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

Q3 2012 Earnings Call

October 18, 2012 4:30 pm ET

Executives

David L. Wenner – President, Chief Executive Officer & Director

Robert C. Cantwell – Chief Financial Officer, Executive Vice President Finance & Director

Analyst

Andrew Lazar – Barclays Capital

Analyst for Bryan Hunt – Wells Fargo Securities

Reza Vahabzadeh – Barclays Capital

Karru Martinson – Deutsche Bank

Edward Aaron – RBC Capital Markets

Robert Moscow – Credit Suisse

Phil Terpolilli – Longbow Research

[Katia Vernochuck] – Sidoti & Company

Sean Naughton – Piper Jaffray

Operator

Welcome to the B&G Foods, Inc. third quarter 2012 financial results conference call. Today’s call is being recorded. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. I would now like to turn the conference over to David Wenner, Chief Executive Officer of B&G Foods.

David L. Wenner

Welcome to the B&G Foods third quarter 2012 conference call. You can access detailed financial information on the quarter in our earnings release issued today which is available on our website at www.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 on them. We refer all of you to our most recent annual report on Form 10K 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 publically update or revise any forward-looking statements whether it is 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 EBITDA, adjusted net income and adjusted diluted earnings per share. Reconciliations of these measures to the most directly comparable GAAP financial measures are provided in today’s press release. We will 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 for the quarter, selected business highlights and our thoughts concerning the final quarter of the year.

Robert C. Cantwell

Net sales for the third quarter of 2012 increased $21.1 million or 15.9% to $154.2 million compared to $133 million for the third quarter of 2011. Net sales of the Culver Specialty Brands which we acquired at the end of November 2011 contributed $20.2 million to the overall increase for the quarter. For our base business a sales price increase of $3.5 million partially offset by a $2.6 million unit volume decrease resulted in a net sales decrease of $0.9 million.

Net sales increased by $1.2 million for Las Palmas, $0.9 million for Maple Grove Farms of Vermont, $0.4 million for Ortega, $0.4 million for Ac’cent and $0.4 million B&M Products. These increase were offset by a reduction in net sales for B&G of $1.3 million and Cream of Wheat of $0.9 million. All other brands decreased $0.2 million in the aggregate.

Gross profit increased $13.8 million for the third quarter 2012 or 33.4% to $55.3 million from $41.5 million in the third quarter 2011. Gross profit expressed as a percentage of net sales increased 470 basis points to 35.9% for the third quarter of 2012 from 31.2% for the third quarter 2011. The increase of gross profit as a percentage of net sales was primarily due to pricing gains of $3.5 million and a sales mix shift to higher margin products primarily due to the Culver Specialty Brands acquisition partially offset by commodity costs increases.

Selling, general and administrative expenses increased $2.2 million or 17.4% to $14.9 million for the third quarter of 2012 compared to $12.7 million for the third quarter 2011. This increase is primarily due to increases in marketing and selling expenses of $1.6 million, warehousing expenses of $0.3 million, professional fees of $0.2 million and all other expenses of $0.1 million. Expressed as a percentage of net sales our selling, general and administrative expenses increased 10 basis points to 9.7% for the third quarter of 2012 from 9.6% in the third quarter 2011.

Operating income increased 41.5% to $38.3 million for the third quarter 2012 from $27.1 million in the third quarter 2011. Operating income expressed as a percentage of net sales increased to 24.9% in the third quarter 2012 from 20.4% in the third quarter 2011. Net interest expense for the third quarter 2012 increase $3.7 million or 44.1% to $12 million from $8.3 million for the third quarter 2011. The increase was primarily attributable to the additional indebtedness incurred during the fourth quarter 2011 to finance the Culver Specialty Brands acquisitions and an additional $0.8 million of amortization of deferred debt financing costs and bond discount related to the acquisition financing.

The company’s reported net income was $16.9 million for the third quarter 2012, a 39.8% increase as reported net income for the third quarter 2011 of $12.1 million. Diluted earnings per share for the third quarter 2012 was $0.35, a 40% increase as compared to diluted earnings per share for the third quarter 2011 of $0.25. Adjusted net income for the third quarter 2011 was $12.4 million. For the first three quarters of 2012 reported net income was $49.7 million or $1.02 per diluted share a 308% increase as compared to reported net income of $38 million or $0.78 per diluted share for the first three quarters of 2011. Adjusted net income for the first three quarters of 2011 was $38.4 million and adjusted diluted earnings per share was $0.79.

Our EBITDA increased 37.7% to $42.8 million for the third quarter 2011 compared to $31.1 million in the third quarter 2011. EBITDA as a percentage of net sales increased to 27.8% in the third quarter 2012 from 23.4% for the third quarter 2011. Our EBITDA for the first three quarters of 2012 were $125 million a 32.4% increase compared to $94.5 million for the first three quarters of 2011. EBITDA as a percentage of net sales increased to 27.2% in the first three quarters of 2012 from 24% for the first three quarters of 2011.

