B&G Foods, Inc. (BGS) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the B&G Foods, Inc. Fourth Quarter 2013 Financial Results Conference Call. Please note today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. David Wenner, Chief Executive Officer of B&G Foods. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to the B&G Foods' fourth quarter 2013 conference call. You can access detailed financial information on the quarter and the full year in our earnings release issued today, which is available on our website at 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 upon them. We refer all of you to our most recent annual report on Form 10-K 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 publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. We will also be making reference on today's call to the non-GAAP financial measures, adjusted EBITDA, adjusted net income and adjusted diluted earnings per share. Reconciliations of these financial 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 and the full year. After Bob's remarks, I'll discuss the various factors that affected our results, selected business highlights and our thoughts concerning 2014. Bob?

Thank you, Dave. Net sales for the fourth quarter of 2013 increased 21.8% to $211.5 million compared to $173.7 million for the fourth quarter of 2012. Net sales of Pirate's Brands, which we acquired in July of 2013, contributed $16 million to the overall increase. Net sales of Rickland Orchards, acquired in October 2013, contributed $12.9 million to the increase. Net sales of TrueNorth, acquired in May 2013, contributed $4.5 million to the overall increase. In October 2013, net sales of the New York Style and Old London brands, acquired at the end of October 2012, contributed $2.9 million to the overall increase. Net sales for our base business increased $1.5 million or 0.9%, of which $4.3 million was attributable to unit volume increase, offset by net price decrease of $2.8 million. Net sales increased by $2.8 million for Ortega, $1.7 million for Maple Grove Farms of Vermont, offset by a decrease in net sales of $1.2 million for Emeril's and $1.1 million for Underwood. All other brands decreased $0.7 million in the aggregate. Gross profit for the fourth quarter of 2013 increased $7.6 million or 12.9% to $67.1 million from $59.5 million in 2012. Gross profit, expressed as a percentage of net sales, decreased 250 basis points to 31.7% for the fourth quarter of 2013 from 34.2% in the fourth quarter of 2012, primarily attributable to a net price decrease of $2.8 million, a sales mix shift to lower-margin products and an increase in our distribution costs. Selling, general and administrative expenses increased $3.9 million or 19.7% to $23.9 million for the fourth quarter of 2013 compared to $20 million for the fourth quarter of 2012. This increase is primarily due to increases in consumer marketing of $1.5 million, selling expenses of $1.2 million, acquisition-related transaction costs of $1.8 million and warehousing expenses of $1.1 million, which were partially offset by a $1.5 million gain on a legal settlement. All other expenses decreased $0.2 million. Expressed as a percentage of net sales, our selling, general and administrative expenses decreased 20 basis points to 11.3% for the fourth quarter of 2013 from 11.5% in the fourth quarter of 2012. Net interest expense for the fourth quarter of 2013 decreased by $0.9 million or 7.6% to $10.9 million from $11.8 million for the fourth quarter of 2012. The decrease in net interest expense in the fourth quarter of 2013 was primary attributable to the refinancing of our long-term debt during the second quarter of 2013. Reported net income under U.S. GAAP was $18.8 million or $0.35 per diluted share for the fourth quarter of 2013 as compared to reported net income of $9.6 million or $0.18 per diluted share for the fourth quarter of 2012. The company's adjusted net income for the fourth quarter of 2013, which excludes the tax -- the after-tax impact of acquisition-related transaction costs, was $20.7 million or $0.39 per adjusted diluted share. For the fourth quarter of 2012, adjusted net income, which excludes the after-tax impact of acquisition-related transaction costs and loss on extinguishment of debt, was $17 million or $0.32 per adjusted diluted share. For the fourth quarter of 2013, adjusted EBITDA, which excludes acquisition-related transaction costs, increased 13.7% to $50 million from $44 million for the fourth quarter of 2012. Turning now to the full year of 2013. Reported net income under U.S. GAAP was $52.3 million or $0.98 per diluted share as compared to reported net income of $59.3 million or $1.20 per diluted share for 2012. The company's adjusted net income for 2013, which excludes the after-tax impact of acquisition-related transaction costs and loss on extinguishment of debt, was $76.3 million or $1.43 per adjusted diluted share. For 2012, the adjusted net income, which excludes the after-tax impact of acquisition-related transaction costs and loss on extinguishment of debt, was $66.7 million or $1.35 per adjusted diluted share. Adjusted EBITDA, which excludes acquisition-related transaction costs, increased 8.9% to $184 million in 2013 from $169 million for 2012. Moving onto the balance sheet. We completed 2013 with $870.9 million in long-term debt. Our net leverage was 4.3x pro forma adjusted EBITDA. Annual cash interest expense for 2013 was $37.4 million. Capital expenditures for fiscal 2013 were $14.6 million, and we expect to -- that to increase to approximately $20 million for 2014 as a result of a planned installation of additional product lines in our North Carolina facility to improve efficiency and manufacturing capacity. We expect our adjusted EBITDA for 2014 to be approximately $198 million to $203 million or an increase of approximately 7.6% to 10.3% versus our 2013 adjusted EBITDA of $184 million. In addition, our projected 2014 cash interest expense is approximately $38.5 million. Our projected 2014 amortization expense is approximately $17 million, and our projected 2014 depreciation expense is approximately $15 million. I will now turn the call back to Dave for his remarks.

