B&G Foods, Inc.
Q2 2015 Earnings Call Transcript

Published: 23 Jul 2015

[Operator:]

Good day and welcome to the B&G Foods Second Quarter 2015 Financial Results Conference Call. Today's conference is being recorded. You can access detailed financial information on the quarter in the company's earnings release issued today which is available at bgfoods.com. Before the company begins its formal remarks, I need to remind everybody 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 the company's most recent Annual Report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact company's 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. The company will also be making references on today's call to the non-GAAP financial measures, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted diluted earnings shares, base business net sales, and comparable base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release. Tom Crimmins, the company's CFO, will start the call by discussing the company's financial results for the quarter. Next, Bob Cantwell, the company's CEO will discuss various factors that affect the company's results, selected business highlights, and his thoughts concerning the remainder of 2015. Now, I'd like to turn the call over to Tom Crimmins, CFO. Tom?

[Thomas P. Crimmins:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us today. Net sales for the second quarter of 2015 decreased 4.6% to $193.6 million, compared to $202.9 million for the second quarter of 2014 with almost two-thirds of the net sale decrease attributable to Rickland Orchards. Net sales of the Rickland Orchards brand decreased $6.1 million compared to the second quarter of 2014, a continuation of the weakness that caused us to impair the brand's trademark and customer relationship intangible assets in 2014. Partially offsetting the Rickland Orchards shortfall was an extra two weeks of sales from Specialty Brands during the second quarter of 2015 as compared to the second quarter of 2014, which positively impacted net sales by $1 million. Comparable base business net sales, which excludes the impact of acquisitions, the Rickland Orchards shortfall, and the Ortega and Las Palmas recall announced in November 2014, decreased 1.9%. The decrease was attributable to a 3.9% decrease in unit volume, partially offset by a 2% increase in net pricing due to increases in list prices and reduced promotional activity. Net sales increased by 16.9% for Cream of Wheat, 6.7% for Specialty Brands for the comparable period of ownership and 4.1% for Mrs. Dash. Offset by a net sales decrease of 7.7% for Pirate Brands, 16.3% for New York Style, 9.7% for B&M, 9.1% for B&G, 22.5% for Don Pepino and 16.8% for Emeril's. Net sales for all other brands in the aggregate decreased 1.1%. Gross profit decreased 1.6% to $62 million in the second quarter, as compared to $63 million for the second quarter of 2014. Gross profit, expressed as a percentage of net sales, increased 90 basis points to 32% for the second quarter of 2015 from 31.1% for the second quarter of 2014. The 90-basis-point increase was primarily attributable to price increases and lower delivery costs offset by minor net cost increases in commodities and packaging and a negative impact of the Canadian exchange rate. Selling, general, and administrative expenses decreased 24.1% to $19.2 million for the second quarter as compared to $25.3 million for the second quarter of 2014. Expressed as a percentage of net sales, our selling, general, and administrative expenses decreased 260 basis points to 9.9% for the second quarter of 2015 from 12.5% for the second quarter of 2014. Net interest expense for the second quarter decreased 6.3% to $11.1 million from $11.8 million for the second quarter of 2014, which was primarily attributable to a decrease in our average debt outstanding. For the second quarter of 2015, the company's adjusted net income, which excludes the after-tax impact of the loss on product recall and acquisition-related expenses, was $19 million or $0.34 per adjusted diluted share compared to adjusted net income of $17.5 million or $0.33 per adjusted diluted share a year ago, which also excludes the after-tax impact of a loss on extinguishment of debt during the second quarter of 2014. Our adjusted EBITDA increased 2.8% to $47.4 million for the second quarter of 2015 compared to $46.1 million for the second quarter of 2014. Adjusted EBITDA as a percentage of net sales increased to 24.5% for the second quarter of 2015 from 22.7% for the second quarter of last year. Moving on to the balance sheet, we finished the second quarter with $984.4 million (sic) [961.9 million] (05

[Robert C. Cantwell:]