Moving on the balance sheet we finished the third quarter of 2012 with $15.4 million of cash compared to $16.7 million at the end of 2011. We finished the third quarter of 2012 with $713.4 million in long term debt. Our net leverage based on the midpoint of our 2012 EBITDA guidance is at 4.1 times. Our expected cash interest expense for 2012 is approximately $43 million. Our expected cash taxes for 2012 are approximately $21 million and our capital expenditures for 2012 are forecasted at $11 million to $12 million.

Earlier this week our board of directors increased our dividend rate beginning with the quarterly dividend to be paid on January 20, 2012 from $1.08 per share per annum to $1.16 per share per annum a 7.4% increase. Based on our current share count this equates to $61 million of dividend payments per year in the aggregate.

On October 9, 2012 B&G Foods completed an underwritten public offering of approximately 4.2 million shares of commons stock. The proceeds of the offering were approximately $120.3 million after deducting underwriting discounts and commissions and other estimated offering expenses. We expect to use the net proceeds of the offering for general corporate purposes which may include among other things, the payment of all or a portion of the purchase price and related transaction costs for the New York Style and Old London Brands acquisitions or any further acquisitions and the repayment or retirement of a portion of B&G’s long term debt. Following the offering we now have 52,560,765 shares of common stock outstanding.

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

David L. Wenner

Third quarter was another quarter of significant gains in our operating results which can be seen in the numbers Bob just cited. The Culver Specialty Brands acquisition continued to perform as expected and grow most of the 15.9% gain in net sales for the quarter as well as our 39.8% gain in net income and 37.7% gain in EBITDA. For nine months the acquisition has added $65.3 million in net sales and at this point is on track, given seasonality, to at least meet our previously announced guidance of $88 million in net sales. Given that new products and new distribution are now entering the market we are hopeful that we will improve on that number by year end.

The quarterly results also reflect continued success with our price increases announced in September 2011 and more modestly in February of this year. As with last quarter price increases are tracking slightly ahead of our projections and contributed approximately 2.6% net sales gains on our base business for the quarter and for the first nine months. Pricing combined with cost reduction and a favorable sales mix raised the margins in our base business again this quarter adding to the margin improvement realized from the Culver acquisition.

Given the pricing momentum we saw in September it’s realistic to expect that we will see additional pricing gains in the fourth quarter at perhaps half the level so far this year as we lap the timing of last year’s increases. This combined with the moment we saw building in the base business in the third quarter makes us more hopeful that the fourth quarter sales increase in the base business will go beyond the 0.7% increase seen in Q3.

As I mentioned a moment ago, pricing, cost reduction efforts, and success with our tier based system of managing brands continues to expands margins in the business. EBITDA margin in our base business grew by 200 basis points in the quarter and by 70 basis points so far this year. Tier 1 brand saw a 1.3% growth in Q3 led by a very strong quarter for Las Palmas and solid growth in the Ortega brand. Tier 2 brands grew by 1.4% overall. Performers included the seasoning business in this tier which benefitted from the introduction of Crockpot Slow Cooker Mixes, our Molasses Businesses and the Emeril’s Brand. Tier 3 sales were down slightly due to an exit from a segment of B&G Food service business and the timing of Sazon export orders.

Overall brand sales in the base business firmed making us optimistic that momentum is building going into the fourth quarter and that we may begin to see volume improvement in the quarter. In fact, as I referred to in the last call our base business volume decline remains very concentrated in certain specific brands and customers. As I mentioned a moment ago we exited a piece of food service business with the B&G brand in the last quarter of 2011. That business exit accounted for half of the volume decline in Q3. The good news is that this should have a minimal affect on Q4 sales as we lap the exit timing.

The remainder of the decline is primarily tied to week sales to wholesalers who supply several struggling grocery chains. The effect of weak retail sales in these customers is compounded by the resulting inventory reductions. We believe that we have seen the final affects of inventory reduction and should be able to offset any further weaknesses at these customer with stronger sales in other grocery accounts. It’s important to note that beyond these two factors the business shows good signs of firming and we expect the trend to be bolstered by new product activity that I will discuss in a moment.

Those comments lead me to a review of our base business sales by channel where the trends remain very much the same as they have all year. Sales to supermarket customers, roughly 50% of our business in Q3 were down 2.1% for the quarter. As I mentioned earlier, this decline was very specific to several chains and sales to the large majority of customers in this channel were flat or positive. The expectation for fourth quarter is that the declines will recover somewhat and we will continue to see sales lift at the remaining supermarket chains.

Special markets which includes mass merchants, club, dollar and drug customers roughly 25% of our business saw a 9.7% sales increase. This was driven by excellent results in Wal-Mart and Target where our points of distribution continued to grow nicely and by a nearly 80% increase in sales to dollar stores. You may recall that dollar store sales were flat last quarter. That result and this quarter’s surge reflect the volatile nature of the dollar store business. Rotational placements can swing the business quarter-by-quarter and new distribution typically has a very significant pipeline affect on sales. We continue to build our dollar store business on a very small sales base still in an attempt to follow consumer buying patterns. Over a third of our brands now have some distribution in one or more dollar store chains and that presence is growing.

Finally, the food service channel nearly 20% of our sales showed signs of revival in Q3 growing by just over 1%. This figure is net of the B&G loss reflecting a stronger performance than the total increase would indicate and reason for optimism for this channels performance in the fourth quarter.

