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

Good afternoon, everybody. Welcome back to our next fireside chat with B&G Foods. B&G has a long history of managing a wide breadth of brands that generate strong cash flows and smartly allocating capital to accretive M&A and returning cash to shareholders. Joining us today from the company to talk more about the look ahead are newly minted CEO, Casey Keller; and CFO, Bruce Wacha. Welcome, gentlemen, and thanks very much for being here today.

Thank you. Glad to be here.

Great. Perhaps maybe a good place to start, for those that don't know you well, Casey, would be free to tell us a little bit about your background and sort of what excited you about the opportunity in front of B&G?

Absolutely. I've been in the CPG predominantly the food and beverage world for 30 years, and I've worked across a number of different categories, touched a lot of brands across different companies. And if I look at my background, it's kind of ironic. I've actually touched some of these brands that are in B&G in my former life. So Crisco when I was at B&G, the Dash and spices and SugarTwin and Static Guard portfolio when I was at Alberto-Culver. So it feels like old home week for me. I'm back with some of the brands that I know and love. And as I said, I worked for Procter & Gamble in the Food and Beverage Group for a long time. I went to Heinz for a while, worked in both the U.S. and Europe. I ran the U.S. company for Alberto-Culver. We ended up selling to Unilever. And after that, worked at Wrigley, kind of moved from the North America to the Americas to running the global business as a subsidiary of Mars. And then for the last several years, I ran Peet's as a CEO out of California, then merged Peet's with coffee companies, the old Sara Lee and Kraft coffee companies, Jacobs Douwe Egberts in Europe moved -- merged Peet's with that, moved to Amsterdam, took that public and successfully launched it, took it through its first earnings track and then moved back to U.S. this spring and then took over B&G in June. So honestly, what excites me about B&G is I see a tremendous amount of opportunity to really shape that portfolio going forward. I see some opportunity to focus on a few categories where I think we can really add value and probably bring in and grow both organically and inorganically grow at pretty significant rates through both M&A and organic opportunities. But that opportunity to shape that portfolio excites me because I see plenty of opportunity. I see the ways to move this company forward from where it's been successful in the past. And if you look at the track record, as you said upfront, is a company that has bought well and is integrated successfully across many, many deals. And so I'm also interested not just in shaping the portfolio, but being active in that M&A environment. I've done quite a bit of M&A in my background, but not at the same concentration and frequency that B&G has. So for me, I really see the opportunity to focus the portfolio going forward and to do that by deciding where are we going to really be able to create value and also using M&A and the successful skill set of this company to buy and integrate companies to be able to do that going forward. And so I see tons of opportunity, and that's what excited me about coming here.

Great. Thank you for that. Historically, B&G, as you said, has had a very successful strategy and track record of keeping sort of a core relatively stable to growing modestly. And then supplementing growth with capital allocation through dividend policy and accretive deals. As opposed to maybe being thought of as a sort of classic marketing company and innovating across all of its brands. That said, perhaps B&G strayed a little bit from that strategy over the past few years as it looked to get maybe more growth out of its core trying to get a sense if you sort of agree with this thought process? And if so, it would be your intention to sort of take B&G a bit back to its roots, so to speak.

Yes. I think for the most part, as I said, B&G has bought well, integrated well. I think we have strayed from that a couple of times with some of the recent deals. And if I look at the model if you buy businesses that are margin accretive, that are -- have strong cash flows and reasonable complexity that you can manage within the capabilities and execution of the company, I think that's worked generally pretty well. My belief is that what we need to do now going forward is to pick a few categories where I think we have strong capabilities where we can execute well and we've proven that we can do that well, where I think we have strong margins, good cash flow generation. And we need to look at how do we grow that part of the portfolio through M&A predominantly, but also through some organic growth because I think that's how we create value. So there may be categories where we have assets, where we have capabilities, where we have synergies that we can bring businesses in and actually create value not just from the onetime integration of the business but also going forward. And that doesn't mean that we're going to neglect the rest of the portfolio because I think there's a group of assets that we still have brands and categories where we can still manage them very successfully and efficiently, but that -- those may not be the places that we say we want to kind of scale up, acquire, build, grow or invest. We may say these are -- we are managed for cash businesses. And so how do we think about those parts of the portfolio where we want it, where we want to grow, where we want to acquire and how do we think about those parts of portfolio we just want to manage for efficiency. And we may still buy businesses that we manage for efficiency, when we can get them for the right price and we can bring them in and we can add them to our infrastructure pretty simply. But there may be some other places that we say, "Hey, these we can add more benefits. We can put them into our manufacturing process. We have strong capabilities. We can execute well against them. And these are the categories where we think we can really build the value." So I think that's a little bit of the twist of us going forward. I don't see us becoming -- I see us becoming a little bit -- I think it's a company that's kind of a mile wide and an inch deep. I see us picking a few areas where we're going to be a foot deep and then how do we manage those areas well successfully. And then how do we segment the rest of the portfolio to manage it for efficiency.

