B&G Foods, Inc. Q2 2008 Earnings Call Transcript

| About: B&G Foods, (BGS)

B&G Foods, Inc. (NYSE:BGS)

Q2 2008 Earnings Call

July 28, 2008 4:30 pm ET


David Wenner - Chief Executive Officer

Bob Cantwell - Executive Vice President and Chief Financial Officer


Edward Aaron - RBC Capital Markets

Robert Moskow - Credit Suisse

Bryan Hunt - Wachovia

Andrew Lazar - Lehman Brothers

Reza Vahabzadeh – Unknown Company


Welcome to the B&G Foods, Inc. second quarter 2008 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.

David Wenner

You can access detailed financial information on the quarter in our earnings release issued today and available on our website at bgfoods.com and in our quarterly report on Form 10-Q that we have filed today with the SEC.

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 also will be making reference on today's call for the non-GAAP financial measure, EBITDA. A reconciliation of EBITDA to the most directly comparable GAAP financial measure is provided in today's press release and is included in our 10-Q.

As usual we’ll start the call by having our CFO, Bob Cantwell, discuss financial results for the quarter. After Bob's remarks, I'll discuss factors that affected our quarterly results, some of our business highlights and our current thoughts concerning the business going forward. Bob.

Bob Cantwell

Net sales increased $1 million or 0.8% to $119.2 million for the second quarter of 2008, compared to $118.2 million for the second quarter of 2007. Net sales of our lines of Maple Grove Farms, Ortega and B&M increased $2.3 million, $1.5 million and $1.1 million. These increases were partially offset by a reduction in net sales of Cream of Wheat, Sa-són, Polaner and B&G of $1.8 million, $0.6 million, $0.6 million and $0.5 million.

Gross profit decreased $3.7 million for the second quarter of 2008 or 10.1% to $33.6 million from $37.3 million in the second quarter of 2007. Gross profit expressed as a percentage of net sales decreased 3.4% to 28.2% for the second quarter of 2008 from 31.6% in the second quarter of 2007. This decrease in gross profit expressed as a percentage in net sales was primarily due to increased spending on trade promotions and increased cost for wheat, maple syrup, corn, packaging, transportation and sweeteners.

Sales, marketing and distribution expenses decreased $1.1 million or 8.8% to $11.5 million for the second quarter of 2008, compared to $12.6 million for the second quarter of 2007. This decrease was primarily due to a decrease in consumer marketing of $0.7 million and a decrease in selling expenses of $0.6 million, offset by an increase in warehousing expense of $0.2 million. These expenses expressed as a percentage of net sales decreased to 9.6% in the second quarter of 2008 from 10.6% in the second quarter of 2007.

General and administrative expenses increased $0.3 million or 17.8% to $1.9 million for the second quarter of 2008, compared to $1.6 million in the second quarter of 2007. Excluding the impact of $800,000 insurance reimbursement received in the second quarter of 2007, general and administrative expenses decreased $0.5 million in the second quarter of 2008 as compared to the second quarter of 2007. This decrease primarily was the result of a decrease in professional fees of $0.3 million and compensation expense of $0.3 million.

Operating income decreased 13.7% to $18.6 million for the second quarter of 2008 from $21.5 million in the second quarter of 2007. Net interest expense decreased $2.6 million or 16.9% to $12.9 million for the second quarter of 2008, from $15.5 million in the second quarter of 2007.

Interest expense for the second quarter of 2007 included a write-off of deferred financing cost of $1.8 million relating to our prepayment of $100 million of term loan borrowings with a portion of the proceeds of our public offering of Class A common stock in May 2007. Our average debt outstanding was approximately $66.7 million lower for the second quarter of 2008, as compared to the second quarter of 2007.

Our EBITDA decreased 10% to $22.4 million for the second quarter of 2008, compared to $25 million in the second quarter of 2007. Earnings per share of Class A common stock was $0.10 for the second quarter of 2008. Capital expenditures for the second quarter of 2007 were $2.6 million and are $9 million year-to-year.

During the second half of 2008, we expect to incur an additional of $2 million in capital expenditures for a total of $11 million. This compares to capital expenditures spending of $7.8 million in the second half of 2007 for a full year total of $14.2 million in 2007.