I’ve made several references to increasing optimism about volumes going forward. Part of that optimism stems from a belief that the overall food industry trends are improving and part of it comes from building momentum and introducing new items and slotting new and existing items in our portfolio. Our success at mass merchants reflects this trend. Points of distribution on our base business are up over 20% at both Wal-Mart and Target. I’ve already discussed the growth at dollar stores.

This increase in momentum is now building at supermarkets at well. Our Crockpot line has been accepted into broad supermarket distribution and is on track to do $1 million in business in the later part of 2012. Kroger has accepted three additional Cream of Wheat SKUs all successful items that are finally in the nations number two retailer. The Emeril’s line recently added two new pasta sauces Alfredo and Four Cheese that are gaining broad acceptance and Ortega is launching value packs in both taco shells and taco kits to appeal to today’s cost conscience consumer.

In the Culver line we are launching over 30 products in five brand including 10 new Mrs. Dash items aimed at a different usage and form than a traditional Mrs. Dash product. This is just a sampling of the efforts we are making throughout the portfolio to return our business to positive volume growth. Having said that, we are doing so in the context of growing cost effectively. We do not tout B&G Foods as an organic growth investment. Our above average growth comes largely from solid, accretive, cash efficient acquisitions that we manage for on average modest cash efficient organic growth.

The cost outlook for B&G Foods remains a non-issue for the foreseeable future. Pricing has offset the cost increases that we expected in the latter part of this year as purchasing positions rolled over into higher costs on some commodities. Our cost reduction efforts continue to whittle away at the total cost increase that we would have otherwise seen this year and next. Active projects totaled just under 4% of our manufacturing and distribution costs and have reduced potential cost increases by over $9 million so far this year, roughly 2% of total costs. This is part of the reasons margins in the base business have improved as we realize both price gains and chop away at cost increases.

Our outlook for next year continues to be an expectation of flat costs throughout most of the year pending the outcome of next fall’s crops. As I mentioned last quarter we have commodity positions well into 2013 and in some commodities such as corn, throughout the entire year at costs that are typically favorable to this year’s costs. In general the quote unquote non-commodity annual crops in 2012 beans, cucumbers, peppers, and tomatoes did not see the draught effect that corn and wheat saw and prices have remained flat and even decreased in some cases.

All of this makes for a very stable cost outlook in 2013. We remain committed to our approach of covering commodity cost by maintain a 12 month window on a large majority of our purchases and even extending beyond that when we see favorable opportunities. It’s very hard to argue with the success this approach has brought in controlling costs and providing ample warning for pricing as needed to offset downstream cost increases. We remain convinced that managing to a known cost picture is the best approach to the business. It’s also hard to find the excess agricultural capacity that would allow you to argue that costs could decline meaningful in the right circumstances.

Distribution expense is the only other meaningful operational expense we have and here we have limited control over costs. Our distribution costs as a percentage of sales was down 10 basis points in the third quarter despite higher fuel surcharges reflecting the dilutive effect of the Culver acquisition. Surcharges are tracking roughly 10% higher than last year right now which could portend a slight but manageable cost increase next year for this cost component.

Bob mentioned the stock offering that we completed earlier this month. Let me add a bit of color to his comments. As anyone who has followed our company for a while knows, our ability to source, purchase, and integrate accretive acquisitions has created tremendous value for our shareholders. The point of the offering was to reposition our capitalization in anticipation of the next Cream of Wheat, Ortega, or Culver opportunity.

Before we purchased the Culver Brands our leverage was nearing three times EBITDA. After the acquisition it was closer to 4.5 times. With this offering, we expect the year to end at approximately 3.4 times leverage, a very manageable number in terms of running our business and financing another Culver size acquisition.

In fact, given our larger EBITDA base at 3.4 times leverage, another Culver size acquisition would bring us back to roughly 4.5 times leverage. Keeping our leverage within those bounds is important for several reasons. The first is that it facilitates a quick transaction which is extremely important to a large strategic seller whose primary concern is speed and certainty of closing the transaction.

The second important consideration is the sensitivity of our equity investors to leverage. We know internally that our debt is easily managed given the cash efficiency of our business but we also understand that equity investors have an inherent concern with leverage beyond a certain level. The recently completed stock offering addresses both of these needs.

As far as the M&A outlook goes, the opportunities are shifting somewhat as we approach year end. Earlier this year there was a flurry of properties coming from private equity and/or private ownership. That flow appears to have slowed as we’ve gotten closer to year end which is not unusual. With the recent reports that the Breakstone and Skippy brands are for sale, we are seeing an increase in activity from large food companies. All the more reason to have our capitalization primed and ready should the right opportunity present itself.

Having said that, as we examine acquisition candidates we remain highly selective in terms of our requirements for a fit to our business and a strong free cash flow outcome. In anticipation of questions I often receive during the Q&A portion of these earnings calls, I remind you that our company policy is to not comment on any specific acquisition opportunity unless and until we reach an agreement with the selling party.

