B&G Foods, Inc. (BGS) Q4 2014 Earnings Report, Transcript and Summary

Good afternoon and welcome to the B&G Foods Fourth Quarter 2014 Conference Call. Today's conference is being recorded. You can access detailed financial information on the company's quarter and the full year in the 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 the 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 net income, adjusted diluted earnings per share, base business net sales, and comparable base business net sales. A reconciliation of these financial measures to the most direct comparable GAAP financial measures is provided in today's press release. Now, I would like to turn the call over to Bob Cantwell, CEO and Interim CFO. Bob? Robert C. Cantwell - President, CEO, CFO & Director: Thank you, operator. Good afternoon, everyone and thank you for joining today. I'll begin the call going over a few financial highlights then get into details on the quarter and finally what we see going forward. So with that out of the way, net sales for the fourth quarter of 2014 increased 12.5% to $238 million. Net sales of Specialty Brands, which we acquired in April of 2014, contributed $32 million to the overall increase. The company estimates that during the fourth quarter of 2014, the product recall reduced net sales by approximately $8.9 million, of which $4.1 million related to customer refunds and $4.8 million related to lost sales from the temporary suspension of production and distribution of the affected products. Net sales were also negatively impacted by the Rickland Orchards shortfall in the fourth quarter of 2014 of $11.8 million, a continuation of the weakness that caused the company to impair the brand. Excluding the negative impact of the product recall and Rickland Orchards shortfall, base business net sales increased $15.1 million or 7.1% for the quarter. Comparable base business net sales, which also excludes the impact of the extra week – reporting week increased $2.6 million or 1.2% for the fourth quarter. Gross profit decreased 15.1% to $57 million and gross profit expressed as a percentage of net sales decreased to 24%. The 770 basis point decrease was primarily due to the product recall and the write-off of certain raw material and finished goods inventory used in the production of Rickland Orchards products. Excluding the impact of the recall and Rickland Orchards' inventory write-off, gross profit as a percentage of net sales was approximately 29.9%. The remaining gross profit shortfall of 180 basis points was attributable to the increase in distribution costs, a sales mix shift to lower margin products and the negative impact of the Canadian exchange rate, slightly offset by a base business net price increase. SG&A expenses increased $0.1 million to $24 million for the fourth quarter of 2014. This was due to increases in warehousing expenses and administrative expenses relating to the recall, offset by decreases in acquisition-related expenses, consumer marketing, and other expenses. In addition, in the fourth quarter of 2013, SG&A expenses were reduced by a gain on a legal settlement. Expressed as a percentage of net sales, our SG&A expenses decreased from 11.3% to 10.1%. Net interest expense for the fourth quarter of 2014 increased 10.3% to $12 million, primarily attributable to an increase in our average debt outstanding due to our recent acquisitions. The company's adjusted net income for the fourth quarter of 2014 was $21.2 million or $0.39 per adjusted diluted share. For the fourth quarter of 2014, adjusted EBITDA increased 4.3%, to $52.1 million from $50 million for the fourth quarter of 2013. Moving on to the balance sheet, we finished the fourth quarter of 2014 with a little more than $1 billion in long-term debt. Our net leverage was approximately 5.1 times pro forma adjusted EBITDA, our current dividend rate is $1.36 per share per annum or approximately $73.1 million in the aggregate based on our current share count. I will now review in more detail our 2014 year, and our expectations for 2015. 2014 and fourth quarter in particular was challenging for the company. One of our largest negative impacts for the year and quarter, especially was the Ortega and Las Palmas recall, we announced in November. We estimate that that recall, which resulted from spice ingredients purchased from a third-party supplier, that were contaminated with peanuts and almonds, not declared on the label, impacted our adjusted EBITDA for the fourth quarter by $3 million. To illustrate how extensive this recall was, it impacted 41 SKUs in two brands. These SKUs generate approximately $70 million in annual net sales. During the quarter, our organization focused most of its energy on the recall, including making sure the product removal and replacement ran smoothly and efficiently. We resumed distribution of the effective products in late December, and expect that the affected items will be back in full distribution by the end of the first quarter. Importantly, before the recall, Ortega sales were very strong. Sales of that line were approximately 3.2% up year-over-year. We expect the strength to continue in 2015 after our business is back to its regular course. One of our other significant challenges in 2014 was distribution inefficiencies. We experienced a 90 basis point increase in distribution costs for the quarter, primarily the result of rapid acquisition growth and inefficiencies resulting from our integration of snack products into our distribution system. We have been working hard to accommodate recent and future acquisition growth. In 2014, we transitioned two of our three primary distribution centers into larger facilities. We also continued to refine our distribution systems and during the first half of 2015, we expect to enter into a partnership with a third-party service provider to help improve our technology and develop better warehouse management systems. We expect to begin seeing benefits in the second half of 2015 and significant improvements in 2016. Pricing was also a challenge during the first half of 2014, but we were able to discontinue a significant amount of our aggressive promotional activity for the second half of 2014 and experienced no major impact in consumer sales behavior. This is very important to our incremental performance in 2015. Pricing in the first half of 2014 was negative $5.4 million. In the second half of the year, pricing was flat and in the fourth quarter, pricing was up $1.2 million. We expect this improved net pricing outcome to continue in 2015 for two reasons. First, we have a price increase in place that