Moving on to the balance sheet, we finished the second quarter of 2008 with $24.1 million of cash compared to $36.6 million at the end of 2007. During the second quarter of 2008 we used an additional $8 million of cash to secure the purchase of maple syrup. During 2007, this money was spent during the third and fourth quarters. We also finished the second quarter of 2008 with $535.8 million in long-term debt and $167.7 million in stockholders equity.

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

Dave Wenner

This quarter was one of the most challenging we’ve seen in the past 10 years and it’s reflected in our results. The results centered around two basic issues, cost and price. Expected and unexpected cost increases hit us hard during the second quarter, while we saw only a very modest benefit from price increases. In fact gross sales which reflect the theoretical impact of price increases were up nicely, but higher trade spending reflecting the fact that we did not see those increases in aggregate, netted sales down to a modest 1% increase, all of which was due to volume.

This is not to say that we did not see price benefits, in fact pricing was higher in about half of our brands, but this net gain was negated by several factors. The three major factors were first, a higher proportion of brand sales done on promotion; second increased sales of high trade spend brands such as B&M, B&G and Ortega and third, price roll back in specific brands with some key customers.

The Emeril brand is a perfect example of the last factor. Overall pricing in the brand is down so far this year as we try to determine what retail price is the best for the Emeril pasta sauce line. A temporary price reduction was done at one customer that doubled unit sales. We then pulled back the reduction to an intermediate level and maintained sales at a level 80% higher than the original base.

Similar experiments are ongoing with other customers and while the price is down as a result, unit volume on pasta sauce is up 34% so far this year. With the exception of this activity we have eliminated the price reductions that were done in the first half. We have also raised promotional price points on most brands for the last four months of the year and another round of price increases becomes effective August 8.

In some cases on items that we have not increased before and in other cases further increases on items for price that are already been taken. We estimate that the net effective of these increases in the second half for the year will be over $10 million and should largely offset the cost increases that are in place or that we anticipate for the second half. In addition, we are planning a further round of pricing that will take effect no later than January 5, of 2009.

With the exception of maple syrup and an unexpected temporary increase on wheat, our cost outlook has not changed dramatically. Maple syrup aside we’re running at an $18 million to $20 million rate of increase for the year when all known and anticipated cost increases are included. Higher wheat costs are included in this number.

In the case of wheat, we did not anticipate the sudden spike in wheat prices that occurred in the second quarter and ended up buying very expensive wheat. This situation has since improved and we are looking at much better although still historically high prices through the first quarter of 2009. Maple syrup on the other hand was a very dramatic affect in the second quarter. Maple syrup is our single largest purchase. Had 2008 been a normal year we would have spend as much as $30 million on syrup.

As was mentioned on our last call the 2008 crop was a poor one. Since then it’s become clear that the crop was not just poor, but a failure coming in at approximately 50% of normal. As a result the price of maple syrup surged past the nominal price set by regulation in Quebec and ended approximately 45% higher than last year. We estimate that we may be able to obtain half of our normal needs this year and have implemented a number of actions to compensate for the reduced availability and higher cost.

An immediate price increase was taken in May from 40% to 60% depending on the customers pricing format. All promotions and discounts were cancelled and customers placed on allocation. About 80 items in the line were discontinued to focus supply on the most important and profitable items. Finally, if a customer was unable to implement the immediate price increase shipments to that customer were suspended until the price increase was in place.

As a result of these actions unit sales have declined while dollar sales have not. Retail unit sales are down 30% so far in July. Frankly that’s not enough given the limited supply and we are reviewing our options to reduce sales further. It is still uncertain what the final effect on sales would be, but there was a negative cost effect of roughly $1 million on EBITDA in the second quarter as we rushed to implement price increases.

Moving on to the other brands in our portfolio, we had mixed results for the second quarter was about half the brands up and half down in net sales. Cream of Wheat had a soft quarter, with net sales down 14.5% for the quarter. Much of that decline was due to a first quarter promotion that moved volume into the quarter and from higher promotional spending that netted down second quarter sales.

Trade spending in the first half is up $1.3 million, a combination of our new trade promotion activity and Kraft programs that were not reflected in their comparable brand P&L. We expected this higher trade spending, but accounted on new product sales to offset it in our plans. What we are finding is that the new products are gaining distribution more slowly than we anticipated due to slow retail execution.

Only about two-thirds of the retailers who have accepted our new products have ordered them through the second quarter. We expect this distribution to fill out over July and August, so that the products are on shelf for the fall season and our September FSI and promotional events. We remain very confident on this brand.