In the meantime, we do anticipate closing the acquisition of the New York Style and Old London brands from Chipita America by year end and perhaps as soon as the end of October. This acquisition brings us a stable grocery snack business with the Old London brand and exciting prospects in snacks in the deli section of the supermarket with the New York Style brand. New York Style is primarily a bagel chip business today and essentially the same business we sold in 2001.

The opportunity that we see is that the deli based snack business has expanded significantly beyond what it was 10 years ago an order of magnitude greater than the New York Style brand. New York Style has not participated in that growth for a number of reasons. But we believe it represents a significant opportunity. In the intervening years issues that once existed such as a diverse and antiquated production facility have been resolved and we are buying a business with a state-of-the-art manufacturing facility that will cost effectively support growth.

This acquisition is somewhat different for us in that it is focused more on growth prospects than most brands we buy and we do not discount competition which includes Frito Lay with the Stacy’s brand and now Synder’s-Lance Snack Factory. But by buying this business at a reasonable price we feel the risk is worth the potential reward. We estimate the 2013 net sales will be between $45 million and $50 million and EBITDA at $8 million to $9 million. So the margins within the base business are healthy as is.

I’m very pleased to be able to close the comments portion of the call by highlighting the announcement just a few days ago that our board of directors increased the quarterly dividend by 7.4% to $0.29 a share. This decision reflects the board’s continued confidence in the businesses ability to reliably generate strong free cash flow and comfortably service our needs for cap ex, the interest payments on our debt, and the dividend while still putting nearly 25% of our EBITDA on the balance sheet as cash.

Our model of solid accretive acquisitions, management of the business for cost effective organic growth and focus on free cash flow have created extraordinary shareholder returns and we look forward to continuing to execute that model in the future. We are narrowing our previous EBITDA guidance to a range of approximately $168 million to $170 million for the full year, the higher end of our prior guidance.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andrew Lazar – Barclays Capital.

Andrew Lazar – Barclays Capital

Just a couple of things for me, thanks for some of the additional clarity on some of the impacts that you’re seeing on volume in the quarter and it sounds like you’re starting to see some of the similar volume firming again, knowing that it’s going to be sort of a gradual recovery that a number of others in the packaged food space have more recently talked about. With respect to the third quarter though, I think on the last call you had talked about the possibility volumes could firm a bit more in this third quarter and maybe be flattish or so. I understand what the issues were but I’m curious did something change or was something just more difficult in the quarter itself relative to what you had originally thought?

David L. Wenner

Nothing really changed I mean, the negatives were what we expected them to be. The lift from the other part of the business in terms of offsetting those negatives didn’t come in as strongly as we thought it would. I mean, we basically halved the volume decline from the second quarter in the third quarter so I guess we look at it as we got half way there. Whether that means the glass is half full or half empty I’m not sure. It was definitely a positive trend and as we look at fourth quarter we know we’re going to roll over against some of those negatives in the fourth quarter and hopefully the positives will continue to increase and we will have a better outcome in the fourth quarter.

Andrew Lazar – Barclays Capital

Then with respect to our gross margin, in the second quarter I think the Culver acquisition was the majority of that sort of 225 basis point improvement in gross margin year-over-year. This quarter obviously it was nearly double that and you had a similar amount of pricing as you talked about so I’m trying to get a sense of was Culver that much more of a positive mix impact to gross margins or was it pretty similar and therefore the base business dramatically improved its gross margins year-over-year? But yet pricing was essentially the same on the base business so I’m trying to get a sense of what drove that – let’s call it this way, the huge sequential improvement in gross margins between the second and third and what that would mean for the fourth quarter as it relates to your full year EBITDA guidance?

David L. Wenner

Culver was very similar, that really wasn’t the factor except for whatever dilutive effect it has on a few of our costs. Beyond that thought it’s really all about sales mix and the margins in the quarter were stronger because we had some very nice lifts in things like Ac’cent that have very, very good margins. The third quarter tends to be one of those quarters where the higher margin brands do sell well and I guess we saw more of that in this third quarter than we did the prior year.

Having said that, I caution everybody about the margins in the fourth quarter because the mix reverses a little bit if you look back you’ll see our fourth quarter margins tend not to be as strong as the third quarter because we are selling more of the lower margin products in the fourth quarter. You get more of that commodity if you will, kind of sales as people eat at home more in the fourth quarter. But it really is more about sales mix than anything else.

Andrew Lazar – Barclays Capital

It would seem, even if margins in an absolute sense aren’t what they were in the third, even if they’re closer to what they were maybe even in the fourth it would still seem like at least you’re at a reasonable amount of visibility from an EBITDA generation standpoint, right as you go towards the end of the year?

David L. Wenner

Yes.

Andrew Lazar – Barclays Capital

As you look out to 2013 you’ve talked a lot about sort of your cost outlook and the pricing outlook. Volumes will be obviously what they are depending upon how some of your new products and things play out but are there any other more sizeable either headwinds or tailwinds that could affect ’13 EBITDA that would be harder for us to see? I mean, discount rates are really low, some companies have talked more about pension expenses, things along those lines that are less clear to us?