Very helpful perspective. The height of the pandemic and throughout much of 2020, B&G was certainly posting some of the largest growth numbers in the group. Currently, B&G's growth on a 2-year CAGR basis has moved sort of, let's call it, towards the bottom end of the group. Could you talk a little bit more about what you think are some of the factors behind this dynamic? And what actions, if any, you're taking to improve, I guess, the relative top line performance?

Yes, great question. I think if you look back to the height of the pandemic, as you referenced, B&G had probably one of the best performances of packaged food companies, certainly the publicly traded ones. And thinking about our second quarter 2020, we had net sales that were up something like 35%, 40% and adjusted EBITDA that was up like 45%. So big, big performance. And as you said, we're lapping that performance right now and so not surprising. When we laid out our plan for the year, we talked about the overall business being up mid-single digits, mid- to high single digits from 2019. And that's exactly what we're experiencing now. In fact, it's accelerating. So we are up maybe 5% of base business concept in the first quarter, up 7-plus percent in the second quarter and trends continue to be accelerating. And so we're pretty happy with where the performance is. Obviously, we've got a portfolio of about 50 brands. And so there are some brands and categories that are outperforming and some that are more challenged. If you think about our spice business, which is up about 20% in the second quarter compared to where it was in the second quarter of 2019, actually up against where it was in the second quarter of 2020. And so that's one where I'd point to that we're outperforming. Green Giant, as we've talked about over time this year, we ran into a situation where we effectively were at risk of outselling all of our product that we had in inventory until we got to the new pack plan. And so we took a strategy there where we were putting products on allocation, which was limiting our ability to sell products just so we didn't go dark on the shelf. And so again, a portfolio of 50 brands, we've got some pluses and minuses, but largely trending to exactly where we laid out the plan from a top line standpoint of mid-single digits and accelerating from growth standpoint.

Great. I know it's still early, obviously, and difficult to predict with any precision. But if you look at opportunities for your business sort of coming out of the pandemic, I guess, what consumer trends or dynamics are you seeing that give you confidence that B&G can emerge from the pandemic in a stronger place than when it entered?

Yes. I think one of the most interesting things that we're seeing is the lingering effects of the pandemic in terms of at-home meal consumption and preparation. And if you look at what consumers are doing relative to 2019, we still see elevated demand or elevated consumer habits around that. And I don't think that's going to stop. So clearly, it's not as high as it was in the spring and summer of 2020 when people were largely kind of locked down and staying at home. But today, we're still seeing people cooking, preparing meals at home, which favors our categories of spices & seasonings, our baking category and also some of our meals like Ortega is also seeing elevated demand. And I don't think that's going to stop. And the reason is that people have renewed their interest in cooking and making fresh ingredients and fresh meals at home and using our ingredients and our brands as part of that process. And I also think that you have people working from home that will -- that on the margin, they may go into a hybrid environment where they go back to the office. But I think there will be more people at home more often working from home post the pandemic than there was pre the pandemic. So which means that people will still consume more meals at home, prepare more meals at home, make more breakfast with prima weed and Maple Grove Farms, et cetera. And I think on the margin, you're going to see higher at home consumption than you would prior to the pandemic. And I don't think it will just go back to where it was. I mean even the foodservice industry is talking about in 2020 -- 2022 being about 90% of where they were pre-COVID because of this effect of people eating a little bit more at home than they did pre pandemic. So that's a trend that really favors our portfolio. And I think it's one that we can capitalize on by looking at those categories where we see those opportunities for elevated demand and maybe into future growth and how we can build our capabilities and expertise there.

And staying on the topic of elevated sales trends, the issue increasingly seems to be that it's more of the cost to serve for this incremental demand is far higher, do not just to the commodity inflation, but all the supply chain challenges of labor, freight and logistics. And even with recent pricing actions, I think B&G as well as many in the peer group have certainly sort of taking down margin assumptions. I mean, do you attribute this to simply the timing of pricing and the associated lag versus inflation? Or maybe is it just too tall a task to expect pricing to cover this sort of supply chain challenge? And if so, maybe could we see more prolonged margin pressure than would be typical in a commodity upswing?