Thanks, Bob. Good afternoon, again, everyone. The growth numbers Bob just stated for our business, net sales up 21.8% for the quarter and 14.4% for the full year, are an excellent illustration of how dynamic 2013 was for our business. 4 acquisitions in the 12-month period beginning in late October 2012, adding approximately 30% in net sales on an annualized basis, were a large step forward for us. The acquisitions did not come without growing pains, however. Some of which impacted adjusted EBITDA performance for the quarter. But despite those effects, our quarterly performance was solid, considering the sales gains just cited; an adjusted EBITDA increase of 13.7% to an even $50 million, a new quarterly record for the company, by the way; and adjusted diluted earnings per share increase of 21.9% to $0.39 per share. Although most of the volume growth seen in the quarter was due to acquisitions, it was encouraging to see volume growth in our base business as well. Base business volume was up 2.5% for the quarter, but was netted down to an overall gain of 0.9% due to lower pricing on a number of brands. As noted in earlier calls, we continue to see price erosion in food service, primarily due to distributors' focus on private label. This caused us to enhance end-user programs to maintain volume on our branded food service items. We also continued promotional activity on certain retail brands. We executed deeper promotions on our Ortega brand, for instance, particularly on taco shells and dinner kits, in response to aggressive pricing by the category leader. In this case, the promotions were deemed successful. Ortega volume was up over 11%, and the net sales increase after pricing was a positive 8.8%. Not every event is that successful, however. The B&M brand, for instance, had a slight increase in overall sales after our volume increase netted out versus higher promotional spending. We continue to fine-tune these efforts to eliminate ineffective promotions and repeat successful events. There is certainly no doubt that the consumer remains sensitive to promotional activity in certain brands or that our competition in those categories is, in general, testing the effectiveness of enhanced promotions. We will continue to defend ourselves wherever necessary, and it is arguable that we are getting better in this effort. The net effect on fourth quarter volume was increased base business net sales. That contrasts to the full year results, we saw a net decline of 0.6% in our base business net sales with a 0.5% volume increase, offset by a 1.1% price decline. We were also successful in growing brands within our Tier approach and priorities for the quarter. Tier I brands were up 4% net sales in total, with sizable gains in Ortega and Mrs. Dash offsetting modest volume weaknesses in Las Palmas and food service price effects with Cream of Wheat. A major customer on the West Coast substantially expanded distribution of products competitive with Las Palmas in the chain. Given the scope of this expansion, the brand did very well and demonstrated how loyal consumers are to the brand. Consistent with the Tier strategy, we continued to launch new products against the brands in Tier I. In 2013, new product introductions included Mrs. Dash slow cooker packets and seasoning packets and Ortega Fiesta Flats, both of which were picked by Better Homes and Gardens as the best new products in their categories. We have also introduced Cream of Wheat Stove Top Maple Brown Sugar flavored hot cereal; Instant Bananas and Cream flavored hot cereal; and Instant Cream of Wheat hot cereal, which has an added appeal as a gluten-free hot cereal. Other Ortega product introductions included Taco Kit for 2 and 3 Ortega Skillet Sauces. These products are being introduced throughout the United States and, in some cases, into Canada as well. Net sales of brands in Tier II were flat for the quarter. Most brands had a fluctuation of a few percentage points, up or down, with the exception of Baker's Joy, which grew 28% after a supply issue in 2012; and our new Crock-Pot slow cooker seasonings, which grew by 38% on a relatively low base. We have expanded this line from the very successful original 3 items to 6 in total, and are introducing all of the items into distribution in the U.S. and Canada. Tier II also includes the Maple Grove Farms brand, which has been a steady growth brand for us, increasing in sales nearly every year since we purchased the brand in 1998. Maple Grove sales increased by over 9% for the quarter, primarily in the food service channel. Tier III brand net sales declined for the quarter, primarily due to timing of export orders on the Sa-són brand and general weakness. The brands in this tier tend to be focused in the Northeast, were we see the most retailer weakness, affecting brands such as Vermont Maid and Polaner. The Polaner brand had the added burden of very weak category trends, which we attribute to changing consumer eating