Thank you, Tom. Good afternoon everyone. I will now review the second quarter in more detail and then go over our expectations for the remainder of 2015. The first item I like to mention is our very successful equity offering in the second quarter raising approximately $126 million, which reduced our net leverage below 4.5 times adjusted EBITDA and provided additional liquidity for acquisitions. With a portion of the proceeds of the equity offering and consistent with our continued commitment to pursue accretive acquisitions, we are pleased to have begun the third quarter by acquiring Mama Mary's, a leading brand of shelf-stable pizza crust that complements very well with our existing portfolio of products, including our Don Pepino pizza sauce. We expect the Mama Mary's brand, after it's fully integrated into B&G Foods, to generate on an annualized basis, net sales of approximately $35 million and adjusted EBITDA of approximately $7.5 million. The acquisition is consistent with our longstanding strategy of acquiring brands with strong category positioning at accretive purchase price multiples. The acquisition at approximately $50 million in cash equates to a purchase price multiple of approximately 6.7 times adjusted EBITDA. During the second quarter, we also announced our strategic partnership with DSC Logistics, a leading innovative, logistics and supply chain management company that has been in operation for over 50 years. DSC will provide all warehousing and distribution management services at our three primary distribution centers. We believe that the transition to DSC which is beginning in the third quarter will be completed by the end of the second quarter of 2016. In addition to providing additional logistics expertise and improving our current state of operations, we believe that the partnership with DSC will provide us with the operational scalability required to continue to execute our growth strategy. After the transition to DSC is completed, we expect to achieve approximately $8 million per year in cost savings. Now moving on to the second quarter performance, there were many moving parts that I will review. The quarter saw a continued growth in adjusted EBITDA and adjusted EBITDA margin. Adjusted EBITDA grew $1.3 million or 2.8% to $47.4 million in 2015 versus $46.1 million in 2014. More importantly, we continued our efforts to expand our adjusted EBITDA margin, already one of the industry-leading margins, increasing our adjusted EBITDA margin 180 basis points to 24.5% in 2015 from 22.7% in 2014. We accomplished this by decreasing our promotional spending, increasing our year-over-year pricing by $3.9 million, and reducing cost including delivery cost as we continued to see lower fuel surcharges. Moving on to our sales results for the quarter. Our comparable base business net sales were down $3.8 million or 1.9% for the quarter and are up $1.6 million or 0.4% year-to-date. With our quarter ending on the July 4th holiday, we were impacted by the shortage of common carry (10

[Operator:]

Thank you. And we will go to Bryan Hunt with Wells Fargo.

[Bryan C. Hunt:]

Yes, thanks for your time. I was wondering, first of all, can you talk in general terms about the acquisition environment, maybe, one, the opportunities you're seeing today? And then two, I would tell you the multiple on the most recent acquisition has definitely caught our eyes, little lower than anything else we've seen recently, so that's really my question and I have got another one to follow up. Thanks.

[Robert C. Cantwell:]

Okay. Well, I mean from acquisitions and just your comment on the multiple, we have been a disciplined buyer for a long time. I mean, our last acquisition prior the Specialty Brands acquisition was a multiple less than seven times or so (20

[Thomas P. Crimmins:]

Yeah.

[Bryan C. Hunt:]

And then my second question is, when you look at Mama Mary's, you really don't mention much about synergies. When I think about synergies here, are there distribution synergies as well as potential manufacturing synergies in the future or how would you frame it?

[Robert C. Cantwell:]

Well as we look at what we, the business that we disclosed around $35 million in sales and $7.5 million in EBITDA has some natural synergies in that from buying a company and not needing certain functions. Yes, long-term, as we get into it, this product will be just more lines on our invoices and it's more product on our trucks. Hopefully, there's some real synergies there. And as a small company like Mama Mary's, their cost of distribution is going to be much higher than B&G just because most of their product does not go out full truckload where most of our product is full truckload, so this is just more products on our trucks, so. Just like SBA, we saw additional synergies after we owned it and we expect more of those synergies to happen. It's a nice little tuck-in acquisition. The other synergy we don't talk. We have a very strong, very good pizza sauce sold in the Northeast. We look at this as an opportunity to hopefully expand that pizza sauce because the Mama Mary's brand is in parts of this country throughout from East Coast to West Coast and we see real opportunity on our Don Pepino pizza sauce business and hopefully driving some sales combining it with the Mama Mary's business.

[Bryan C. Hunt:]

And then lastly, looking at the breadth of your product portfolio, whether it's snacking, meal preparation, bold flavors, is there anything that you can decipher about maybe the change in consumption trends of the U.S. consumer in the last couple of quarters from the velocities within your product portfolio? Thank you.