Sure. I think you're hitting on something that's important. I mean, look, when we laid out our view for the year and our plan, we talked about sales growth and where we thought we'd be relative to 2019 and 2020 and kind of a new normal that's elevated. But we also talked about some of the challenges that we thought that we would face and the industry would face from a supply chain, whether it's labor costs, whether it's the economy snapping back and certain things have extreme elevated input cost inflation or just kind of just general cost inflation. And so we're seeing that. I think the industry is seeing that. I think the reaction, what you've seen from people in the food industry, and it's something that there's a lot of precedent for us. People are taking price. And generally speaking, that's something that's held true over the long time in this industry, and we expect it to continue to hold true in this industry and for B&G. Fair point, though, from a timing standpoint, I think people can be compressed for a short period of time. But generally speaking, our view is that we can manage the margins that are comparable to what we've delivered in the past. But obviously, challenges from the short term.

And since your earnings call a month ago, are there any incremental reads you've been able to attain with regard to sort of implementation and acceptance of pricing by retailers and associated volume elasticities? A number of companies have talked about maybe pricing going through maybe even a little bit more quickly than they would have anticipated seeing elasticities that are maybe a little bit more favorable than they may have seen historically or than they have budgeted for, I don't know if you're seeing some of the same things or not?

Yes. I mean, obviously, pricing conversations with retailers are never easy ones. But for the most part, we have the breadth of the inflationary impact and the number of price increases that are being fielded. We have been pretty successful at getting our pricing through with all of our major customers. And so it's a little early to read any of the effect of elasticities because I think our larger price increases are just going into the marketplace now or within the next month. But our -- the first price increase that we would have seen and fielded in June, we would be at a more modest level. We haven't seen a lot of elasticity impact from those. I think the real test in what we're going to watch pretty closely is we have 1 brand in our portfolio, Crisco, which has had the highest impact from inflation because soybean oil, canola oil has pretty much doubled from where it was a year ago. So it is a very significant increase in price that we really aren't seeing in other categories for the most part. And so we'll watch that one pretty closely as we get into kind of October, November to see if we -- if there are any elastic effects different than what we've modeled. We've assumed some, but we really need to see kind of what happens as the higher pricing goes into the marketplace and we also are kind of altering the promotion price points as well. So that's the one that I think that we'll be watching pretty closely, and we'll be able to probably give some early indications in our third quarter earnings.

Got it. Got it. On the other side, how has inflation trended for your business since you updated last time when -- at the time, you talked about, I think, low to mid-single-digit input cost increases in your base business, coupled with obviously double-digit increases for Crisco, that a lot of companies talked much more recently about, of course, the aspect around labor shortages, transportation, freight and things that were less linked directly to sort of your key inputs or commodities?

Really no changes from what we laid out when we had our earnings call and still fair to talk about low single digit, mid-single-digit input costs across the base portfolio and the double-digit increases that Casey mentioned on Crisco. Again, freight is probably up double digits, but that's something that was trending all year. And actually, we're lapping some of the damage last year because that started to show up in our fourth quarter. So no real changes there. I think the key element is going to be look at 2022 and do you see inflation at the current pace? Or do you just see inflation where costs remain elevated but somewhat moderate in the rate of increase.

Yes. Given the inflationary pressure at B&G and the rest of the industry is facing as well as the lag that typically occurs between pricing and inflation, I guess, what gives you confidence that maybe targeting around an 18% EBITDA margin which was reaffirmed, I think, last month is sort of the appropriate outlook? And are there any key elements that you can lay out in terms of maybe providing a bit of a bridge of how you see this target being achieved?

Sure. I mean as we enter this year, we felt important that we bring back guidance for sales, which we did, and then we've reaffirmed it in the first quarter and second quarter. And we also thought it was helpful even as we were talking about inflation to make sure people understood that we have a portfolio that we think should be able to generate 18-plus percent EBITDA margins challenges this year for sure. But we don't think that the portfolio has changed necessarily. And so that's still a reasonable target for us. I think it's fair to acknowledge that there will be challenges this year, but we also have a portfolio that can accept price increases and management job is to implement price increases and cost savings initiatives to try to manage that margin.

Yes. And with regard to commodities, oil inputs related to recently acquired Crisco, obviously, have been particularly inflationary. Can you talk about the drivers maybe behind this move? And if there's any reason to expect your ability to protect Crisco's margins maybe would be different this time around versus what has been typical? And it sounds like, obviously, there's -- we're going to get more learning on this as we go forward, of course.