habits around breakfast, similar to what is being seen in cold cereal. In the coming months, we will be repositioning the Polaner All Fruit line as a non-GMO product line, in contrast to regular preserves, which are typically sweetened with corn syrup and high-fructose corn syrup. We are hopeful that this point of difference will be in tune with consumer concerns about GMOs. In general, base business sales firmed across all channels. Our supermarket net sales, which are just under half of total net sales, were down just 1%. This channel continues to be weak in the Northeast, as I just mentioned, though not to the degree it has been in the past. We are lapping soft results from several retailers who continue to struggle, and their impact has been lessened to the degree their overall business has shrunk, while others have grown. Our net sales to supermarkets in the remainder of the country were overall up. Warehouse club net sales were flat in the fourth quarter on the base business, an improvement from past quarters. This channel still only represented slightly over 3% of our base business sales, a figure that we expect will expand substantially as snack sales annualize. In fact, sales of snacks to warehouse clubs were more than double the sales of our base business grocery items. Dollar and drug net sales were also stable for the quarter at just over 2% of net sales. Mass merchants, at 21% of base net sales, grew by 3.5%. Our points of distribution grew by more than that with these retailers, reflecting the slower overall sales trends they're reporting. Finally, food service was our outstanding performer for the quarter, growing at over 9% despite pressure on pricing and from private label. Much of that growth came in sales of maple syrup, which we supply to a number of restaurant and distributor accounts. It's appropriate to discuss our now 4 snack acquisitions separately, simply because each of the purchases was still incremental to some degree in the fourth quarter. The New York Style acquisition was owned for 2 of the 3 months in the fourth quarter of 2012, while the other 3 acquisitions were entirely incremental. Together, the 4 businesses contributed approximately $36 million in incremental net sales to the fourth quarter and over $45 million in total net sales, towards the lower end of our annualized projections. The New York Style acquisition contributed $12.9 million in net sales and was ahead of the same 2-month period of our ownership by almost 12%. This business is still a work in progress. We have relaunched the New York Style brand with new packaging that is being very well received by retail customers and consumers. Our display efforts paid very good dividends where we were able to put new displays in place, but those placements were still relatively limited. Where the combination of packaging and display was executed, however, we saw a significant increase in consumption trends, making us believe we have a winning combination. And while some erosion continues in certain accounts, new or regained distribution has just started to take effect, as has the introduction of the new Sweet Swirls products. New York Style also gained distribution in some regions of Costco with an organic pita chip as the year began. Meanwhile, the relaunch of the Old London brand is scheduled for the early second quarter of 2014 and will include the introduction, for the first time in recent memory, of Melba Toast with contemporary new flavors, such as Ancient Grains. TrueNorth has gained incrementally in warehouse clubs. The $4.5 million in sales in the fourth quarter were at the high end of our estimates for the brand. Here, again, we plan to innovate and make use of an attractive brand name. At $16 million in net sales, Pirate Brands matched the net sales of prior ownership for the fourth quarter. Frankly, we have set our sights higher than that and plan to grow the business through better execution in a variety of accounts and through innovation. The first half of 2014 will see us expand Pirate Brands into new snacking products beyond the existing Puffs snacks. We also hope to expand sales further in warehouse clubs, and are working hard to achieve that as well. Rickland Orchards hit the ground running, reaching nearly $13 million in sales in our first quarter of ownership. As I said in our last call, this brand is all about innovation, with Greek-yogurt enrobed bars and bites now selling at retail and in warehouse clubs. Organic trail mix and organic crispy treat rice bars have also been introduced into the warehouse club channel. The recently acquired snack brands brought with them a good number of aggressive, talented people, who are now part of the B&G Foods team and are bringing new energy to our offices on a daily basis. The innovative thinking has spread to our grocery brands and should generate interesting results there as well. Moving to costs. Manufacturing costs ended the year in line with our