was effective January 1, 2015. This increase has been accepted by our customers and covers approximately half of our product lines. The increased average is 2% with variations on that increase depending on the brand. Second, as we compare our promotions in the first half of 2015 versus 2014, we have eliminated or reduced some of our most aggressive promotions and we are not seeing aggressive promotional activity by our competitors. We expect that these two factors will deliver approximately $8 million to $10 million in incremental pricing during 2015. We expect both of these initiatives will more than offset commodity pressures for 2015. Another challenge affecting our net sales in 2014 was currency. Our net sales and profits were negatively impacted by approximately $1.6 million due to weakness in the Canadian dollar. We expect an additional negative impact of approximately $2.5 million in 2015 relating to our Canadian sales and profits. Finally, in 2004, we saw the impact of our first disappointing acquisition Rickland Orchards. As a reminder, when we bought this brand in October 2013, its sales were disproportionately in the warehouse club channel with limited distribution in more traditional retail. Unfortunately, the risk of concentration of clubs is that you may lose distribution of key products due to competitive pressure and the ever-changing nature of club sales. That is exactly what has happened in the case of Rickland Orchards' core Greek yogurt-coated bar and bite products. We estimate that the sales for the brand in the foreseeable future will be in the order of $4 million to $5 million annually. Despite this disappointing development, we learned a lot from this acquisition. We still believe that our entry into the snack business is and will continue to be an important part of the company. Beyond the Rickland Orchards acquisition, our snack brands contributed $1.6 million in base business growth for the quarter, an increase of nearly 6% on the overall base business net sales of those brands. This was driven primarily by the strong performance of Pirate's Brands, which grew 18% in the quarter and 29% for the year. We expect Pirate's Brands' strong performance to continue in 2015. During the fourth quarter of 2014 Pirate's Brands was authorized in over 1,000 Walmart stores. This is a significant benefit to Pirate's Brands as we begin 2015, and we hope that success brings further expansion of the line with this important customer. Most of the Pirate's Brands base business net sales increase in 2014 was the result of exceptional performance at grocery, a benefit from our increased focus at store level. Another initiative that positively impacted the Pirate's Brands business was the launch of our retail activation teams. These teams built promotional displays in conjunction with our distribution partners, and are a big part of the growth we are seeing in our Pirate's Brands business. We expect to continue this initiative and expand this go-to-market strategy to our TrueNorth and New York Style brands. A few other highlights I would like to point out for the fourth quarter and going forward. First and very importantly, the Specialty Brands acquisition continues to exceed our expectations. Fourth quarter net sales for the business were $32 million, and are accelerating as we move through the traditional season for soup and syrup. The brands are now fully integrated into our infrastructure. The acquisition continues to perform very well, and we anticipate additional opportunities of warehouse, clubs and food service. We are also in the final stages of developing new innovative Bear Creek products that we expect to launch starting the fall soup season. We have expanded our distribution of Maple Grove Farms' pure maple syrup, and new Maple Grove Farms' salad dressing into club stores late in the fourth quarter. So far, sales are off to a strong start. We believe that we can be innovative with Maple Grove Farms as the brand is consistent with the growing emphasis on better for you consumer alternatives in the club channel. Mass merchant net sales for our base business were up 5% in the fourth quarter. Our presence with these merchants is growing rapidly via both base business growth and acquisition growth. Our business at Walmart, for instance, now consists of over 350,000 distinct points of distribution with 14% growth in points of distribution on our base business in the past year, and 12% growth via the Specialty Brands acquisition. Our club sales are approximately now 10% of our total net sales. Food service net sales were flat for the quarter, and that channel continues to show signs of firming as the economy recovers. Our export business continues to grow, and is now approximately $28 million in annual net sales. We project cost increases in 2015 of approximately 1% of net sales, which includes increases in packaging, nuts for our TrueNorth business, fruit and other commodities, and distribution, net of the fuel savings we expect on lower diesel cost, and reduced maple syrup cost. We are locked in on most of our purchasing through 2015, and therefore do not expect meaningful changes to this cost increase projection. We continue our commitment to our continuous improvement process, and expect to keep all of our other costs in the aggregate flat first 2014. As I've just explained, and as you've heard on recent conference calls held by others, 2014 had many challenges for the company and the entire industry. However, we have learned a lot from 2014. Importantly, we have determined what went wrong and know how to fix it. It will take time, but we expect that 2015 will be a step in the right direction. We are undertaking new initiatives, to improve our distribution systems, and focusing on new product initiatives on products that would be margin accretive to our existing business. As announced this afternoon, we expect adjusted EBITDA for full year 2015 to be approximately $196 million to $202 million, adjusted diluted earnings per share to be $1.48 a share to $1.55 a share, and net sales to be approximately $860 million to $880 million. As I start this new year from a new position, I could not be more proud of our company, our history, our people, and our perseverance. I will continue to support our dividend policy and our acquisition strategy in center of the store grocery and snacks. I also could not be more excited about the future and expect a successful 2015 with a return to the consistent performance that our investors have come to expect from B&G Foods. With that, I would like to open up the call for questions. Operator?

