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

Hello, and welcome to the Annual Meeting of Stockholders of B&G Foods, Inc. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Casey Keller, President, CEO and Director of B&G Foods. Mr. Keller, the floor is yours.

Good morning. I am Casey Keller, President and Chief Executive Officer and a Director of B&G Foods. On behalf of the directors and officers of B&G Foods, I'd like to welcome you to our Annual Meeting of Stockholders. We appreciate your attendance, your interest and most importantly, your support of B&G Foods. Due to the COVID-19 pandemic, we are holding this annual meeting of stockholders in an audio-only virtual format to provide a safe experience for our stockholders and employees. I will act as Chairman of this meeting. And at this time, I would like to call this Annual Meeting of Stockholders to order. I would first like to introduce each of the other current directors of the company who are in attendance today: Steve Sherrill, the Chair of the Board; DeAnn Brunts; Debra Martin Chase; Chuck Marcy; Rob Mills; Dennis Mullen; Cheryl Palmer; Al Poe and Dave Wenner. Each of us is also standing for reelection. I would now like to introduce the following members of B&G Foods executive leadership team. Erich Fritz, Executive Vice President and Chief Supply Chain Officer; Jordan Greenberg, Executive Vice President and Chief Commercial Officer; Eric Hart, Executive Vice President of Human Resources and Chief Human Resources Officer; Scott Lerner, Executive Vice President, General Counsel, Secretary and Chief Compliance Officer; Ellen Schum, Executive Vice President and Chief Customer Officer; Bruce Wacha, Executive Vice President of Finance and Chief Financial Officer. Scott Lerner will act as the Secretary of this meeting. Also in attendance are [indiscernible], Diane Weitz and [ Susan Blyth ] of KPMG, the company's independent registered public accounting firm. The stated items of business for this meeting are: one, the election of 10 directors to serve until the 2023 Annual Meeting of Stockholders; two, an advisory vote on executive compensation, commonly referred to as say on pay vote; and three, the ratification of the appointment of KPMG as our independent registered public accounting firm. In order to have an orderly meeting after the proposals are presented, I will ask if there are any questions or comments. I ask that you restrict your remarks to the proposals that are before us. Stockholders may submit questions by clicking on the Q&A tab on the meeting center site. Time has been allotted later in the meeting for any appropriate questions you may have concerning the company. Please review and adhere to the rules of conduct that are posted on the meeting center site. We will now proceed with the voting on the proposals. If you have voted your shares in advance of the meeting by one of the methods described in the proxy materials for the meeting, there is no need to vote those shares during the meeting. If you have not already voted your shares in advance of the meeting, you may vote by following the instructions on the meeting site. For the 2022 proxy season, an industry solution has been agreed to that we expect will allow the vast majority of beneficial owners, those stockholders whose shares are held in the name of a broker, bank or other nominee to vote their shares during the meeting using the control number received with their voting instruction form. Please note, however, that this option is not available to all beneficial owners and the inability to provide this option to any or all benefit owners shall in no way impact the validity of today's meeting. For those beneficial owners who do not have this option, you will not be able to vote your shares electronically during the meeting today, unless you have obtained a proxy executed in your favor from the institution that holds your shares and have previously submitted the proxy to Computershare and received the confirmation of your registration with a control number from Computershare in accordance with the procedures described in the proxy statement. Your vote must be cast before the polls are closed. The polls will be closed at the end of this general discussion and my CEO report to stockholders. Again, please be assured that there will be an opportunity later in the meeting for stockholders to ask general questions regarding the company. We will now begin the formal business of this meeting. Mr. Lerner, will you please present the notice of meeting?

I present to this meeting an affidavit of Computershare, the transfer agent for the company's common stock, which states that the notice of Annual Meeting was mailed on April 7, 2022, to all holders of record of the company's common stock as of the close of business on March 21, 2022. The notice of meeting and the affidavit will be filed with the records of the company. The report of the Inspector of Election certifies that there are in attendance at the annual meeting or by proxy, stockholders entitled to cast at least a majority of the votes which all stockholders are entitled to cast.