estimates, giving us a slightly favorable outcome on commodities and packaging costs. We expect 2014 to bring further improvement. But the net result in the upcoming year is projected to result in a cost reduction of less than 1% of net sales, consistent with what we have projected in the past. As our purchasing group examines costs in the new snack businesses, we hope to find reductions there as we have with most acquisitions. And as we have in recent years, we remain committed, in general, to maintaining a 12-month horizon on most meaningful commodity purchases, even though prices have been trending lower. For our other major purchase, maple syrup, we expect to see lower costs, assuming a reasonable crop in the upcoming months and the currency exchange rate remaining where it is today. For many years, a point of pride in running our business has been the predictability of expenses in the SG&A area, but fourth quarter was an exception. Not readily apparent in the results, but certainly a factor, was an increase in slotting expenses in the quarter, which were $0.6 million higher than last year, netting sales down by that amount. The spend reflected the nature of category reviews these days. In this case, we took an opportunity to slot snack products in the U.S. and several of the grocery products in Canada. We typically avoid slotting in the fourth quarter, as shelf placement can be problematic during the holidays. But these events were an opportunity that warranted the exception. Also, we had predicted that marketing expenses for the fourth quarter would be a positive versus 2012 due to higher spending early in 2013. But that proved not to be the case, largely due to the higher-than-expected cost of revamping packaging and displays in the snack brands, and other marketing expenses related to snacks. This was a swing of over $1 million in the quarter. Similarly, warehousing expenses were approximately $800,000 higher than expected. The roughly 30% increase in volume experienced in the past 15 months strained several of our facilities in terms of space and efficiencies. This will be resolved as we relocate 2 of our warehouse facilities in the first half of 2014. And all of these 3 events affected fourth quarter results by over $2 million and, combined with lower pricing, were significant contributors to our adjusted EBITDA falling short of projection and guidance. The encouraging outcome for the quarter was that base business volume stabilized. We will now recover expense spending in the context of our acquisitions. As Bob mentioned, our balance sheet is in excellent shape, leveraged at a highly manageable 4.3x pro forma adjusted EBITDA. And even after increasing CapEx to execute on cost savings opportunities, free cash flow before dividends is expected to be nearly 60% of adjusted EBITDA in 2014. After paying dividends, approximately 20% of adjusted EBITDA is expected to flow to our balance sheet as free cash flow. This leaves us in good shape to execute the next M&A opportunity, should the right property present itself. At this stage, it appears that the businesses that are for sale are typically owned by private equity. There is no sign that strategics intend to shed brands in any significant manner in the near future. In fact, given the general difficulty around growth, I believe it's unlikely there will be anything but the rare divestiture of that nature. In any event, in light of my comments regarding the work we have to do on our latest acquisitions, we will continue to be highly selective in viewing the next potential acquisition opportunity. And in anticipation of questions I often receive during the Q&A portion of these calls, I remind you that our company policy is not to comment on any specific acquisition opportunity unless and until we reach an agreement with the selling party. As I said at the beginning of my remarks, this was a very dynamic year for our company. We increased net sales by over 14% for the year and positioned the business to see a further increase of the same magnitude in 2014. We made a very meaningful investment in acquiring brands that we expect to bring an enhanced growth aspect to our company, while still being consistent with our emphasis on profitability, superior margins and superior free cash flow. Our refinancing activities have reduced our interest cost to below 20% of adjusted EBITDA, at the top end of our guidance, leaving our business well positioned to continue M&A activity, should the right acquisition present itself. The fourth quarter expense anomalies highlight the fact that we have work to do in optimizing the performance of our recent acquisitions, even as we take advantage of the opportunities they present. But we are comfortable that those opportunities exist and that we have added the talent to execute on them, even as we continue to run the important base business effectively. At this time, we'd like to open up the call to questions. Operator?