And we'll go first to Farha Aslam of Stephens, Inc.

Good evening. Robert C. Cantwell - President, CEO, CFO & Director: Good evening, Farha.

A question on your guidance for next year. Ortega is not going to be fully back on shelf in that first quarter. How much did you take off for the fact that Ortega will not be in full distribution for that first quarter? Robert C. Cantwell - President, CEO, CFO & Director: There is approximately $1 million of EBITDA for that. It's back in most distribution and it's been accepted back by a pretty much all the customers, but we still fight the daily fight of getting it back in at store level, store-by-store. So, even though at customer corporate, it's back in and it's back in many customers as we speak. We're still across the country making sure every store within that customer has the product back on shelf, and that's going to take through the end of the first quarter here.

Okay. And you are very confident about the brand coming back in terms of consumer market share. But others in that time have introduced kits that include standup tacos that were doing so well for Ortega. Do you anticipate the momentum with consumers to be back pretty quickly after it's on the shelf? How long do you anticipate that to take? Robert C. Cantwell - President, CEO, CFO & Director: We're seeing where we're on shelf and we started shipping kind of the second to last week of December, and where it's back on shelf, we're seeing no consumer shortfalls. Again, this was a peanut allergy. No consumers, we had no serious illnesses from any consumers. It's back on shelf. We didn't have a lot of bad consumer reaction and we had actually lot of positive consumer reaction from consumers coming inbound to us, asking us when we'll back on shelf. So, we're not seeing that, the momentum of Ortega was very strong before this recall. Again, it's our biggest brand and we've really put a lot of emphasis on making sure everything was done 100% properly through the recall process and we expect a very strong Ortega 2015 year, once we get through kind of February, March timeframe here.