Thank you, Secretary. In view of that report, I declare that a quorum is present and the meeting is duly constituted. We are now ready to proceed with the transaction of business. The Board of Directors has appointed Kerri Shenkin of Computershare to act as Inspector of Election for this meeting. The Inspector is in attendance and has taken a oath of office, which I direct to be filed with the minutes of this meeting. The Inspector has a list of stockholders of the company indicating the name, address and number of shares held by each holder of the company's common stock as of the record date certified by the company's transfer agent. This list is available for inspection during this meeting by any stockholder on the meeting center site. The Secretary will file a copy of the list of stockholders with the records of the company. We will now have the presentation of the 3 proposals before the meeting. Each of the proposals is described in the proxy statement previously made available to you. Stockholders who have questions specifically relating to the 3 proposals, you may submit them now. And after I finish summarizing the proposals, we will answer those questions. The proposals. Proposal number one is the election of 10 directors to serve until the 2023 Annual Meeting of Stockholders. The company has an advanced notice by law provision. Accordingly, all nominations are closed. As set forth in the proxy statement, the Board of Directors has previously nominated for reelection each of the current members of the Board. Proposal #2 concerns an advisory vote on executive compensation commonly referred to as a say on pay vote. And proposal #3 concerns the ratification of the selection of KPMG as the company's independent registered public accounting firm for the year ending December 31, 2022.

As we have received no questions on the proposals, we will proceed to the opening of the polls. Mr. Keller?

I declare the polls now open for voting on all proposals. If you have voted your shares in advance of the meeting by one of the methods described in the proxy materials for the meeting, there is no need to vote those shares during the meeting. If you have not already voted your shares or wish to change your vote, you may do so now by clicking on the Vote tab on the meeting center site. [Voting]