Comparing the first four months of our ownership in the first half of 2007 to the same four months in 2008 the brand’s net sales are up 4.5%. Where we have fully implemented our plan to recover distribution on the base line products and placed new products, we have seen double-digit growth.

Sales at one key mass merchant, who placed the new products in relatively limited distribution, are up 27% so far this year. Meanwhile the capital project to move production of the instant products to our Wisconsin facility has been completed and the product line is in operation.

Several brands such as the B&G brand and Trappey were down due to softness in the food service channel of distribution. We are seeing certain customers in the food service channel affected by the weak economy, while others seem to be benefiting. Mid-scale restaurants seem to fair the worst so far in this economy. We’re still seeing heavy price competition in our Regina brand and are responding as necessary to defend that brands position.

Other brands continue to do quite well. Our Hispanic oriented brands, Las Palmas and Ortega have had excellent years so far. Las Palmas net sales were up 10% this year on expanded distribution and share gains. Ortega has left 5% this year and continues to expand distribution with existing and new products. Sales seem strong throughout the Ortega product line, but Dinner Kits are doing exceptionally well, based by several new products.

Our two molasses brands are doing very well showing over 8% growth this year. We are also seeing consumers buy more of our promotion driven brands. B&M Baked Beans have benefited from this trend; sales were up nearly 13% in the second quarter. The B&G brands retail products have had a strong quarter as well reinforcing our impression that consumers are eating at home more and preferred branded products when they’re offered value.

We’ve been working hard for several years to find products that would appeal for the dollar store class of trade given the volume of stores this class represents and we made it finally and found the answer. As we enter the third quarter we have sold Las Palmas, Ac’cent and Underwood products into this channel, which should increase the sales in each of those important brands. Distribution of our new Underwood Barbeque Chicken and Turkey products continues to expand in the traditional supermarket channels as well.

Our operating expenses are well under control in the quarter and were favorable versus last year by $800,000 between sales, marketing, distribution and G&A expenses. We’ve reduced cost in sales by consolidating several customer service functions and reducing selling expenses in a number of areas. Marketing expenses while down for the quarter, are up for the first half due to coupon and advertising events that were executed earlier this year than last.

We expect second half marketing expenses to be approximately $1 million lower than past year. G&A expenses are down due to lower incentive compensation accruals reflecting the fact that our results are not what we had hoped for in the quarter or year-to-date.

Our cost reduction activities are gaining momentum and are reflected in these results to some extent and we still expect to save $2 million to $4 million this year. We have already reduced headcount throughout the company by 2% and hope to use less seasonal and part time labor in our facilities as the year progresses.

As Bob referenced, our cash position is down versus year-end and last year, but for very specific reasons that are temporary. Inventory is up due to maple syrup purchases. Our inventory should decline as the year goes on and we expect to end the year with inventory lower than prior year. Our finished goods unit volume in inventory was down over 13% at the end of the second quarter versus June 2007, indicating the progress we have made in reducing finished goods inventory.

Capital spending in the second half of 2008 is expected to be over $5 million less than the second half of 2007. Between these two factors we remain comfortable that cash will return to more normal levels in the second half of this year. On that note our board of directors announced our 15th consecutive dividend last Wednesday, payable on October 30, 2008 to stockholders of record as of September 30. We currently see no reason to expect that our dividend policy will change.

As I said at the beginning of these remarks this was a very challenging quarter for our business. We are usually much more stable but we were hit with extraordinary cost increases including several issues we believe are one-time events, specifically the wheat cost spike and the maple syrup shortage. Each of those impacted our results by over $1 million and came so quickly that we could not compensate for them completely.

Borrowing similar cost of prices and assuming our prices increases generate the expected revenues we still believe that we can match 2007 EBITDA for the full year of fiscal 2008 and at this point I would like to open up the call for questions; operator.



(Operator Instructions) and we’ll go first with Brant Johan with RBC Capital Market.

Edward Aaron – RBC Capital Markets

A couple of questions for you; so on the Cream of Wheat this is the first you’ve talked about any response to promotions being less than very positive, I’m just kind of wondering if it’s caused you to rethink anything strategy wise in terms of the promotion of that brand going forward.

David Wenner

Well, actually the promotions from a retailer point of view were almost two positive Ed. It moved volume into the first quarter and out of the second quarter. We had a very, very good March based on a promotion we did in March and we saw a lot of customers buy in on that promotion, so a very strong March depressed second quarter sales and that’s why I used the four month comparison of the four months where we owned it 2007 versus the four months in 2008 and showed you that we are up 4.5% over that same four months.