That's helpful. And my last question is regarding your CFO search. Could you just update us on where you stand with that? Robert C. Cantwell - President, CEO, CFO & Director: Sure. We are actually in the conclusion of the search process, almost done and we expect to have the new CFO in place by the end of the first quarter. So, I'm looking forward to that person joining our team. And we should be there here in the next number of weeks here, but before the end of the first quarter.

I'm sure. You're doing double duty. Thank you very much. Robert C. Cantwell - President, CEO, CFO & Director: Yeah.

And we'll go next to Sean Naughton of Piper Jaffray. Sean P. Naughton - Piper Jaffray & Co (Broker): Hi. Good afternoon, Bob. Robert C. Cantwell - President, CEO, CFO & Director: Good afternoon. Sean P. Naughton - Piper Jaffray & Co (Broker): Just a question for you from a high level on the gross margins. If we just step back, looking at the business today at a high level, assuming no future acquisitions, how should we be thinking about the gross margin in your business over the medium, kind of the longer term as the – it has been a little bit volatile over the last couple of years? So just trying to think about how you are viewing the business based on all the different moving pieces that you have had come in on the snack business, et cetera? Robert C. Cantwell - President, CEO, CFO & Director: Well, we're rolling over against all the snack pieces. We certainly have rolled over against all of that. As we go forward, we're looking at kind of a gross profit number a little bit above 31% for the business and EBITDA margins close to 23%. And more importantly, we're refocusing this organization on all of our product innovation to be margin accretive going forward. We've launched a number of products over the years that within the brands, we're actually a little margin dilutive for the brands, so we've changed that focus kind of right off the bat as we headed into 2015. And so, margins and managing margins and growing margins are extremely important message that this organization has heard going forward. But we're looking at today in steady state of business that's approximately 23% EBITDA margin and a little bit above 31% gross profit margin. Sean P. Naughton - Piper Jaffray & Co (Broker): Okay. That's helpful. And then, I guess on the cost, I think you were targeting for 2015 about a 1% increase kind of with all the puts and takes that you are seeing today. How should we think about your ability to offset that 1%, either through pricing – how much is pricing going to potentially offset that? What should we think about from productivity savings, essentially? Robert C. Cantwell - President, CEO, CFO & Director: Well, certainly when you look at kind of a 1% cost increase on net sales, you're looking at $8 million to $9 million for us. We feel very confident at this stage that the price increase we put in effect with reduced promotional spending and some list price increases will generate us $8 million to $10 million. So, we absolutely offset those cost. And then, all of our continuous improvement projects more than offset the normalized cost increases that every company has with kind of wage increases and medical costs going up on us all. We're very comfortable that we offset all of that. And we expect to see some benefits. We're certainly seeing benefits on diesel and we certainly expect to see benefits on being more efficient, and certainly in the latter part of 2015 and going forward on our distribution systems, both in the warehouse and shipping. Sean P. Naughton - Piper Jaffray & Co (Broker): Great. Just a quick question on guidance, or just how to think about CapEx and interest expense for 2015? Robert C. Cantwell - President, CEO, CFO & Director: We're looking at CapEx of around somewhere between $16 million and $18 million, and that's kind of our normalized need for CapEx. We spent a couple of million dollars more than that in 2014, but on a go-forward basis, $16 million to $18 million more than services everything we need and cash interest expense about $42.5 million. Sean P. Naughton - Piper Jaffray & Co (Broker): Thank you. Robert C. Cantwell - President, CEO, CFO & Director: Okay.

And we'll go next to Karru Martinson of Deutsche Bank.