David L. Wenner

There really aren’t. I mean, some people like to describe our business as boring except for the acquisition activity and to some extent it is in that it is very predictable. The postures we have taken with the commodities have made it even more predictable than it was in the past. I know pension is an issue for some other companies. Our pension plans are in very good shape from a funding point of view. There’s really not any significant wild card out there that would swing the base business results one way or another that I can see.

Andrew Lazar – Barclays Capital

The very last thing for me is your comment on just sort of the M&A environment broadly and the pipeline was interesting how it kind of shifted from earlier in the year more private and private equity related sales now more to perhaps more assets from some of the larger branded companies. I assume your comment was going beyond just the one or two assets that you referenced have been referenced in the news as potentially being for sale? That perhaps there’s more out there at least pipeline wise that you’re at least kind of seeing. Is that a fair statement?

David L. Wenner

Yes, that’s a fair statement and as I said in the comments, it’s not unusual to see that private equity and private offering pipeline dry up towards the end of the year because people want to get the deals done by the end of the year and when you get into timing like right about now, that’s highly unlikely if you’re sitting something out there right now.

Andrew Lazar – Barclays Capital

What do you think is driving the sort of increase in the branded company potential asset sale camp? Anything in particular or it’s hard to figure that out?

David L. Wenner

That’s a good question, I wish I knew the answer to that question. To me, it’s a unique situation company-by-company based on whatever strategic decisions that they make. You could argue Unilever is certainly more free to do these kind of things because they – I don’t understand their tax consequences but I don’t think they face the same tax issues that a US company faces in trying to dispose of a brand. In the case of Kraft I’m a little surprised that they’re moving on anything right now but clearly that was part of their planning as they split the company.

Operator

Your next question comes from Analyst for Bryan Hunt – Wells Fargo Securities.

Analyst for Bryan Hunt – Wells Fargo Securities

A couple of questions, you mentioned that your outlook for volumes has turned favorable especially as it relates to supermarkets. Is it fair to assume that these retailers are actually conducting category reviews again? You had mentioned in the past that’s one of the reasons why some of your newer products have not been getting on to shelves?

David L. Wenner

Well, certainly in the case of Cream of Wheat we saw a category review done that was not done for several years and that’s why we have the distribution gains we have. It really is not unique to the struggling retailers. Retailers good and bad are stretching out these category reviews in general. You really need to jump on them when they happen and there has been a flurry of them recently. I wish they would put out a schedule then we would have some idea of what’s going on but it’s pretty much you need to be ready when they decide to review and move when they do. But it’s not predictable.

Analyst for Bryan Hunt – Wells Fargo Securities

Then as we look out into 2013 is there any sensitivity in your forecast assuming we go over the so called fiscal cliff? What would that do to volumes in your opinion? How would that affect your outlook? You mentioned that your costs are kind of locked up and that’s a good thing but what are your thoughts as a management team of the potential impact of going over the fiscal cliff?

David L. Wenner

Wow, you have to think that’s going to have a negative economic impact and every other time the economy has turned bad it’s actually been a good thing for a business like ours. People tend to cook at home more so you see sales of everything that’s connected with cooking at home go up. Now, in the last 12 months we’ve been kind of surprised as an industry that the consumer as they’re pressed harder as sort of evaporated in terms of growing declines in demand. I would hedge any guess based on that very unusual occurrence. But as I said, in general bad economic times mean that people cook at home more and buy more of the kind of products that we sell.

Analyst for Bryan Hunt – Wells Fargo Securities

Two more questions, one relates to inventory. I know that Q3 is typically a seasonal peak for your company. Given the seasonality of the business and all the acquisitions you’ve made and will close on, what’s the new baseline in your opinion so we can model out working capital usages or sources through time?

Robert C. Cantwell

Pretty much the increase you’ve seen year-over-year through September is about where that increase will be towards the end of the year, a little less than that. So we’re up about $12 million or $13 million this September verses last September. Half of that increase is the Culver piece of business so this doesn’t include the snack business, that will add about another $5 million of inventory on top of that before year end. Then there’s just been better produce seasons so I think I would look at where we are year-over-year through September and kind of apply that to the end of December as a good baseline plus about $5 million for the snack business that we’ll be closing on towards the end of the year.

Analyst for Bryan Hunt – Wells Fargo Securities

Lastly for us, regarding the use of proceeds from the equity raise, thank you for the color. You’ve an equity call on your high yield bonds that expires in January, a call at 35% that’s about $120 million, is it fair to assume given your comments about deal activity in the space that we could maybe see some movement before this call expires on the acquisition front? What are your thoughts with regard to the bond versus drawing down the revolver?

Robert C. Cantwell

I think we’re looking at kind of what the best use of capital is for us right now over the next few months and we have time to make that decision. We certainly hopefully will be closing on the snack deal which is $62.5 million here in the next few weeks to a month, certainly before the end of the year but hopefully a lot sooner than that. That will use some of those proceeds and/or revolver will pay for that. I think we’re just looking at, at the end of the day what ends up setting us up for going forward, and improves our kind of P&L and improves our earnings per share. So we’re looking at various options right now. We haven’t made the decision on exactly how to use the $120 million today.

Operator

Your next question comes from Reza Vahabzadeh – Barclays Capital.