While stockholders are voting, I will now present the Chief Executive Officer's report to the stockholders. Before I begin my remarks, I would like 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. I refer all of you to our recent filings with the SEC 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. I will also refer to the non-GAAP financial measure adjusted EBITDA. Reconciliations of this financial measure to the most directly comparable GAAP financial measures are provided in the earnings press releases that we issued for fiscal year 2021 and the first quarter of 2022, both of which may be found in the Investor Relations section of our website, bgfoods.com. Having dispensed with that, thank you all for joining us this morning. We very much appreciate your interest and continued investment in B&G Foods. Fiscal 2021 was a strong year for B&G Foods. We set a company record for net sales, which increased 4.5% to $2.056 billion. We also successfully completed the integration of the Crisco brand, which we acquired in late fiscal 2020 and represents one of B&G Foods largest acquisitions. Notwithstanding our net sales growth, fiscal 2021 witnessed unprecedented industry-wide input cost inflation and supply chain challenges. As a result, our net sales and adjusted EBITDA finished the fiscal year at the low end of our guidance. Following are some of the key factors driving our fiscal 2021 performance and results. Crisco integration. In 2021, we successfully integrated Crisco, one of the largest B&G Foods acquisitions. The brand performed above our expectations despite major increases and volatility in the primary soybean and canola oil inputs. Since September, Crisco is running on B&G Systems and is fully integrated into our business processes. It is now the second largest brand in the B&G Foods portfolio. Inflation. Inflation in full year 2021 was in the mid-single digits with the second half increasing to a double-digit increase across the portfolio. Crisco input cost inflation was significantly higher than the base portfolio given the major increases in soybean and canola oil. We anticipate that substantial inflation will continue well into 2022, particularly with the impact of the war in Ukraine. Pricing. We executed pricing actions in 2021 across the portfolio to recover inflation and gross margin dollars. Most increases were effective in the second half with some lag for implementation with customers. By the start of Q4 2021, much of our recent pricing was in effect. While we were able to mitigate a portion of the impact of inflation by implementing cost savings measures and successfully exiting pricing throughout the year, pricing actions generally lag behind input costs, and therefore, we were unable to fully offset the input cost increases. Supply chain. We made several key additions to capacity in 2021 to meet higher demand, principally on our and taco shells as well as spices and seasonings. However, we continue to face supply challenges behind shortages in some critical packaging, commodities and materials. In addition, several of our factories have been unable to achieve full staffing due to COVID-19 in the highly competitive labor market. Our service levels were improving in Q4 towards the low to mid-90s, but dropped back below 90% during the Omicron surge. The supply chain challenges and disruptions were exacerbated by the Omicron surge in December and January, which significantly impacted our fourth quarter net sales. Overall, the team -- the B&G Foods team responded well to the significant challenges facing the industry in 2021. We moved quickly on pricing to confront significant inflation on key inputs and costs. We worked through numerous supply constraints to maintain production and deliveries to our customers. We successfully integrated the Crisco brand despite record high soybean commodity prices and added new capacity to meet elevated demand for core product lines. The first quarter of 2022 continue to be challenged by inflation and supply recovery. Total COGS inflation in 2022 is projected between 19% to 20% following the impact of the war in Ukraine and global supply impact. We plan for inflation in the low to mid-teens, but now have line of sight to significantly higher costs. In particular, soybean oil, the primary input to Crisco, is now over $0.80 per pound relative to our projections in January of less than $0.60 per pound. Wheat and corn have reached historical highs because of the Ukraine Russia disruption and vegetable costs for Green Giant have risen as farmers shifted crop planning. Freight and delivery costs have also increased sharply behind higher oil prices. Net sales increased by plus 5.4% versus the first quarter of 2021, ahead of our expectations. Sales were driven by continued elevated demand compared to pre-COVID levels and higher pricing with relatively low elasticities. However, first quarter adjusted EBITDA declined 16.2% versus the first quarter of last year behind higher-than-expected new inflationary cost pressures accelerated by the war in Ukraine, particularly in oil, wheat, corn, fuel and other commodities. We expect that our latest pricing initiatives will recover these higher costs in the back half of 2022, but there is a lag between higher COGS and pricing during the first half of 2022. New pricing actions will take effect in late Q2 and early Q3 with a 2- to 3-month notification and implementation period required by our retail partners. We will continue to closely monitor inflation and respond quickly with any further pricing and continued productivity efforts. Customer fill rates are expected to steadily improve, barring any further disruptions to enable growth and improve margins. The outlook for fiscal year 2022 is for net sales to increase more than our original guidance for 2022 with pricing elasticities increasing marginally from current low levels. On the bottom line, adjusted EBITDA is projected lower than our original 2022 guidance, driven by the lag between new hire costs and pricing actions moving into the market. We continue to believe that our shareholders are best served by the operating model that we have had in place since we went public in 2004. We strive for modest organic growth in our base business of well-established brands, layer on a larger growth component via accretive acquisitions and returning a meaningful proportion of free cash flow to shareholders through dividends. We have paid a dividend every quarter since our initial public offering and over the 17 years since our initial public offering. We have increased the dividend at a compound annual growth rate of 4.9%. We have been able to maintain our dividend policy year after year by growing net sales and adjusted EBITDA over the past 17 years at compounding growth rates of 10.6% and 10.1%, respectively. Our dividend yield is among the highest in the industry, and we intend to continue our policy of returning a meaningful portion of our excess cash to stockholders. During 2021, we returned $122.9 million of cash to our stockholders. Other progress in 2021 that is well worth noting includes a continued heightened recognition of the corporate responsibilities of B&G Foods. For example, during fiscal 2021, we developed our environmental, social and governance, ESG mission and goals, which we adopted and announced in early fiscal 2022. By 2027, we are striving to have 100% of our packaging be reusable, recyclable, compostable or biodegradable and for 50% of our packaging to consist of recycling content. By 2027, we also aim to reduce energy usage at our manufacturing facilities by 25% and water usage by 10% and achieved 0 waste to landfill. We plan to report on these goals annually. In January 2021, we hired a third-party diversity, equity and inclusion, DEI consultant, to help us understand and meet the needs of our employees while achieving appropriate workforce DEI throughout our company. In January 2022, we established 5-year DEI goals. By 2027, we are striving to have 50% of all employees be female and 30% of corporate leadership be female. By 2027, we are striving to have 30% -- 35% of all employees being members of underrepresented groups and 28% of corporate leadership being members of underrepresented groups. We plan to report on these goals at least annually. Additionally, in 2021, as part of our DEI efforts, B&G Foods founded the B&G Foods Culinary Leaders of Tomorrow scholarship at the Culinary Institute of America to support individuals from diverse backgrounds in their pursuits of culinary careers. With the goal of making culinary education and employment more accessible to all, the B&G Foods Culinary Leaders of Tomorrow scholarship awards 5 $10,000 grants to eligible students at the CIA each year with a total commitment of $1 million in scholarships over 8 years. Food is a universal language and B&G Foods believes that the culinary arts are made infinitely more powerful with a diverse blend of people and perspectives. Whether students seek employment in or outside the kitchen, B&G Foods hopes that these annual awards will promote greater diversity. As a company, we are committed to enhancing our corporate social responsibility efforts and plan to continue to increase our public disclosures regarding the steps we have been taking over the years to promote corporate social responsibility and minimize our impact on the environment. In summary, we remain consistent on our major priorities. Foremost, managing B&G Foods effectively through the current inflationary pricing and supply environment, which means pricing as quickly as possible to recover higher input costs and increasing production and critical supply to improve service levels above 95%. Improving organic growth performance beyond COVID recovery to 1% to 2% growth, capitalizing on the post-pandemic trends of remote working from home and a renewed interest in cooking. Focusing on brands and categories where we have the capabilities, scale and right to win in terms of resources, investment and structure, making disciplined acquisitions that are accretive to our portfolio and cash flows and fit with our core expertise in center store drive distribution, accelerating cost savings and productivity efforts to eliminate nonvalue-added costs, offset inflation and strengthen margins longer term. To deliver on these priorities and goals, we are working to reorganize the company operations into 4 business units, establishing clear focus and expectations within the B&G Foods portfolio. As previously discussed, these units will define the categories and brands that we will resource and grow, the platforms for future acquisitions, the brands that will run for efficiency and cash flow and the businesses we may exit over time. The business unit structure will also push accountability and multifunctional responsibility down to more closely manage parts of the complex B&G portfolio, improving the speed and clarity of decision-making to deliver growth and financial performance. The time line to complete these organization changes is the next 3 to 4 months, and we expect to provide specifics on composition, structure and performance expectations in late summer or early fall. Despite the challenges of fiscal 2021 and those we are continuing to face in 2022, demand for our products remains elevated as consumers continue to cook and being more at home relative to pre-pandemic levels. We believe that the post-pandemic trends, including flexible remote work and renewed interest in cooking are generating opportunities for our existing and future portfolio. I believe stockholders of B&G Foods should continue to expect a bright future ahead. Thank you very much for attending our annual meeting of stockholders today and for your time and attention, and thank you for your continued support of B&G Foods. This concludes my prepared remarks. Now we will return to the business of the meeting. since everyone has now had the opportunity to vote, the polls are now closed. While the votes cast and proxies are being counted, I now invite stockholders to ask any questions you may have about the company.