[Robert C. Cantwell:]

It's hard to say. We've seen some of the – little bit more of the in-home eating meal occasion brands, which would include snacking. Even though it's not a full meal occasion, it's kind of sometimes a meal replacement. We're seeing that piece of business pick up. Some of the other kind of products, the more stable commodity kind of things, are still a little slower. We're seeing that even in the spice categories for example not so much with our Mrs. Dash, but just the other spices we compete within those category seem to be little slower. But the meal occasion businesses – and we consider our Ortega brand certainly that and certainly now Mama Mary's and certainly our snacking brands along with a few others seem to have picked up a little bit. Still a little bit of struggle in the Northeast. It's a little tougher in the Northeast than the rest of this country. For some reason, the Northeast seems to be responding a little slower than the rest of this country has and we are hoping that happens sooner than later in the Northeast.

[Bryan C. Hunt:]

All right. I'll get back in the queue. Thanks, Bob and Tom.

[Robert C. Cantwell:]

Sure.

[Operator:]

Thank you. And we will continue on to Karru Martinson with Deutsche Bank.

[Karru Martinson:]

Good afternoon. Just continuing on the acquisition, you guys certainly have been disciplined over the years, but is there any temptation of those larger targets that are out there?

[Robert C. Cantwell:]

Well, we are certainly capable of doing a much larger acquisition, but the multiple has to be right. At the end of the day, it does not make sense for us to buy something at our multiple that we trade at or even higher, certainly we want to buy something that at turns of our multiple lower than where we trade, so shareholders get accretion they want and long-term that's a good investment for both B&G and shareholders. So, we look at bigger things, when and if they show up, but typically the multiples certainly in this market in the last couple of years have not made sense to B&G.

[Karru Martinson:]

Okay, and when we look at the Albertsons and Safeway merger, Chapter 11 filing for A&P, I mean are there share of shelf considerations that we should be mindful of as the industry kind of goes through some consolidation and changes?

[Thomas P. Crimmins:]

Well, the Albertsons – I mean we actually look at the Albertsons/Safeway merger as a benefit to us. And we're getting additional distribution in the stores that weren't as fully distributed as some of the others in those chains. So they are kind of evening out of distribution and that's a benefit to us. The A&P bankruptcy is certainly going to be noise in the system, it's an initial negative just because there's noise in the system is that change disperses into different ownership. Certainly when we – this is – now we're a business that has some of those lower margin Northeast brands I mentioned in my remarks that are all sitting in here in A&P and the A&P chain is an important part of those brands too. Now those brands will continue being sold to consumers, but there's going to be noise in the system as that chain is broken up into pieces. So there'll be a little hiccup along the way, and hopefully, it is not too long. What we know is our consumers want our products, we just have to make sure those distribution outlets are available for us to sell those products in.

[Karru Martinson:]

All right. Thank very much guys, appreciate it.

[Operator:]

Thank you. . And we'll go to Farha Aslam with Stephens.

[Farha Aslam:]

Hi, good afternoon.

[Thomas P. Crimmins:]

Hi.

[Robert C. Cantwell:]

Hi, Farha.

[Farha Aslam:]

Could we talk about the TrueNorth brand. You'd highlighted that the retailers had accepted the prices. Could you share with us the volume trends and importantly, how you think going into that holiday period that that brand and nuts overall are going to be featured versus other options?

[Thomas P. Crimmins:]

Well, at least kind of initially what we've seen is we had a tough first quarter on TrueNorth as we actually held back on shipments getting customers to agree to the price increases because we needed the price increase to make any money based on what we were paying for the product. So the good news is we've seen a very flat second quarter. And we're watching this very closely. It remains to be seen. The consumer trends out of our largest customer of TrueNorth seems to be really good. It was good in the second quarter. Certainly your question is, this business does pick up in the second half of the year, and it's certainly the kind of product that's eaten occasionally, but it is also used for parties and things like that as you get into the fall holidays. Right now we think it's okay, but it is something we have to watch very closely. But basically anybody selling almonds, pecans, certainly almonds has taken major price increases to consumers. But there's always a consumer breaking point where you potentially lose some consumers just buying those products. But at least through the second quarter we saw a flat second quarter and we are very happy with that.

[Farha Aslam:]

That's helpful. And then just overall on your top line adjusting for the fact that you have that end of the quarter shipping timing. Generally you had anticipated volumes were going to be tough this quarter because you were planning to take price. Was the volume in line, in terms of the volume weakness in line with your expectations, great or less?