Yes, I think we will. I think certainly, any -- we're seeing input cost inflation across the portfolio, both core ingredients as well as packaging and freight, as we talked about. I think some of the areas that have been the biggest wildcards are areas that are tied to commodities trading where you see some other things that go on. And then I think with Crisco, which has a reliance on soybean oil, canola oil, there's some other things going on from the demand side with regard to things like biofuel and just pure demand for the categories. And so we're seeing that. I mean the thing that we like about Crisco and we fell in love with during the diligence process was this is a leader in the category. And so you have both the oil and then you also have the shortening. We're the #1 brand in vegetable oil. We're #2 in canola oil. And we're really the only brand in the shortening where a lot of the profits are made. And so it's actually a category that we were able to push through double-digit increases in price. We've also seen in our competitors raising price as well. So it's a somewhat reasonable and rational category. And so I would prefer that input costs aren't going up as much as they did, but also very comfort in the ability to leverage this brand and the power that it has in the category.

We've seen the category pricing even across private label increasing in that category -- everybody is facing the same pressures and responding.

Yes. Yes. And Casey, given B&G is typically and has been one of the more active participants in the M&A arena. Maybe you could provide a little bit of an update on what you're seeing in the M&A environment right now? And how, if at all, the company sort of acquisition criteria might change or not under your leadership?

Sure. I think we do see the M&A environment is pretty active right now. There's quite a bit of deal flow. I think we're being a little bit cautious right now in looking at businesses because we're coming off of the -- what I would call the COVID bump. And we want to make sure that any elevated demand that we really understand what the long-term really rate is. So we're looking at businesses and just making sure that we can understand kind of what the going trend post pandemic will look like. I mean, in some cases, you may have elevated demand. But in some cases, we're looking at even higher demand coming off the COVID period. So I think there's quite a bit out there. It's interesting. We've been looking at things. But again, we want to make sure that we're buying the right long-term business. In terms of acquisition criteria, there's -- I would say there are some things about our acquisition criteria that I want to maintain. You've heard Dave Wenner in the past talk about it. But we want to buy businesses that are accretive to our margins. We want to buy businesses that have strong cash flows and that we're not adding a lot of working capital complexity to our operations, and that we can integrate successfully. And you've heard us talk quite a bit about that. I would say the only other lens that I'm going to put on it is what we -- what I talked about at the front, which is I think there are categories and I mean that plural, where we have stronger capabilities, stronger synergies and where I see us being able to create longer-term value. And I think we'll be more proactive in those areas in terms of M&A and growing through M&A. Maybe there will be some deals that aren't quite in those focused categories that I think meet the other criteria that we talked about that we could buy and pretty simply bring into our portfolio and manage efficiently, but I will also put a strategic lens around are these -- will be proactive in going after businesses that we think fit within our category framework where we have the capability -- internal capabilities to manage them more successful and drive value.

Yes. Would you rule out the potential for some divestiture activity to the extent, again, as you think about how and where you've got the capabilities and how you want to focus the portfolio, that there may be some that you regard that maybe you're a better fit elsewhere than with B&G or is that less likely do you think?

I think the larger focus will be on where do we want to grow, what are the categories where we already have some presence where we want to scale. I wouldn't say we'll rule out divestitures, but I think that will be the lower priority because a lot of the businesses we can manage effectively, we can manage efficiently, and we would choose the time to when or if we would sell those. I mean, there will be some of those, I think, but they'll be relatively small in the scheme of our activity. One example might be snacks. We did acquire Pirate's Booty and sold it pretty successfully. I don't think we, frankly, are the best owner of snacks businesses in terms of our internal capabilities, either our manufacturing or distribution networks. So those -- that part of the portfolio might be something that, over time, we would say, is it the right fit for us, but we would take our time and be patient about when we would do that. And there may be some other parts of the portfolio, but I don't see this -- what I'm going to focus on is where do we want to grow? Where do we want to acquire? And how do we get really more proactive on that side? Less on, let's strip out the assets that we don't think are good fits. We'll be more patient and take our time doing any of that activity. And as I said, I think that will be a smaller piece of the portfolio because honestly, a lot of the brands and asset we have, we can manage them effectively. We can be efficient. We can drive good cash flow from them because that's how we acquired them.

Yes. Yes. Got it. Got it. At our conference 2 years ago, you laid out -- or B&G laid out 2024 targets, which included net sales of $3 billion, a gross margin of, I think, 27.5% to 30% and an EBITDA margin of about 20%. Now of course, much has changed over the last 2 years, most notably a top line benefit from elevated food and home consumption, but also some margin pressure from inflation. So in light of all this, do you think these targets broadly still seem appropriate to you? Or should we be thinking about them somewhat differently at this point?