Reza Vahabzadeh – Barclays Capital

Is this acquisition of New York Style, is this a different rational and philosophy of acquisitions than the prior acquisitions which have been successful of course?

David L. Wenner

It is to some extent. I mean, the portion of the business that is Old London is a stable grocery shelf business that has good margins and we’re not looking at that as a set the world on fire kind of business, it’s more typical of the businesses we have today. As I said in the comments, the deli snack part of the business is really where we see a totally different opportunity and we saw an economical way to buy our way into that opportunity and to take on that challenge. As I said, it’s really a different world than it was some 10 plus years ago when we sold that business. That was a pretty sleepy section of the supermarket, not a lot going on.

New York Style was actually one of the biggest snack brands in that section of the supermarket. Today New York Style isn’t much different than it was then but the deli snack part of the business is 10 times plus what it was back then and growing very rapidly. So we see the ability here to grab onto a business that we think we understand, having owned it once upon a time, with bigger opportunities. A lot of the issues that we saw in the business back then such as need to consolidate manufacturing facilities, upgrade equipment, and things like that, all those needs have really been taken care of by prior owners and really also presenting an opportunity in terms of what you can do with the business.

So yes, it’s a different business but it’s an exciting business. We’re hopeful it’s more of a growth play and not without its risks in terms of competition though. So we’ll see how it works out.

Reza Vahabzadeh – Barclays Capital

I recall when you owned it last one of the challenges you had was you had to sell to a different buyer, really a different part of the grocery category management and that represented a different channel because you had to really have different sales people for that. Is that still the case?

David L. Wenner

Yes, you remember quite correctly. The business comes with a self contained sales force however that does address that channel and that’s another reason we like the business. There’s no cost addition from an infrastructure point of view to address the sales need of the business the sales force is there and we think we can manage that at least as well as the existing owner.

Reza Vahabzadeh – Barclays Capital

Then as far as the base business, did I hear you correctly that for the base business EBITDA margin was up 200 basis points in this quarter and 70 basis points year-to-date?

David L. Wenner

That’s correct.

Reza Vahabzadeh – Barclays Capital

So what about the Culver business, how did the Culver business do against its own performance in the prior year in the third quarter and year-to-date?

David L. Wenner

The business is fairly flat. We had a little bit of a blip on the export side. There’s still a little bit of disruption in Canada out of the change in distribution that got finalized in August but the business was fairly flat for the quarter. Still doing very well considering the declines it was having last year and as I said, we’re really hopeful about the fourth quarter because we’ve launched a pretty good array of products into a variety of distribution points.

Reza Vahabzadeh – Barclays Capital

Your comments on the M&A environment does that suggest that just given the actions by some players out there that all in you would generally expect more activity in general in the coming 12 months whether or not you might participate might be a different issue?

David L. Wenner

You get that sense. You do get the feeling that there’s going to be more opportunities out there and your last comment is well taken. That doesn’t mean we’re going to buy them, they have to be the right opportunity for us.

Operator

Your next question comes from Karru Martinson – Deutsche Bank.

Karru Martinson – Deutsche Bank

When we look at some of the brands here like Cream of Wheat, I was wondering how much of the kind of younger flavors, chocolate and cinnabon have we rolled out? Are we in full distribution with that now?

David L. Wenner

No, we’re not. Chocolate certainly is not and that’s because it’s been introduced in the last year and the category reviews have not occurred at a good number of retailers. We have gotten it in where the reviews have taken place. Cinnabon has probably doubled the level that chocolate is at, but again, not in full distribution yet. It is kind of trench warfare on these things sometimes in terms of just getting it in. Now, we’ve gotten it into alternate channels very well, mass merchants, and dollar stores, and drug stores, and all of that but the supermarket industry is a little tougher in terms of getting it in.

The good news is it’s a very successful item. We’ve also put out a variety pack that includes the cinnabon product and that’s getting into further distribution. So the younger flavors are getting out there. We’re grabbing every opportunity we get to put them into distribution. We’ve just come out with a new shipper that is basically that we’re selling a two pack package of these new flavors as sort of a trial size that will be going into everywhere that is in distribution. The two pack pack basically lets you for $0.99 buy a couple of these packets on a trial size basis and hopefully that will get some sampling and people try them and like them. We continue to try to pull younger consumers into the franchise.

Karru Martinson – Deutsche Bank

When we look at the dollar channel where you guys are growing, where are we today? I know you said specialties is kind of around 20%. I mean, how much of that is dollar today and where do we think we could take that distribution?

David L. Wenner

Well special markets is about 25% of our sales, dollar is about 2% of our sales in the third quarter. Where is it going to go? That’s a very hard one to answer. I’m delighted with the progress we’re making because dollar is a very broad distribution channel but not very deep in terms of the size of the stores and the number of products that can go into the stores and I assume the rest of the industry is trying to get in there as well. I think we have a bit of a leg up on people in terms of our speed to market and our ability to put out new products to appeal to this channel but I would expect competition would rev up as time goes by. So I’m not sure where it could go, all we know is that consumers are shopping there more and we’re making are best efforts to get the products there when they show up there.

