B&G Foods Seen Serving Savory Q4 Results Thursday
What's the recipe for making tasty acquisitions?
B&G Foods ( BGS ) CEO David Wenner can tell you all about it.
Over the past 15 years, the maker of shelf-stable foods like jellies, hot sauces and seasonings has bulked up its business with 12 buys that have brought to the table well-known brands such as Cream of Wheat cereal, Ortega salsa and Mrs. Dash seasonings.
B&G goes in for small, high-margin brands typically with sales of less than $100 million that are owned by large companies. Wenner calls these "orphan" brands because they're too small for their larger parents to give them the attention they need to adequately grow. Enter B&G, which has a knack for taking these typically underperforming brands, breathing new life into them and turning them into moneymakers.
"We're very good at acquiring things and integrating them into our company and making them accretive as soon as they get here," Wenner told IBD.
A steady stream of winning buys has helped B&G rack up a solid track record. Profits have climbed by at least 22% the past 15 quarters. Watchers expect B&G to continue to serve up savory results when it issues its fourth-quarter report Thursday after the close. Analysts polled by Thomson Reuters see earnings rising 30% to 39 cents a share. They estimate sales will grow 20% to $180.3 million. They forecast full-year earnings to be up 30% to $1.42 a share.
Prospects for a solid fourth quarter follow a strong showing in the third quarter. Earnings leapt 40% to 35 cents a share. Sales popped 16% to $154.2 million. Gross profit rose 37.7% to $42.8 million before extinguishing debt and EBITDA, earnings before interest, taxes, depreciation and amortization.
B&G's November 2011 acquisition of the Culver Specialty Brands division from Dutch consumer giantUnilever ( UN ) was a major contributor to B&G's strong performance in 2012. The $325 million deal brought six brands to the mix, including Mrs. Dash, Molly McButter, and Baker's Joy, with combined annual sales of $90 million.
The Culver brands had "wonderful margins," says Wenner, and they've contributed very good growth to sales and the bottom line in 2012.
In the third quarter, the Culver business drove most of the sales, EBITDA and net income gains, Wenner says.
Piper Jaffray analyst Sean Naughton says with acquisitions such as the Culver brands, B&G has added to its sales volume and improved the margin of its business.
Its EBITDA margin, he says, increased to 27% in 2012 from 24% in 2011 and 16.8% in 2008.
"The very strong shift toward higher-margin businesses has led to strong earnings growth," he said.
B&G's latest buy came in October with the purchase of the New York Style and Old London brands from Chipita America for $62.5 million in cash. The buy marked B&G's entry into the fast-growing snack category with products like New York Style Bagel Crisps and Old London's Melba Toasts and Melba Rounds. The acquisition includes a state-of-the-art manufacturing facility.
Consistent with its prior buys, B&G Foods expects the acquisition to be immediately accretive to earnings per share and free cash flow, Wenner said in a press release at the time of the buy.
B&G estimates the brands will generate sales of $45 million to $50 million and EBITDA of $8 million to $9 million in 2013.
The buy brings B&G a stable grocery snack business with the Old London brand and an exciting prospect in snacks in the deli section of the supermarket with the New York Style brand, Wenner said on the third-quarter conference call.
"We are still in the early innings with that acquisition," said Naughton. "Both brands have the opportunity to be successful, but probably more so for the New York Style business where there's more room for top-line growth." Naughton sees more buys in the offing.
Given where interest rates are now, he says, it's a good time for strategic acquirers like B&G to be looking to buy other brands because they can use relatively low-cost capital to fund acquisitions. He sees continued opportunities for B&G to acquire niche brands with $80 million to $120 million in sales.
Wenner believes there's a lot of opportunities for acquisitions.
"We know what we want to buy," Wenner said. "And we diligently talk to people about selling."
Wenner says it takes a lot of discipline to do acquisitions because it's tempting to do a deal for the sake of doing deals. That's why B&G sticks to a clear strategy when making acquisitions.
The brands it buys, like B&G, consist of shelf-stable products. They also fit into B&G's business model in terms of sales and distribution so B&G can bring synergies with its sales force and distribution centers. The brands it acquires also have strong margins and generate significant excess cash flow.
B&G returns cash to shareholders via dividends. Its current dividend yield is 4.1%, the highest among its midcap packaged food peers, according to the company.
Once under its wing, B&G aims to nurse the acquired brands and make them more relevant to consumers. In keeping with that strategy, in the Culver line B&G is launching over 30 products in five brands, including 10 new Mrs. Dash items aimed at a different use and form than its traditional Mrs. Dash products.
Meanwhile, the climate for B&G's business is a bit tepid. The volume across the packaged food channel has been relatively flat, says Naughton.
"That's not to say B&G can't perform well," he said. "They're going to continue with their strong operating expansion and they're positioned well to meet expectations for 2012."
In terms of commodity costs, Naughton says B&G will be in a "more favorable position" in 2013, given the way it buys commodities, and it's looking for its commodity prices to be relatively flat year over year.
"We stated at Q3 earnings that our outlook in terms of costs for B&G for 2013 continues to be an expectation of flat costs throughout most of the year, pending the outcome of the fall's crops," said Wenner. "B&G has taken commodity positions well into 2013, and in some commodities such as corn, throughout the entire year at costs that are typically favorable to 2012 costs. We remain committed to our approach of covering commodity costs by maintaining a 12-month window on a large majority of our purchases, and even extending beyond that, when we see favorable opportunities."
Analysts polled by Thomson Reuters see 2013 earnings rising 8% to $1.53 a share.