Given the lessons learned with Rickland Orchard, have you given any thought to the change in terms of the scale of a business, that you would like to buy whether it's in terms of top-line contribution or is it still more of these type kind of plug into the distribution network? Robert C. Cantwell - President, CEO, CFO & Director: It's still – the model that we have built here is that $100 million or less sales business, and certainly we'll look at bigger things and if the opportunity avails, I mean, we certainly can handle much bigger than that. But we have found over the years that $100 million or less works. I think as we look at the Rickland decision, that was a brand that was really in business and a business that really started kind of 12 months prior to us buying it. So it was absolutely brand new. I think we would hesitate on doing that again, but we are very comfortable with buying center of the store dry grocery, and very comfortable with buying snack brands that could ride along with Pirate's Booty, because Pirate's Booty has been a big success for us, and so has TrueNorth in a smaller way, it's a smaller business. So, if we can buy brands like that and continue growing both snacks and grocery, that's really where we want to play. And typically those brands are going to be $100 million or less, because it keeps away a lot of the bigger strategics when we look at those size brands.

And when you guys look at the overall consumer, I think I asked a similar question last quarter about the pressure on that center of the store, consumer. There had been a lot of talk that as gas prices came down, more money in consumers' wallets, they would kind of return to traditional shopping patterns. Given the guidance and the challenges that you guys see, where is the health of the consumer today? Robert C. Cantwell - President, CEO, CFO & Director: Well, I think from – I think historically, I've been doing this a long-time and the one thing history has always shown, and it's early in the game to see what the consumer is doing, with the money they now have in their wallet that they're not spending at the gas pump. Historically, those consumers went back into grocery stores and treated themselves. It could have been, I buy pasta and a cheap jarred sauce for my family, now I buy a better sauce to go along with my pasta. And so, those treats happened at family level in stores. It's a little early to see. I think from the – as we look at our brands and certainly in the second half of this year, except for the Rickland issue which is kind of behind us now, and hopefully, the one and only recall we ever had, and this was the first recall we really ever had of any significance. The rest of our business was up in total, as far as volume and price. So we're very happy with that, and we've seen a steady state on volume here in the last kind of six to nine months, and we've fixed a price. So we're feeling good about our business. I mean we don't expect huge volume increases, we expect strong volume increases on our key brand, such as Pirates and Ortega and a few others. But if we can kind of hold our own on the rest of the businesses, we're setting ourselves up for a very successful 2015.

And how should we think about cash flow usage here, obviously opportunistic if acquisitions arise, is that correct to kind of assume the dividend and debt repay down – debt repayment for the rest of it? Robert C. Cantwell - President, CEO, CFO & Director: Absolutely. The dividend is a very important part of who we are, and I'm a very big supporter of giving back our cash flow to our shareholders and how we run that model. So, yes, we're going to take our cash flow and pay down, any excess cash flow is going to pay down debt on an annual basis. But we think M&A is a very important part of our strategy, and we're very willing buyers, you got to have willing sellers and we're always looking. So, the better use for our cash for shareholders is to buy accretive acquisitions that fit our model that we can buy for lower than we're trading at and increase to shareholder dividend. And that's been the B&G model, and that's our preference to use of cash. But again, our leverage today is a little over 5 times. And we don't really want to take that leverage up. We would do that in the short term for an acquisition. We go up 5.5 times tomorrow for a good acquisition, but we would probably be back into the equity market soon after that to take a turn leverage down after we did that acquisition.

Thank you very much, guys. I appreciate it.

And there are no further questions from the phone lines. I'd like to turn the conference back to Mr. Cantwell at this time for any additional or closing remarks. Robert C. Cantwell - President, CEO, CFO & Director: Okay. I want to thank everyone again for joining this call. As I look forward in my new position here, I expect 2015 to be a positive year of change for B&G as we refocus our efforts to maximize sales and margin growth. And again, I truly look forward to hitting and beating consensus numbers as we go forward. And thank you again for today.