B&G Foods, Inc. (BGS) Earnings Call Transcript & Summary

Good afternoon, everybody. We are pleased to, once again, have B&G Foods here with us at the Global Consumer Staples Conference. B&G has historically been an acquisition story, which has allowed the company to put together a portfolio largely focused on center store brands with defensible market share positions that produced modest growth, solid EBITDA margins and very strong free cash flow generation. As such, it has come as no surprise that B&G has seen some of the best top line growth performance across the consumer staples space since the start of the pandemic as well as meaning cash flow generation, which has helped to reduce leverage and solidify the dividend not to mention to support continued reinvestment behind the business. So with us today to further discuss B&G's playbook is President and CEO, Ken Romanzi; and CFO, Bruce Wacha. Welcome to both of you.

Thank you.

Thank you.

Thrilled to have you. And as planned, we'll do this as sort of a back and forth in a fireside chat format. So maybe I'll kick it off, guys, with the first question. And really, the first one is, an appropriate place to start is on cash flow and liquidity. For some time now, there's been a concern over B&G's dividend security. Part of this is due to the company's comfort level, frankly, with leverage to begin with. But the recent benefits from elevated at home consumption, given that, can you take us through the company's cash flow outlook, cash flow position, liquidity and sort of comfort level at this stage with the dividend just to kind of get that one behind us?

Sure, Andrew. Great question. Obviously, we've had accelerated and elevated sales, which has led to elevated EBITDA and more importantly, elevated cash production. We've long thought of our cash flow model as an EBITDA less cash interest, cash taxes, CapEx. And then typically, not a lot of changes in working capital. But as we mentioned, on our fourth quarter earnings call, this would be a year where we'd also optimize some of that working capital. On a trailing 12-month basis, we're close to $345 million, $350 million of adjusted EBITDA, after noncash comp is removed from that. We then have another $150 million between cash interest, cash taxes and CapEx kind of is how to think about the business. That is a massive cushion, particularly when you think about our guidance for lowering inventory this year and optimizing working capital with only $120 million or so of dividend. So we're covering that almost 2x when you think about it. So really, the dividend question, I know it's been asked. We've always been committed to the dividend, but I think with the levels of cash that we're generating and expect to continue to generate that probably should come off the table. When you think about leverage, we started this year a little bit north of 6x net debt-to-EBITDA. Potentially levels that we're comfortable with, but we recognize for equity investors, people like to see a little bit lower. We've got a stated guidance target of 4.5 to 5.5x net debt-to-EBITDA over the long term. We're less than 5x net debt-to-EBITDA at the end of the second quarter, and that number probably continues to decline. Generating cash, there's a healthy amount of cash sitting on the balance sheet. We repaid all the revolver draw that we did at the beginning of the pandemic. And then we also paid down our term loan by about $75 million last month. We expect to continue to generate cash this year.

Very helpful perspective. Maybe we pivot a bit to recent consumer behavior and consumption patterns. I guess, first of all, many have described this crisis as the greatest CPG trial experiment of our lifetime. I guess what can you tell us about thus far, how it's playing out for B&G in terms of repeat purchase? What that might mean for how sticky some of this recent trial by new relapsed users could well be?

What's fascinating is that I've been -- I've said publicly and privately that we think, as a consumer marketer, new households is like the fountain of youth for our brand. We worked for years to try to get a point increase on household penetration. And we have seen -- we have detailed data, we have over 50 brands, as you know, many of them small. So we have detailed data on 28 of our brands. And really, there's no one answer. We're really all across the board. There are some businesses that all of the growth is through just existing users. And then we have several of our business that up to 50% of the growth, but only 50% of the growth through new users. The other 50% of the growth through existing users. And that makes sense because the brands had established franchises. Those people stayed home as much as the new users stayed home. So we believe a lot of the increased consumption and the stickiness is due to consumer changes in behavior. And as you and I were talking a little bit before, it's really all about whether there's a vaccine or not, the stickiness will come from the fact that if there's going to be any more work-from-home economy post-COVID than there is pre-COVID, that's the stickiness. And we have great categories, whether it's baking breakfast, spices and seasoning, vegetables, both canned and frozen. Those are the places that are going to continue to benefit as long as the eye can see that people are going to be working home a little bit more than the past. That means they'll be cooking and eating more at home. We're -- and from a brand standpoint, the brands that have high increases in household penetration and new users, we now have the data to be able to go market to those new users, and that's what we're doing to try to create that stickiness. But a lot of it's going to be driven by consumer behavior, regardless of what we do in terms of whether people are going to be cooking and eating at home more, and we firmly believe they will be, even if there's a vaccine tomorrow as well as the shift to online. I know personally, I -- while I would have shopped for paper goods and peanut butter online, I thought I'd never shop for fresh fruit and vegetables and meat online, and the companies have made it so easy to do. I mean I may not do it 100%, like I'm doing it now. But I'm not going to go back to 100% visiting the stores, just too daring convenient to do it on my phone. First thing in the morning or last thing at night, and it's delivered within hours. So it's that type of behavior that I think is long-term. Online shopping behavior as well as working from home, cooking from home, those are the things that will create the most stickiness. And our category is really nicely positioned for that.