We didn’t see the response at the consumer level we might have hoped to see, we saw a weaker response than we hoped from consumers. So we’re rethinking how we’re going to do the September promotion and I’ve actually recast it in light of that and its still a work in progress in terms of what promotions work and don’t work but we’re trying something new in September?

Edward Aaron – RBC Capital Markets

As far as the pull forward of sales into March, I mean was that something that you had internally model for. In other words, realizing that you knew in April that you had a good March were you expecting a higher level of sales and actually came in for the second quarter for the brand?

David Wenner

We were and as I have said it was because we expected more pipeline fill on the new products. We thought that would backfill what we lost on the existing products into March. That did not happen as much as we would have hoped. As I said we’ve acceptance at a wide range of retailers, but there is fully a third of them that haven’t ordered the product yet. In some cases people have actually deducted the sorting money and installed haven’t ordered the product. So we’re all over people to get those products into the store here before we drop our September FSI and do the promotions in September.

Edward Aaron – RBC Capital Markets

Okay and then can you just talk a little bit about the acquisition pipeline. It just seems like maybe it’s a little bit more likable than it was six or nine months to go?

David Wenner

Well, it is more liable than it was six to nine months ago. We continue to look at several properties. I would say that what’s interesting nowadays is the financing window tends to open and closed depending on what week it is. It seems to be closing right now but it was opened three, four weeks ago, so you kind of have to pick your spot there, but I think we’re confident that it will open back up again and if there is an opportunity we’d be able to do the financing.


And we will go to Reza Vahabzadeh.

Reza Vahabzadeh – Unknown Company

On the pricing actions that you’ve taken and I think you mentioned an August, mid August kind of a price increase followed by January 1, but do you think you’re pricing increase in August once fully utilized can allow you to catch up with cost as you foresee it now and would that be in the fourth quarter or could that happen by the end of the third quarter?

David Wenner

Well we have actually two price increases in play this year because we still have the one we announced in March to get a benefit from and we believe that we are getting a benefit from that now and will for the full second half of the year.

Then we have the August one kicking in here in another week or so and as we’re double checking what we expect to happen based on how the first half went we’re confident that that one is going to have much more effect than the first one did and be much more immediate in terms of effect.

So between those two and some other scattered ones we’re doing with food service and things like that, we’re forecasting that we will see about $10 million benefit out of pricing in the second half and working hard to make sure that happens.

Reza Vahabzadeh – Unknown Company

And as far as spending back the pricing increase back into trade, I assume there is going to be less of that in the second half than there was in the second quarter?

David Wenner

Some as I said there is really three factors; one, was deliberate price reductions on some product lines either as a competitive response and in the case of the Emeril line as an experiment to see what would happen at price points and again as I said everything, but the Emeril line pasta sauce experiment has stopped, so those are all positives relative to the first half.

The second is that we did see a very good response from consumers on things that are typically promotion sensitive; B&M, B&G and Ortega frankly, so that mix shifted our trade spending up to some extent and then third when I say more products sold on promotion there seems to be a trend in the industry for some of the major retailers to try and go to an EDLP format rather than high-low promotions necessarily and even when they do high-low promotions they are funding it off at EDLP formats with manufactures.

We frankly had several of those in place and did not realize what the dynamics of those would be in terms of the trade spending positives to negatives versus last year and it was a negative to us in the second quarter. We expect that to turn positive in the third quarter and some of those are ending and will be reset at a higher level in the third quarter.

Reza Vahabzadeh – Unknown Company

Okay, and as far as competition, has competition generally matched your pricing increases, give or take?

David Wenner

In the vast majority of cases we’re following competition, so yes. It’s a self fulfilling prophecy. In the case of Ortega it would probably be the only place where we are leading pricing and we have not seen general mills move yet. Having said that we’re really making our Ortega gains not so much at the expense of Old El Paso as of the expense of Taco Bell, so despite the fact that they have not moved in price, OEP I mean, we are still making headway.

Reza Vahabzadeh – Unknown Company

Okay and then as far as the inventory numbers that you mentioned, so by the end of the year just to be clear you’re going to see inventory levels come back to prior year level?

David Wenner

Well below, yes.