The first question from stockholders. Inflation in a tight labor market are current challenges for all companies. How is B&G addressing these issues in order to protect the profit margin?

So we watch our cost inputs very carefully. We look at those every month, and we are addressing the cost inputs by taking pricing actions to recover at least the gross margin dollars impact of the higher inflationary input costs. And this has been a real dynamic process as we've seen inflation kick up in 2021 and continue pretty heavily into 2022. As I said, we expect inflation in our -- across our portfolio this year to be in the 19% to 20% range, and we have executed pricing actions to recover those higher input costs. As I discussed in our remarks, there is a lag between when we announced price increases to our retail partners and customers and when they get implemented, and it's typically 60 to 90 days. So we have a lag between when we see the higher cost kind of coming in and when we're able to price recover those. But we are priced to fully recover those higher costs in the back half of 2022.

And the next question, do you see any change in consumer preferences for the type of food that is currently in demand?

I think the 2 trends that we see fairly clearly that are happening in the post-pandemic environment, number one, we know that people in lots of different work situations are working more remotely or working at home. They may be going into the office a few days a week, but they're also continuing to work at home a couple of days a week. This is part of the new kind of flexible remote work environment that you probably read a lot about. And what is happening as a result of that is that there are more meals being consumed at home, like breakfast occasions, lunch occasions and even some casual dinner occasions. So versus pre-pandemic levels, you might have a few more meal occasions per week that are consumed at home. And so we've seen an interest in the products that meet those demands that allow people to something good at home, whether that's Cream of Wheat or be able to grow farms, lunch occasions, also casual dinner occasions of Ortega tacos, taco sauce and other products have also responded to those kind of trends. The second thing is, ironically, I think a lot of people, when they were stuck at home during the pandemic learned how to cook again. And so we've seen a renewed interest in baking to some extent. We've also seen a renewed interest in learning how to cook flavorful foods and use spices and seasonings. And so we've seen some elevated demand for those categories as well as people who have learn how to cook in the pandemic now we want to continue to do that, maybe not as frequently as they were in the pandemic, but higher than they were probably preparing meals at home before the pandemic.