Yes. B&G, among others, has discussed consumers looking for comfort and brands they know and trust is part of the reason that some of these well-established brands have been winning market share during the pandemic. There are others that think maybe big brand success is really more tied to simply having advantaged supply chains and really better availability on the shelf right now. I'm curious how you view this dynamic? And if you've seen, let's say, any benefit from certain competitors maybe just not having the supply chain resiliency. And are they beginning to catch up? Or how you're seeing that play out?

Yes. I would have to say that -- and I've been saying in weekly video kind of broadcast to the organization, we are just lucky and blessed with, number one, a portfolio of brands and categories that are right for this time in a very, very difficult time in the dark cloud of the pandemic. We have been fortunate to have the right brands. We also are fortunate to have the right supply chain. And I have to say that much of our growth was due to a terrific reaction from our supply chain, jumping in early March on many, many ways to keep our employees healthy. We have had no spreading of the virus at work. I think 1 or 2 cases out of over 3,000 employees. We have kept production -- we have kept people safe, which was our #1 priority. We've kept production strong and ramped up to drive that growth. So I would say that supply chain is a good hefty contributor to our growth. Fascinatingly, not only have we seen big brands grow at the expense of small upstart brands that don't have well, mature and well-seasoned supply chains, we've been benefiting in some of our larger categories against well-seasoned supply chains and have been gaining share as a result. So no one was protected during this. We -- knock on wood, we benefited. So both large and small, we've seen customers come to us and ask for help when other supply chains failed them, both mature and new. I'd have to say that there -- that might -- I don't want to venture a guess, but let's just say half of the success of big brands was supply chain. But there's -- the other half has got to be through trusted brands. I mean we have consumer learning. We've talked to consumers. When you think about all the young adults and millennials, I mean they're now in our household, our son's college education and senior year lacrosse season came to an abrupt end in March. We weren't expecting him home. And so we're seeing millennials are now into all these brands. Millennials are into all these brands because Mom's saying, I have -- if you want a hot cereal, I have Cream of Wheat in the cupboard. I'm not going out shopping for more, eat what's in the cupboard. So I think all the young adults and millennials were introduced to the old brands because they're home more and eating home more where they weren't before. I know a lot of people -- a lot of young adults that are living with their parents during the pandemic, they were off on their own, but they were living in New York or Boston, and they decided to leave that and go to the comfort of home so they can be with their family. So I think a lot of this -- the stickiness was driven by in this new found exploration of old brands, where these brands -- B&G brands are in -- we're approaching 90% of households. And all those households had a lot more people in them that we were already in. And so maybe the households we weren't in are the ones that were left vacant in Manhattan apartments out to the suburbs to visit mom, and that's where all the B&G brands were.

Yes. By the way, knowing that consumption has been so phenomenal across so many of your brands. How has the market share for B&G held up? I know it probably differs by brand and you've got a lot of them, but broadly speaking.

Very good. Yes, we track that very closely. We -- last check, 12 weeks setting end of July, we were -- 2/3 of our brands were gaining market share. Many brands just holding our own, and a small percentage of our brand is losing share. A lot of that was, they were growing, they just weren't growing as fast. So we're gaining share in a good healthy portion of our brands.

Yes. It's funny, a number of food companies. I don't know if this is the case for B&G at all, but have been losing some share more because they just have been producing all they can. And yet, the category is still growing more quickly. So they're losing share even though they're basically manufacturing all they can. So I view that as a share loss, that's a little different than some competitor comes in, obviously, and there's a structural thing. I don't know if you've sort of experienced any of that because some of your categories have grown at pretty heavy levels.

Yes, a few of our brands, yes, remarkable share -- sales growth but -- and losing a little bit of share. So we're not as concerned about that long term as things settle back down. But obviously, we're doing everything we can to expand our supply chain. We're really -- we have been stressing our supply chain quite some time. Was on a 2.5-hour call just this morning to look out over the next 6 months where we're still -- out of 50 brands, we have 3 or 4 product categories that are still constrained. And so that's not good enough. We can't live with 85% customer service levels for the next 6 to 9 months, that's just not -- customers won't stand for it. We have to figure out supply solutions. Not as easy, right? We've already -- we and the industry has zapped up every last ounce of excess supply. So we have to come up with more creative solutions and we are. Some of it's going to be repatriating product into -- repatriating product into reinvented sections of some of our own facilities. Some of it will be -- continue to search for co-manufacturing partners to supplement production on products we never produce outside, always produce inside. But if it's not enough, we need more. We want to meet our customer and consumers' needs.