And we’ll go next to Robert Moskow with Credit Suisse.

Robert Moskow - Credit Suisse

Let me ask on the sales line, I guess you’ve actually given a pretty detailed explanation as to what happened and why it’s kind of stagnating here and I appreciate all of that, but is there anyway to peel that out, like for sales to be essentially flat here, like how much pricing did you really take and then how much did you then have to deal back. Is there a way to peel out like what list pricing was actually up, so we can get a sense of how much trade spending there was?

David Wenner

Our trade spending was up several million dollars as a percent of sales, Bob you want to…?

Robert Cantwell

Yes. I mean less our fuel price increase as well as mix year is up between $4 million and $5 million and because of certain brands Emeril being one that Dave mentioned we basically dealt with the majority of that back during the course of the quarter, but there were pure less price and from a pure kind of go forward basis we feel very comfortable with that and that list price will stick in the third and fourth quarter.

Robert Moskow - Credit Suisse

Right, and then on the commodity costs side, I’m of the mind set that the commodity costs are not just persisting but I think they can actually accelerate from here and that inflation could accelerate. I know it’s hard to have a crystal ball for ’09, but do you get a sense that the cost at least in the back half are actually accelerating beyond your current phase of inflation?

Robert Cantwell

Not really. There will increases from where we are today and the back half but we foresee that -- it’s really something we’ve seen coming down the road. For instance, beans going into B&M and Joan of Arc. We’ve known for some months now that those costs are going to go up 60% in September.

So I guess we don’t see them accelerating in the sense that we’ve know about this for quite sometime, unless something happens in the corn market we expect the corn syrup guys to hit us with another big increase January 1, but not a typical of what they’ve done for the last couple of three years 25% of so but, ultimately we’re not sure, but beyond that I -- and this is an opinion and nothing more than, I’m really seeing things tending to plateau past that level. I think there is not the pressure; you’ve seen wheat start to level off, you’ve seen corn pull back some, you’ve seen actually oil pull back some; I guess I won’t be surprised if things actually start calming down in the last quarter of the year and we don’t see anymore remarkable cost increases going forward.

Having said that we are still planning for a price increase in January and we are certainly hedging our bets that that extraordinary thing can happen that will drive the price to oil backup again and we’re going into another round of inflation, but all things being equal unless something extraordinary happens, my impression and it’s one persons opinion is that our costs might actually plateau four, five months down the road.

Robert Moskow - Credit Suisse

Okay and then as far as the overall consumer is concerned, you’re in a lot of different categories; maybe this is just kind of hard to talk about, but I’m trying to figure out if consumers are trading down within your portfolio also, but I guess it’s kind of hard to tell because if they shifted to B&M and B&G and Ortega it might have been because you had deals on those categories and maybe that’s what the reason that they were attracted to them, is that fair?

David Wenner

More sales of B&M doesn’t mean consumers are trading down per se; what it means to me is they might be eating at home more and they are looking for inexpensive side dishes and baked beans, there is very little private label business there, it’s a branded business and it’s a branded business because you can buy a good serving size at a very reasonable price.

We’re seeing the same thing with B&G retail products increase sales at retail on those products. Ortega offers meal solutions at home and so we’re not surprised that we’re seeing increase sale there. We’re basically executing the same promotions as last year and in the case of B&G higher promotional prices and seeing a better consumer response, so we think its all about consumers trading down and that they are not eating out, there are eating at home more in that sense, but within the grocery store products not necessarily trading down.


And we’ll go next to Bryan Hunt with Wachovia.

Bryan Hunt - Wachovia

Thanks. David I was wondering if you could talk about other than maple syrup before you’ve taken the biggest price increases and conversely maybe the smallest moves. It sounds like in Regina you have so much competitive pressure you’re not doing much of anything?

David Wenner

Although we’ve take the biggest price increases -- I guess we would boil down to things where you’ve seen broad cost increases; for instance our B&G pickle and pepper line has seen very broad cost increases; fully, every major component of those product is 20%, 30% higher and so we’ve raised promotional prices considerably and have taken a retail price increase as well. The pull in our line preserves and things -- again fruit has gone up a lot, corn syrup has gone up a lot, glass has gone up a lot, so we’ve tended to follow Smucker’s latest price increases on that line and they’re considerable.