Karru Martinson – Deutsche Bank

Just lastly, as you guys have done the acquisition here or are about to close the acquisition here to move into the deli, does that change perhaps your philosophy as you look at new brands? Are you going to look more into the deli category is it still really just kind of finding that right fit for yourself overall?

David L. Wenner

Well the first, second, and third priority is to have the brand be the right brand in terms of fitting the profile that we operate well within in the company. The fact that we’re going into deli snacks broaden the ability to source these brands just as the household entry broaden our selection of things we have to choose from. So it definitely adds breadth to the opportunity but the opportunity still has to be the right opportunity.

Operator

Your next question comes from Edward Aaron – RBC Capital Markets.

Edward Aaron – RBC Capital Markets

I wanted to circle back to the earlier comments about mix in the quarter. It sounds like it was a nice contributor to your margins. The tier 1 brands were a somewhat smaller driver of your sales in Q3 than I think they were in prior quarters and I’ve generally associated those brands as being kind of mix and margin accretive. Is that a false assumption on my part because it is hard for me to understand why you would have had a nice mix benefit without those brands growing faster?

David L. Wenner

It’s only incorrect in there are actually some brands in tier 2 that have better margins than tier 1 and that’s for several reasons. I mean Ac’cent is a tier 2 brand, it has wonderful margins because number one it’s in the seasoning category but number two, it has better margins than some of the tier 1 brands because we’re not investing in an Ac’cent product like we’re investing in a tier 1 brand. So when you look at a P&L if we didn’t invest anything in tier 1 and just left it where it was it might have better margins than tier 2 overall, but the fact is we’re trying to drive growth in these higher margin brands and the investment is pulling those margins down some as we make that investment, at least temporarily.

It’s a mix and match kind of a thing. Sometimes tier 2 brands actually have a better margin than tier 1 brands. I’d also note that the mix shift in terms of favorability reflects the fact that our sales decline was a lot in B&G which is a tier 3 brand and has lower margins than tier 1 and tier 2 so you’ve sold less of the lower margin brands and more of the higher margin brand be them tier 1 or tier 2.

Edward Aaron – RBC Capital Markets

Just as a follow up, thinking about Q4, you do typically have seasonally lower margins Q4/Q3 but looking back they seem to be lower by the magnitude that the guidance sort of implies. Is there anything kind of unusual that might break against you in Q4 versus a typical year?

David L. Wenner

The only factor that is different in Q4 is we do have a number of marketing programs laid in with couponing and things like that, that will raise marketing spending in Q4, the better part of $3 million. So to the extent those drive the sales number that’s great and it may not be dilutive to the margins but if they don’t drive a commensurate sales number immediately than that may be a factor.

Edward Aaron – RBC Capital Markets

That $3 million of an increase on a year-over-year basis?

David L. Wenner

That’s correct.

Robert C. Cantwell

Yes.

Operator

Your next question comes from Robert Moscow – Credit Suisse.

Robert Moscow – Credit Suisse

Maybe you could help me on that last point, that $3 million incremental how much of that is above net sales and how much of it is within SG&A?

Robert C. Cantwell

It’s pretty much a third of it is in net sales in couponing and two thirds would be in SG&A.

Robert Moscow – Credit Suisse

Then when I’m trying to model out SG&A for fourth quarter you’ll probably have a stub from New York Style and Old London, let’s say it closes in the middle of the year – well, I guess on an ongoing basis how much SG&A should we add on an annual basis for that acquisition? And then I’m also going to ask about what does it do to gross margins?

Robert C. Cantwell

The EBITDA margin on that business is around 20%. The gross profit margin on that business is lower than our typical gross profit it’s around 25%. There’s not much in between the gross profit and the EBITDA margin so it’s a little over 5% kind of SG&A.

Robert Moscow – Credit Suisse

I guess you’re not going to comment on your interest in peanut butter today, but I will say peanut butter and bagel chips a fantastic snack. I guess that leads to my last question then, you mentioned you have a sales force now that is focused on getting into the deli section, is there anything else they can sell within your portfolio to that deli section? Pickles or peanut butter or jelly?

David L. Wenner

There really isn’t. I mean we sell [inaudible] into the deli section of the super market or produce section of the supermarket depending on the retailer. We do that today and they may be able to bring a little leverage to that. But no, there’s not a whole lot else that is appropriate to sell into that section of the supermarket.

Operator

Your next question comes from Phil Terpolilli – Longbow Research.

Phil Terpolilli – Longbow Research

Just two quick questions at the end here, Cream of Wheat it still seemed pretty weak in the quarter. I know this is kind of out of the peak season but there was some distribution gains so I’m trying to see what was going on there if you’ve seen any recovery so far in 4Q and what you kind of think about the brand going forward?

David L. Wenner

The weakness in Cream of Wheat really was not in the grocery retail per say part of the business. A good portion of it was timing of rotational events at dollar stores. We had some events last year in that quarter that did not repeat in the third quarter and I believe a number of them are going to happen in the fourth quarter instead. Another big piece of that was export business where we reformatted the export product that we ship into Mexico and we changed the distribution in Canada and both of those pieces of business were a little soft as a result.

