawn as the shares have traded in a fairly narrow range the past week, and they remain down about 8% from the $24.07 2011 closing price. At its current price of just over $22 per share, the $1.08 dividend provides a very attractive 5% yield, much stronger than other companies in its sector. For example, J. M. Smucker (SJM) yields 2.5%, Kraft (KFT) 3.0%, Kellogg (K) 3.4%, General Mills (GIS) 3.2% and PepsiCo (PEP) 3.1%.
During the conference call CEO David Wenner downplayed the Q1 CSB products' sales figure of $25.6 million (the company had previously stated that it expected $90 million for the year), explaining that B&G expected seasonality in the sales. However, when pressed on the issue, CFO Bob Cantwell revealed that sales of the products were about $1 million higher than the previous year when the CSB products were owned by Unilever (UL). This came in a quarter when sales of B&G's other products increased very slightly (by just $0.2 million), largely from the benefit of 2% price increases.
Wenner noted that the entire industry was weak during the first quarter. He referenced a report that details year over year unit volumes in all the categories in which B&G competes, calling it a "sea of red" with only three categories showing increases. Against this backdrop, the CSB performance was especially strong. The CSB acquisition also had other benefits for the company:
- An increase in scale resulted in distribution costs dropping 40 basis points as a percent of net sales despite increases in fuel surcharges.
- Gross Profit expanded 2 percentage points from 34.1% to 36.1%.
- Wenner reiterated that with respect to Canadian markets, "we now go to market directly in Canada and have a sales and distribution infrastructure there that should help us build sales of our entire portfolio with Canadian retailers."
Wenner also expects to grow the CSB sales by leveraging B&G's presence with mass merchants, dollar stores and certain supermarket chains. In addition, the company is looking forward to adding new CSB products as early as Q3. On the cost side, there is also the potential for decreases as the company becomes more familiar with the products.
The quarter was not without some weaknesses, with some of the company's tier 1 legacy product sales down. Wenner attributed the decline to the unusually warm weather during the quarter, especially in the northeast. Industry-wide volumes were down 11% in hot cereals and 7% in pancake syrups, and B&G was not immune with its Cream of Wheat and Vermont Maid brands, significant revenue contributors for the company, experiencing weak sales.
B&G is not an investment without risks. The company took on significant additional debt to purchase the CSB products and conservative investors could be concerned about its debt to EBITDA leverage of more than 4x. B&G reported $42.6 million EBITDA for the first quarter, and following the solid results, maintained its full year EBITDA guidance of $166.0 - $170.0 million.
These figures provide adequate coverage for the attractive dividend, and the current share price provides a decent entry point. As the company reduces debt, continues to introduce new products, leverage distribution channels and grow sales, there should be the opportunity to continue to grow the dividend in future years.
Additional disclosure: I have no positions in the other stocks mentioned in this article and no plans to execute any trades in the next 72 hours.