Yes, there is something like Regina that it’s very competitive and we really haven’t taken up price increase, even lines like B&M, the increases will be considerable going forward on B&M, but they are more oriented towards promotional activity than they are towards pricing. We’re going to take a modest increase here in the fall on B&M, in terms of list price, but our promotional pricing probably will change dramatically and that’s due again to the fact that beans are up 60%, cans are up somewhat and the sweeteners that go into the product, they’re up as well.

Bryan Hunt - Wachovia

Okay. Could you talk about maybe on which costs that you‘re hedged out for a significant period of time, whether it’s tin plate or glass, corn, peppers, anything along those lines?

David Wenner

Well in terms of packaging, we have annual or multi-year contracts, but I have to tell you that any contracts like that, that you are signing nowadays has energy inflators in it. So, depending on what oil does; your package, you can’t insulate yourself on packaging; can’t insulate yourself on packaging from the effect of oil or something like that.

As far as commodities go, wheat has become a significant commodity for us relative to the size of our business, and we’re locked in on wheat prices through the first quarter of 2009. We’ve locked in corn prices in a similar timeframe, so we’re taking more positions then we ever have on commodities where we have exposures like that and then there is other things like corn syrup that basically are annual pricing contracts and that’s pretty common through the industry and so our corn syrup costs are locked through the end of the year, but a new price comes into effect January 1.

Bryan Hunt - Wachovia

Looking at backing up the promotion, what would you say your tonnage was up during the quarter or your overall volume?

David Wenner

The volume was up comparable to the net sales about 1%.

Bryan Hunt - Wachovia

Okay and then we’ve heard a lot about coupon redemption has accelerated in the current environment; are you seeing that hit out as well and let’s say if you did have a big step up in coupon redemption, what kind of risk is there to numbers?

David Wenner

We are not seeing a very large coupon redemption increase; it’s very comparable to prior years. Last year we spent $3.5 million on coupon and we might spend an extra $1 million this year because of Cream of Wheat, so we just don’t see a huge risk on that.


And we’ll go next to Andrew Lazar with Lehman Brothers.

Andrew Lazar - Lehman Brothers

I have just a couple of things; one, I’m still trying to get a little bit -- I appreciate all the detail around sort of the trade spending and kind of the three different buckets that that fell into; I guess I’m really surprised because you are one of the only; if not the only food company frankly that hasn’t seen pretty dramatically accelerating top-line growth largely because of pricing flowing through and I realized you went through a couple of different things, but I guess I’m trying to get a sense which of those was sort of the biggest and was that something that you knew was going to happen; like you had visibility to it and realized that was what you were trying to accomplish or was it something that you didn’t necessarily see until it started to come in that way and you internally in your plans have expected a lot more pricing to come through.

David Wenner

Well we expected a couple of million dollar of price benefit in the second quarter and why it didn’t happened -- I think the everyday low pricing with some retailers kind of snuck up on us in terms of the effect and the reason I say that is when we set those everyday low prices we actually set them with a price increase in mind; in other words the net collect from that customer on those prices we’re going to be higher than the net collect was last year.

Then it’s gets down to timing in terms of when did you spend your promotional money with the customer last year versus this year as to whether your plus or minus that net collect at any point in time and if the effect basically in the second quarter was that we were minus the net collect the prior year, as promotional activity goes through the summer on some of those brands like B&M, like B&G and others we will gain ground on that net collect, but that part surprised us. The price rollbacks were done for defensive purposes in a lot of case and those are very ad hock, so we had not planned all of those and to that extent they were unexpected.

Finally the mixture to more trade promotion brands, obviously we had not predicted that as well. We have eliminated the price decreases, not that we understand the EDLP; we are confident that we are going to gain ground on that EDLP format, but yes there were a couple of things there that we went through some learning curves, but the price decrease was not one of them.

Andrew Lazar - Lehman Brothers

Okay, and then as I think about how the top-line will start to shape up as we go into the third and fourth quarters, I’m trying to get a sense of how you think the top-line is likely to come through and then sort of how the components between pricing and volume will shape up because there’s a lot of puts and takes here and I’m still not sure how that sort of plays through in the back half of the year?

David Wenner

And we are not sure to the extent that maple syrup will affect that top-line and that’s a big bogie out there because it’s all about how much supply can we continue to get on maple syrup and how much will this dramatic price increase that we’ve taken affect volume.