Phil Terpolilli – Longbow Research

Then just one follow if I could, we talked a lot about distribution gains, pretty impressive today. With the Chipita acquisition coming up is there a potential for Dash distribution gains there?

David L. Wenner

No, it’s really a different part of the supermarket. We don’t see a lot of opportunity there. It’s funny, there’s a sensitivity, supermarkets and managers within supermarkets tend to be pretty territorial about putting a grocery product in produce but the grocery guy still gets the ring and the credit for the sale and vice-a-versa so there isn’t a lot of cross roughing of the products.

Operator

Your next question comes from [Katia Vernochuck] – Sidoti & Company.

[Katia Vernochuck] – Sidoti & Company

A quick question, I understand packaging costs are up a little bit, will that have a visible impact on the gross margins in the coming year?

David L. Wenner

No, there is a slight increase in glass costs. Everything else seems to be fairly stable. All of that is comprehended in the comments I made about overall costs which we expect to be flat. I’m hedging a little bit there because right now they’re slightly favorable.

[Katia Vernochuck] – Sidoti & Company

Can you maybe comment about potential cost synergies from your latest acquisition?

David L. Wenner

There may be some distribution advantages. As we add volume into our system we tend to see some cost dilution but by in large this is a pretty self contained business, unique manufacturing, unique sales, not a lot of synergies with the existing business. But all of those costs self contained in the P&L we’re buying.

[Katia Vernochuck] – Sidoti & Company

Last question, have you observed any price increases among your direct competitors so far? If yes, in which categories?

David L. Wenner

Really haven’t see anything in terms of price increases in the last six months at least.

Operator

Your last question comes from Sean Naughton – Piper Jaffray.

Sean Naughton – Piper Jaffray

A quick question for you on Mrs. Dash, it sounds like there are some new products coming here. How has that been performing to your expectations? I know that was a nice brand inside of the Culver acquisition?

David L. Wenner

It actually performed very well. We saw that the business had a little bit of a downdraft throughout the Culver portfolio as we were buying it. So for it to snap back, actually sales in the first half were up a little bit and fairly flat in the third quarter, for it to snap back like that usually it takes us a good six months to stop a decline in a business so we were very pleased at that. We see opportunity in really every brand in the portfolio we bought except for Clean Guard which is literally just a couple hundred thousand in sales and just not getting a whole lot of our attention. It’s pretty exciting. We have over 30 products launching over the other five brands and now we’ll see how well they perform as they get out there.

Sean Naughton – Piper Jaffray

I guess just on that front, I think you said 10 new products potentially coming out for Mrs. Dash. Where can we expect to see where some of those are going to be trialed initially?

David L. Wenner

Well we usually are very successful in quickly getting them into some mass merchants and getting them into places like Wakefern which is close to home. I know H-E-B is another one of the retailers that has already accepted some of the line extensions and frankly, we’re out there presenting them right now and I can’t tell you a lot of other specific retailers right now.

Sean Naughton – Piper Jaffray

Just lastly on Stacy’s how has that particular brand, I know the deal is not closed yet, but how has the product been performing over the last couple of years given the increased competition that it’s been up against in the category?

David L. Wenner

I’m not sure which product you mean?

Sean Naughton – Piper Jaffray

Just primarily the bagel chips that are out there inside of the Chipita products?

David L. Wenner

There’s a little erosion but the distribution is very solid still. I mean, if you go into grocery stores and go into the deli section I have commonly seen the bagel chips there so they’re still there. What you need to do is execute on display activity in this particular part of the business. The deli section is all about the captive audience that is there buying the prepared foods, or the cold cuts, or whatever you’re ordering and putting product in front of that captive audience for them to buy. Stacy’s and Snack Factory have done a very good job on executing that, this business not so much and that’s part of the opportunity we see.

This business has a pita chip, Stacy’s has a pita chip. Stacy’s outsells them probably 50:1 because they really haven’t made it a point of emphasis. We just need to take this business and fish where the fish are and execute well at retail and we think we can have an impact here.

Sean Naughton – Piper Jaffray

I guess just lastly, Bob I don’t know if you updated the cap ex and cash taxes for the full year?

Robert C. Cantwell

I said in the remarks where our cash taxes will be which is $21 million kind of for the year. Cap ex is $11 million to $12 million. The acquisition adds about $1 million of cash taxes and upwards of $1 million because it’s a large facility well capitalize we’re going to spend probably upward of $1 million more in cap ex on an annual basis. New cap ex will be kind of $12 million to $13 million annual but cash taxes kind of only moved up $1 million so it’s very cash accretive to us.

Operator

That concludes our question and answer session. I’d like to turn things back over to Mr. Wenner for any closing or additional remarks.

David L. Wenner

Thank you for joining us. We appreciate the interest in the company. We certainly are looking forward to the fourth quarter, there’s a great deal of promise out there. It’s nice to see volumes increasing in the industry. We never saw the decreases everyone else saw but we do expect to see the increases as they occur. We continue to execute on the Culver brand and bring this new acquisition in, integrate it and execute on that acquisition. We have great prospects for the business in the fourth quarter and going into 2013 and look forward to making them happen. Thank you.

Operator

Once again, that concludes our conference. Thank you all for your participation.

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