[Thomas P. Crimmins:]

If we had shipped to $3 million or $4 million at quarter end our volume would have been right where we thought it was going to be, because we knew our major brands what was going on was Ortega and Pirate's and we knew that was a little bit more timing than not and we'll get a lot more of those sales back in the second quarter. A couple of the brands in the Northeast reacted heavier to us reducing promotions/raising prices than we expected, because we actually got – through this year and through the end of last year, we didn't see a lot of competitive pressure on pricing, but we sourced some in the Northeast in our pickle category, in our bean category more than we expected as we went into the July 4 holiday. So where we're looking at our programs on those two brands and may have to be a little bit more aggressive on those brands as we head into the rest of the year. But we've kind of calculated that into what we've just said is our $10 million to $12 million pricing for the full year.

[Farha Aslam:]

Okay. And my final question. I'm sorry for the background noises. D&A, interest and taxes, could you just share with us those modeling questions, what you expect D&A to be, interest and taxes?

[Robert C. Cantwell:]

One second. As Tom is just pulling that up, the tax rate is around 35.5%, we expect that for the rest of the year, so that's not going to change as a percentage.

[Farha Aslam:]

Okay.

[Thomas P. Crimmins:]

And interest expense is going to be somewhere in that sort of call it $43 million to $45 million range.

[Robert C. Cantwell:]

For the whole year.

[Thomas P. Crimmins:]

For the whole year.

[Farha Aslam:]

Okay, $43 million to $45 million and then your D&A?

[Thomas P. Crimmins:]

Overall D&A...

[Robert C. Cantwell:]

D&A.

[Thomas P. Crimmins:]

D&A, I will (31

[Robert C. Cantwell:]

It should, I mean Farha it should except for the Mama Mary's acquisition that will add a little bit of amortization and customer relationships.

[Thomas P. Crimmins:]

Yeah, you're somewhere in that sort of $27 million to $29 million range for the year.

[Farha Aslam:]

Okay. Perfect. That's exactly what I needed. Thank you so much.

[Robert C. Cantwell:]

Okay.

[Thomas P. Crimmins:]

Okay.

[Operator:]

And we have a question from Kevin Ziets with Citi.

[Kevin L. Ziets:]

Hi, thanks for taking my questions. I'm just curious on Mama Mary's, how the business has been performing I guess in recent years or periods. Just what its growth profile been? How well distributed is it? And if you see an opportunity to sort of gain distribution under your ownership?

[Robert C. Cantwell:]

Well, certainly we see the opportunity, but the business has been relatively flat, up a little bit. It is the leading brand of pizza crust. There's a competitor who is a very close second and so they kind to go neck-and-neck, but the business is pretty solid. It has some very good distribution to key retailers. What we can certainly add to that is they didn't get everywhere just because of the nature of their business and their size. Within our retail grocery organization, we should be able to get it in distribution where they are not. And we look as that as a real opportunity, and we look at having our pizza sauce right along with it as a real opportunity in our pizza sauce business too. So we think there is real opportunity in the upside. This is not going to be a business that's going to sky rocket in a big way, but certainly our natural sales and distribution network can fill in distribution voids that they do not have. But they're in most major customers, they're in Walmart, they're in Kroger, they're in Safeway. They're in the key retailers in this country.

[Kevin L. Ziets:]

Okay, great. And then just following on Karru's question, I know it's a little bit early, but in terms of like the Ahold and Delhaize merger, is there an opportunity there similar to what you're seeing with Albertsons and Safeway?

[Robert C. Cantwell:]

We hope so. Everybody – all organizations think differently. We will see how – I think it's a little too early for us to understand how they think about managing what they own. And it varies. We've seen mergers where they understand don't mess in certain areas with the store put ups because that's what consumers want in those areas, and that tends to be what honestly has worked longer term for most of these chains. We have to adjust just like everybody else in this industry, but again our customers are consumers. These are the outlets that sell our consumers and we just need to make sure we have the proper product put up to sell our consumers and all of these customers.

[Kevin L. Ziets:]

Okay, great. Thank you.

[Operator:]

Thank you. And with no additional questions in the queue, I'd like to turn the conference back over to Mr. Cantwell for any additional or closing remarks.

[Robert C. Cantwell:]

Thank you, operator and thank you all for joining the call and your continued interest in the company. We look forward to a very successful second half of 2015. Thank you again. Bye.

[Operator:]

Thank you. And ladies and gentlemen, once again that does conclude today's conference. Thank you all again for your participation.