B&G Foods Culver Acquisition Drives Q2 Growth

| About: B&G Foods, (BGS)

B&G Foods (BGS) reported second quarter results late last week, management re-affirmed full year guidance, and shareholders have since been rewarded with a solid 5% gain in a weak market. B&G showed revenue gains of 14.8%, gains that were entirely attributable to the acquisition of the Culver Specialty Brands ("CSB") product suite from Unilever (UN). Without this acquisition that generated $19.5 million, revenue would have declined by $0.3 million. Furthermore, B&G price increases that were instituted in the past 8 months helped offset a $4.6 million unit volume decline in sales of its other products.

The decline in unit volumes prompted CEO David Wenner to make the following observation during the company's earnings conference call:

The volume loss shows that we have not been totally immune to the general weakness in the food business, though our percent decline is meaningfully lower than many of our competitors. We have no good answers to the 2 key questions: Where are the consumers and what are they eating? But we most certainly see that price increases have influenced their behavior.

Categories where we and our competitors have taken sizable price increases are more noticeably affected than others. The fruit spread category is an excellent example of this. Sweeteners and fruit costs, in general, have increased substantially in the past 12 months, and the category has seen price increases reflecting that. Our Polaner brand, which competes in that category, saw a 3.9% sales decline in the second quarter but an 11% volume decline. That number is very much in line with what competition has reported and with what Nielsen reflects at the consumer level. One reason I believe that we have not seen the overall volume drop that others have seen is that we, in general, have taken very modest price increases, and thus, have not experienced the sticker shock seen in categories such as fruit spreads.

Regardless of where consumers are purchasing their food (or what they are eating), B&G has been able to avoid sharp price increases by staying ahead of the curve with several of its price increases. Many of B&G's products are among the leaders in their categories and the company has been willing to institute small price increases ahead of the competition. In addition, they have been successful at accurately hedging key commodity purchases. Also from the conference call, Wenner responded to a question:

As far as pricing goes, we're looking at 2013. And because we are aggressive in terms of extending our positions on these things, right now, our first blush at 2013 says we're going to see a modest overall price cost decrease and we're certainly going to see that cost decrease in wheat and corn. In the case of corn, when we saw the dip in corn, we have taken positions into the fourth quarter of next year on corn. And as I said earlier, on wheat, when you started seeing the futures dropping and everything, my inclination, I at least ask the question, "Should we shorten up our horizon on these and take advantage of these lower costs sooner?" We decided not to do that. And of course, the weather proved me correct immediately. Or I guess, the weather showed me the wisdom of that way immediately by things drying up and cost skyrocketing again. So we're pretty -- in pretty good shape for 2013, in terms of commodity costs right now.

This successful hedging should provide margin benefits in 2013, with wheat and corn being two of the key ingredients in the company's Cream Of Wheat and Ortega brands. But, the company's future success and growth will be about much more than controlling costs.

Much of B&G's success comes from injecting new life into neglected or "orphan" brands that are acquired from the company's larger competitors. Despite many of these brands being leaders in their categories, the sales they generate are often considered too small for food giants like Kraft (KFT) (the previous owner of Cream of Wheat) or Unilever (the previous owner of Mrs. Dash seasonings) to devote product development or marketing resources. This is not the case for B&G.

B&G will be rolling out new product offerings for its CSB products in the latter part of the year and will continue to introduce new offerings for its base brands throughout the year. The company also expects to realize cost savings and sales improvements in Canada during the second half of 2012.

CSB Acquisition

The CSB acquisition increased the company's presence in Canada, and it is proving to be a learning experience for company management. There have been delays in implementing new UPC codes and retailers have been reluctant to re-order until the current inventories have been exhausted. Management estimated this reduced sales by $0.5 million in Q2, a number that should be recovered in the second half. In addition, changing the method of distribution in Canada is expected to generate an additional $1 million of revenue in the second half of the year. And, this does not begin to address the potential leveraging of sales for the base B&G products in Canada.

Despite these experiences in Canada, B&G had $45.1 million in sales of CSB products in the first half, a rate slightly ahead of its previously announced 2012 guidance of $88 million. With expected improvements in Canada in the second half of the year and the introduction of a half dozen new CSB products beginning in August, the $325 million CSB acquisition continues to look better and better.

The Dividend

I was originally drawn to B&G because of its dividend. The yield had been significantly above its competitors, including J. M. Smucker's (SJM) dividend yield at 2.7%, Kraft at 2.9%, Kellogg (K) at 3.6%, General Mills (GIS) at 3.4% and PepsiCo (PEP) at 3.1%. With the recent B&G share price appreciation, its dividend yield is now 3.9%, and obviously it is much closer to the yields available elsewhere in the food sector.


B&G management prides itself on being shareholder friendly and has always paid out a high dividend. Since cutting the dividend from $0.85 to $0.68 in the midst of the financial crisis, management has worked diligently to restore the dividend. It was subsequently raised three times in a little more than a year to $1.08 per share.

At the same time, the company continues to be aggressive in its pursuit of acquiring additional brands and has taken on significant debt in order to make accretive acquisitions. The CSB acquisition speaks to the benefit of this strategy, as it was cited as the reason for the most recent dividend increase of more than 17%. With leverage still fairly high, the company may find it difficult to make additional acquisitions and use more cash to fund the dividend.

In an article written on B&G in mid-June I recommended holding the stock, although I also noted that I would not be committing new capital (aside from re-invested dividends). I may have been too conservative since the share price has since increased from $26.11 to $27.61 (+5.7%). The yield has now declined below 4%, my opinion hasn't changed very much, and I will continue to hold.

Disclosure: I am long BGS, PEP.

Additional disclosure: I have no positions in any of the other stocks noted in this article.

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