Yes. I think if I talked about those targets, I'm looking less at the actual sales number, the size number. I'm more concerned about acquiring the right businesses and growing with the right businesses. And I think the EBITDA margin of 20% that, that is something that we are going to go after. And if we buy businesses that are margin accretive, they should be helping us to get to that. I think that's a good goal for how we're growing. The gross margin target, honestly, to me, at the end of the day, it's what do we need between the gross and the EBITDA net margin line to be able to support the businesses appropriately. I want to -- I would like -- I do think we should be a growing business and acquiring businesses and growing largely through M&A in a more focused environment, but I don't care if we hit $3 billion, $4 billion, $3.5 billion, $2.5 billion. What is important to us is are we acquiring the right businesses where we're adding value and where we're building strong EBITDA and cash flow generation. And so I do -- I think we can get to $3 billion, absolutely. I'm just less enamored with that. I'm more about are we acquiring the right businesses and growing and creating value with the business that we bring into the portfolio.

And Andrew, just to tag on to that, if you think about that guidance or goal that we set in 2019, that's a 5-year target. It's about 10%, 12% sales CAGR from where we were at the time. And so if you think back at our company, just obviously needs M&A. And as Casey said, needs good M&A to get there. But whether you look at a 10-year or whether you look at since IPO, but just using a 10-year, I think we've grown sales something like 12%, 15% adjusted EBITDA. Something like 12%, 15% over the past 10-year period on a CAGR basis. And so it would be comparable performance to what we've done in the past but obviously, very important to how you get there.

Yes. Absolutely. Absolutely. I'm curious, a number of companies have talked like even more specifically and maybe it's just because I didn't ask the question specifically, but around sort of current labor shortages. And even if it's not necessarily impacting you and your plants, specifically, sometimes in a lot of sort of external suppliers, right, packaging suppliers, transportation and things labor is becoming increasingly an issue. I assume some of that is impacting you as well, but I wanted to make sure at least asked it specifically and just get sort of your take on it?

Yes. We're definitely seeing and feeling that. I wouldn't say it's our biggest challenge in terms of supply constraints, but it is certainly one of them. And we felt it in a couple of our plants, where it's becoming more difficult to bring in labor, retain labor, and we've got competition from other places, but it hasn't become our primary constraint. Still, I would say, materials availability, particularly in packaging has been one of our constraints. The crop -- waiting for the new crop to come in so that we can have good service on our vegetable business, particularly our shelf-stable Green Giant vegetable business. These have been probably our biggest challenges. But labor, some of our facilities and factories is definitely a factor. And we've been doing things to try and bring people in and retain people because we want to keep running full out. And we've also, I think another dynamic that I'm sure a lot of food companies have been feeling and I've heard people talk about it is we've been running very, very full out for the last 16 to 18 months. And so how long can you keep doing this with your labor force over time and everything else. So we're also looking at how do we reschedule, reorient our shifts to be able to give people more breaks, bring people on, expand shifts and other things to solve that issue as well. So it's been a factor, but I wouldn't say it's our biggest factor in supply constraints.

Got it. Great. I think we have about a minute left, so I'll just throw one out there, which is just more about do you think there's much of an opportunity or not around more SKU sort of complexity? Obviously, we've got 50 brands. So plenty of SKUs. I didn't know if there were learnings coming through and out of this pandemic that may be suggested that there is an opportunity to be able to sort of take out some of the complexity and focusing on some of those more core SKUs. And I didn't know how big or not of an opportunity that might be?

I think it's still an opportunity. Actually, I think in quite a few of our brands, we've already done that because that was part of how we got through sort of the surge in demand and be able to meet the needs and maintain our service. So there has -- there's already been a lot of work on that front that's helping us to sort through the SKU complexity and kind of cutting some of the tails to be able to run larger impact. And honestly, during the pandemic, also the level of inflation -- innovation has come down in terms of customers wanting to do all that. So all -- some of that work has been done. I honestly still believe there are opportunities in that. Some of it is in the neighborhood of managing our SKU assortments more effectively to say what's really incremental. The other aspect I'm seeing is harmonization across SKUs in terms of packaging materials content and other things. I think there's actually beyond just SKUs themselves sells harmonization of materials that we can look at as opportunities. So I do see some opportunities moving forward beyond just what we've experienced in COVID. And we had to make changes in COVID to be able to maintain production levels.

Yes. Great. Well, I think that's a good place to end. I want to thank you, Casey and Bruce for taking some time with us today and look forward to tracking the progress as we move forward.

Great. Thank you. Thank you very much.

Take care.

All right. Thanks Andrew.