Frankly, when we raised price as much as we did, we hoped the volume would go down comparable to the 40% to 60% price increase we took depending on a customers, because there is not enough maple syrup to supply the same amount of usage as we did last year, so if its perfectly even, if we raise price and the unit volume goes down as much as we raise price then obviously the sales are ineffective, but we don’t know what that affect is going to shake out to be going forward.

Putting that aside, we expect a modest increase out of pricing. I would say we do not expect a lot of unit growth overall because we are exiting two significant private label pieces of business on the B&G side and that’s done simply because they were not profitable and used up a lot of working capital, so we decided to move away from those, but we could see that that volume loss will probably leave us to where -- if we see a modest unit growth, maple syrup aside we’ll be pretty happy.

Andrew Lazar - Lehman Brothers

Okay and then last one would be, I know I realize there is all sorts of competitive issues that you need to be talking of in each of your individually categories; do you think there is an argument to be made that in an environment like this, that to the extent that you or anybody else are not taking even more aggressive sort of pricing actions, even if there is some volume offset in the near-term that your kind of leaving money and margin on the table as you will -- isn’t this the time ultimately even if the leading player in a certain category hasn’t taken it. I know in other small account names in certain categories, the number two player has led with pricing; even in the same categories where they’re competing with general mills in many cases and have led and that’s a scary thing to do, is a distant number two, but ultimately led to a better place?

David Wenner

It’s an interesting question and I guess we’re going to learn the answer with Ortega unless general mills take the price increase pretty soon we’ll find out. As I said, we’re fortunate and that there are several players in that category and we’re actually gaining ground of the expenses in some of the others.

I think everybody should be as aggressive as they can be in this situation. As I watch everybody else’s earnings, a lot of people’s margins have degraded and frankly when they are the category leaders, I don’t understand why they’re letting them go down as much as they are. They know everybody else wants to increase price to, I don’t know why you would depress it.

So, we’re conducting our little experiment here with Ortega and we are certainly trying to follow everywhere else as category leaders do take price. We think if we can get all the pricing we want to get, we will hold our own as far as earnings and things. Frankly, I don’t know what’s enough, what’s too much, that remains to be seen in this environment.


(Operator Instructions) and we’ll go next to Reza Vahabzadeh.

Reza Vahabzadeh – Unknown Company

Just a follow-up, you mentioned you have some coverage on your corn and wheat needs all the way to the first quarter of ’09. I mean does that sound like you are hedging more of your cost need to give you more visibility and I’m just wondering what is your thought process on covering your costs and having more protection on it?

David Wenner

I guess its better the devil you know than the one that you don’t know. Yes, we just we’re looking for predictability in our costs, so that we can lay in our plans or what we’re going to do with our products and pricing and thinks like that based on predictability and the costs, so yes we’ve taken more positions than we’ve ever taken before where we’re able to. If price of those commodities goes down we’ve left ourselves some room to benefit from that what, but we wanted to make sure that we had a predictable future.

Reza Vahabzadeh – Unknown Company

So, would you anticipate continuously rolling forward some hedges as you move forward just to give you that visibility?

David Wanner

Yes, I think we are definitely aspiring to be much more sophisticated going forward and looking to do that.


At this time, we have no further questions. I’d like to turn the call back over to Mr. David Wenner for any additional or closing comments.

David Wenner

Thank you operator. As I said at the beginning of the call this was a very challenging quarter for us and despite the challenges and some very extraordinary events with maple syrup and with wheat we believe we produced a fairly consistent quarter that we’ve positioned ourselves to over come these extraordinary occurrences.

I think the quarter speaks to the diversity of our portfolio in providing consistency when your single biggest commodity goes up about 50% in price and you can still deliver relatively consistent performance on EBITDA. I think it says that the portfolio really does cushion us from shocks in the business and allows us time to recover and reposition ourselves to continue to provide consistent results.

I know everybody watches the cash on our balance sheet in the context of the dividends; please be assured that there have been some extraordinary circumstances there as well. We had to buy as much maple syrup as we could; as soon as we could to assure supply given the circumstances and our capital spending has absolutely been at an unusual level for the 12 months. I think our LTM capital spending is around $16 million, that’s very extraordinary for our business.

The high point we see in our business going forward is $11 million a year. So, we truly have used more cash than we would normally expect to on capital spending especially in the first half of this year. Those things will come back and provide a reasonable balance sheet position on cash going forward and in that context we believe our dividend is assured for the foreseeable future.

With that, thank you very much joining us on the call, we look forward to the next call.

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