[Operator Instructions] We'll take our first question from Sean Naughton with Piper Jaffray.

When you guys think about the contribution from acquisitions in Q4, you kind of outlined some of the sales trends. But when you think about the EBITDA contribution from Ricklands and Pirates, TrueNorth, et cetera, what was the contribution from these deals versus the base business? And did the base business actually fall on an EBITDA basis in Q4?

I mean, base business, relatively flat -- actually, up a little bit, and the rest was really the contribution on the new businesses. I think, as Dave mentioned, what we saw [ph] on the new businesses and just absorbing them into our structure, we spent more than we expected in the fourth quarter getting that done. And we still have some things to do here in the first and second quarter of the year, as we move some warehouses and make those snack acquisitions more efficient in our system. But base business, very relatively flat on a contribution basis overall.

And that's pretty much true year after year. Our base business results and margins don't really move much, except depending on mix shifts within the brands, and those typically are not very dramatic. So that's where the consistency has come from over many years.

Okay. And then, I guess, your expectation for Pirate's is probably a little bit higher than what you delivered in the fourth quarter. Any comments there on the business, just kind of being flat in the fourth quarter compared to opportunities, I guess, looking forward?

Well, I think, the general comment on Pirate's was it was being positioned for sale. So there was a lot of very aggressive programs being done, some of which we have chosen not to repeat. So we're running the business perhaps a little more -- I hate -- the right word isn't rationally, but certainly with more judgment towards an ongoing business rather than positioning a business for sale.

Got it. And then, just lastly, I think you talked about an organic pita chip and then some non-GMO Polaner lines that you're working on. How aggressive are you going down this path with some of the brands that you have in the portfolio today? And maybe just give us an idea of what that looks like in terms of the overall structure of the company today. How many lines do you kind of have in those 2 spaces?

Well, to the extent consumers care, we're going to pursue those opportunities. I mean, as far as organic goes, we have found, over the years -- and this may change going forward, but we have found over the years that, in general, on dry grocery products, consumers do not care about organic. It's not that important to them. Snacks, it's a hot-button issue[ph], especially in places like Whole Foods and warehouse clubs. The fact that we got the distribution in Costco was primarily due to the fact that we were able to execute quickly on something Costco wanted in terms of an organic pita chip. So where we see it's important, and we think it's important in some aspects of snacks, we're going to go down that road. The same thing with GMO, where we think it's an important aspect of the product and it differentiates us meaningfully from our competition, we will go down that road. If -- obviously, it may imply an added expense if the added expense is also warranted. Not a lot going on right now in either area, but I -- certainly, as we expand in snacks, I would think both would be a lot more relevant.