It's funny. We've obviously focused a lot as investors around the potential top line opportunity that could come from -- that has come and could welcome continually from this crisis. We're hearing many packaged food companies also beginning to talk a little bit about, ultimately, taking some of the learnings from this pandemic. And thinking about some longer-term structural changes on the cost side as a result of all this. So I was hoping maybe you could provide us sort of your perspective on this, whether it's travel, real estate, consulting fees, things of that nature? And then also maybe it gives us an opportunity to just kind of update us on where sort of B&G's cost productivity plan was sort of pre-pandemic? And if there are any changes to it as a result of the crisis?

Yes. From our standpoint, B&G has always run very, very lean. Our SG&A as a percentage of sales are on the very low end of other major food companies. So we don't see -- it's not like we spend a lot in real estate. We'll do the necessary travel that we need to do. We're really taking our lead from our customers. If they're going to have virtual meetings, then our salespeople will have to have virtual meetings, and then we'll see. But I don't think there's going to be a big margin play. We don't have enough room in our SG&A to have it be significant driver of improved margins. From -- our biggest opportunity really is in our cost of goods. We've been on a multiyear effort to save $20 million a year. The only thing the pandemic did for us was just delay a little bit the start of some of our asset rationalization. We've done things in logistics. We've done things in product and packaging. We've done lots of good stuff over the last few years to get to that $20 million over the last year or two. The next step really is to rationalize assets, both repatriating things in and out of our facilities. Some of that's been delayed only because we've just been so focused on producing everything we can possibly produce. So when things calm down a little bit, we'll get back to our next phase of cost productivity that will be our way to offset inflation in our cost of goods. That's our largest expense. So we -- hopefully, we'll get a little bit of margin improvement going forward. But at the very least, we try to use that productivity to offset any inflationary pressures on the gross margin line.

B&G's sort of longer-term guidance, if you will, calls for, call it, stable base business, net sales growth, maybe 0% to 2%, EBITDA margins between 18% to 20% and then the kicker of the M&A that you do historically. And just trying to get a sense of, do you think that's still the right way to think about the business longer term? Has the pandemic sort of given you reason to think maybe differently or that the base business portion of that could potentially be a little bit better? And just trying to get your thoughts on that part.

Yes. I think from a long-term guidance standpoint, that's probably the appropriate way to look at the business, but I really do think that over the near or medium term, we're going to be in a much more favorable environment for food companies like B&G and for brands like the brands that we have in our portfolio. And so if there were some challenges, 2017 through 2019 for the industry, we just think that it's -- you're going to see a long-lasting effect in many of our brands, many of the channels, many of the ways that people eat at home and where they're eating. But over the long term, I think that's the appropriate way to look at the business.

Now the company's strategy has not changed at all. This company's value was built through a stable base business with accretive acquisitions. Got into a little bit of trouble on the bottom line with rapid growth and a little bit of lumpiness on the bottom line. But over the long term, this company grew sales and earnings 12% to 13% top and bottom line growth through accretive acquisitions. So what COVID did was accelerate that cash flow, get the balance sheet in shape so that we can get back to accretive acquisitions. And I would say that while we had a little bit of lumpiness going into the COVID period of whether or not we can actually keep the base business stable, I think now it firms up that base business stability of very, very low-digit growth. We're not all of a sudden going to become a high gross -- growth food company through the base. We want to be the high-growth food company this company has always been through accretive acquisitions, and COVID just firmed up the base, it firmed up the base volume. It's certainly firmed up the balance sheet, and now we're ready to roll. And last year was a great example of that with the acquisition of Clabber Girl. We took that business in a full stride. We had it fully integrated within 6, 7 months and delivered great results and then, bam, COVID hit, and we took advantage of all that upside to the business, doing more business than anybody ever predicted on that acquisition.

Thinking a little bit closer in, scanner trends show retail sales growth up 20% or so for B&G through the, let's say, the first 8 weeks of the quarter. I don't know if that's like a fair approximation or if there are some discrete reasons that reported sales might differ, whether it's alternative channels or food service piece. And then from a profit standpoint, I think during 2Q, the company noted it expected EBITDA margins in the second half to be roughly in line with year ago levels. Do you still think that's the right way to think about it? Or has elevated demand maybe resulted in better than planned operating leverage?

Yes, so I'll be careful around kind of the leading third quarter question around what's the right manufacturer shipment sales growth. But I will point out, we did give pretty good detail when we gave our second quarter results that if you took the average of June growth and July growth, you had, call it, 10%, 30% averages out to be about the 20% that you saw in consumption, that you may see some lumpiness or unevenness, but generally speaking, we are trending to about those levels wild card being food service, although it's a small portion of our business. From a margin standpoint. Nothing...

Just to be careful from -- before you get on to margin. But just to be clear, you can't take the consumption growth of retail and say that's going to be net sales growth. There will be a haircut even though we're lower than the average food company, there is a haircut because of declining food service business.