Our next question will come from Farha Aslam with Stephens Inc.

A question on your snacks brands again. You had said that for your New York Style, where you did get the new packaging and the shelf, that it performed well. Is there any kind of, sort of, structural issues in getting the new packaging and the new shelf sets into increased locations?

Well, there are several considerations. The first is you have to get the retailer to agree to it. And I think, right now, the opportunities are there to do that. The second is a pure cost issue of how much it costs for all of these display pieces and in what context we can afford to expand it. Right now, our plans are to place it into about 10% of the ACV in the United States, and we'll make judgments based on how -- whether or not that continues to be successful and what the payback is on how fast we'll expand that activity.

But then, looking at your snacks portfolio overall, going into next year, what would you say, aside from just lapping, you would anticipate those snack businesses to grow at?

Well, I -- anticipate or aspire to would be the distinction. We really want -- we want the snack businesses to grow at a double-digit rate that pulls the whole portfolio up to a low-single digits growth rate. Can we achieve that? I don't know. A lot of it's going depend on success at warehouse clubs and creating new products and getting some fulsome distribution in warehouse clubs on those products, because that kind of growth at retail would be very expensive in terms of slotting and things like that. So that's what we're looking for. Things like Pirate's was growing at double digits, and we'd like to continue that story. You have things like New York Style and TrueNorth that are really rework projects. First, we had to get the patient stabilized before we could get them growing. And then, Rickland, obviously, is growing very fast. So you have a mixed bag in terms of where the products are. And hopefully, we can get them all growing and obviously at different rates, depending on where they've come from.

And my final question is really in your club channel. Is there a goal you have in that channel in terms of a percentage of sales or how much that will contribute to growth?

Well, it's not really a goal. I mean, to the extent you can sell things in the clubs and make money, you want to do it. So we're trying to get to where clubs are a meaningful number simply because clubs are a meaningful number in the food business, and it's a hole in our portfolio, if you will, in terms of taking advantage of selling things where consumers are. And it's also a higher growth part of the food business than most outlets selling foods. So there's a variety of reasons to aspire to do more business there. I think you're going to have to -- we're going to have to learn how well we can do that and what works in grocery, for instance, before we can define here's where we think we can get to with clubs. But certainly, we see it as a big opportunity and a big facet of the overall food business that we really haven't been a player in up till now.

[Operator Instructions] We'll hear next from Robert Moskow with Crédit Suisse.

This is Clay Crumbliss on for Rob. Just a quick question on your EBITDA guidance. You've guided to 10% -- 7.5% to 10% growth. Can you talk about how much of that is coming from the base business and what's acquisitions?

Well, the base businesses is just going to be a couple of percent, and it really is -- as we said earlier, it really is a matter of how much the base business top line grows, how much the bottom line grows. It's pretty much lockstep. There's not a whole lot of margin expansion opportunities there, except, as I said before, to the extent the mix shifts. So most of the growth would come from lapping the acquisitions and any growth we can drive out of the snack acquisitions. But our base business aspirations are not very high, given the environment these days in dry grocery. I watch company after company report a lot of difficulty in growing their business, which made us pretty happy we had the volume growth we had in the fourth quarter. And I think it would be unrealistic to plan for a significant volume growth in that base business. So to repeat what I've said, most of it will be coming from the acquisitions. And a very modest low-single digits, if we can grow the top line, would come from the base.

[Operator Instructions] And at this time, we have no further questions in the queue.

All right. Well, thank you, all, very much for your interest in the company and attending this call. 2013 was a challenging year in a variety of ways, but it was also a very rewarding year in terms of the acquisitions we did and where we think we have the company positioned to perform in 2014. We're looking forward to doing just that. Thank you.

Thank you. And again, ladies and gentlemen, this does conclude our conference for today. We thank you for your participation.