The next stockholder question is supply chain challenges are affecting all companies. Specifically, how is it affecting B&G Foods? And are there any signs of the problem easing?

Yes. We've had supply chain challenges, as I referenced, both in terms of the availability of materials and packaging components also in terms of getting contractor capacity for some of our products that are outsourced. We've also experienced tight labor markets with our -- some of our plants and facilities as most of our peers have. So we're not alone. This has been happening to many people in other industries. And we're working through it. So as I said, probably the Omicron surge in late -- in December and January was our most difficult time as we saw shortages of supply materials coming in. We also saw sort of tight labor markets and absences going on in some of our factories. But we've been steadily recovering through the first quarter. Our service rates have picked up. Our labor availability and our full staffing measures have kind of almost taken place in most of our factory. So we're feeling that we're on demand and things are improving and getting better. And we expect to get our customer service levels back above 90% this quarter. We're well on trend to do that. And as I said, most of our factories are operating at kind of full staffing capacity.

Next stockholder question is, during the pandemic, food companies benefited from an increase of stay at home cooking. With the economy opening up, how much of a headwind to sales growth do you expect it to be for B&G Foods this year as people get back to a more normal life?

So we did see -- we saw very elevated demand for at-home food consumption and cooking and baking during the pandemic. We've seen that demand level stay relatively high in 2021, not the same level as 2020, and it's staying relatively high in 2022. It is coming off the high of 2020, but it's -- most of our categories are still seeing very strong growth relative to the pre-pandemic 2019 levels. So although we may see some slowdown in those categories, I think it's still going to remain elevated to the 2019 pre-COVID periods. And that's part of the trends that we just talked about in certain people making more at home than they were pre-pandemic, but maybe not at the same level as they were in 2020. So honestly, our biggest -- the biggest thing that's going on right now is pricing actions. So we want to watch the pricing actions going into the market, see how those are going to impact demand and elasticity by consumers. But that's probably one of the biggest things we're watching this year in terms of growth rates.

With challenges facing the industry this year and the increasing worry of a pending recession, are you finding more companies willing to discuss an acquisition with B&G Foods?

We always are talking and looking at acquisitions and potential acquisitions and we're in many discussions this year as well. I mean it will be interesting to see what happens to the M&A environment going forward. You probably just saw that we announced that we completed the acquisition of Growers Express, which gives us a lot more supply capability with some of our Green Giant innovations in rice and veggie spirals. So I think that's the latest one that we've just completed and announced, I guess, a couple of weeks ago, but we are constantly talking to potential opportunities that could be of interest that fits back the acquisition criteria that I laid out in my comments.

Next stockholder question. With interest rates increasing and credit spreads widening, is the environment becoming more difficult to fund acquisitions or roll over existing debt?

We are seeing interest rates increasing, but we have long-term debt that is locked in for at least 3 to 5 years now. We also are seeing not that much impact on our short-term interest rates on the short-term debt. But it is starting to creep up a little bit. So we'll watch this. But obviously, as interest rates go up, it could make our debt more expensive, but we haven't seen a huge impact from that yet.

And before we conclude the Q&A session, as we've done in prior years, unfortunately, in the remote context, we don't have goody bags of sample products for stockholders. But if you send an e-mail to Corporate Secretary, and that's one word, [email protected] we'll send you a coupon book for samples of some of our products. As we received no further questions, the next item on the agenda is the report of the Inspector. The Inspector of Election has tabulated the votes cast at this meeting electronically or by proxy, with respect to the election of directors and has preliminarily reported that the director nominees have received between 92% and 96% of the votes cast. And accordingly, they are elected as directors of the company. In addition, the say on pay proposal received approximately 89% of the votes cast, and the proposal to ratify the appointment of KPMG has received approximately 97% of the votes cast. Accordingly, all of these proposals are approved. The full and final details of the votes cast will be contained in the written report of the Inspector, which may be examined by any stockholder and will be filed with the records of the company. In addition, as required by SEC rules, the company will file a current report on Form 8-K later this week to report the details of the votes cast. Mr. Keller?

I want to thank all of you for attending today's meeting and for the interest you have shown in B&G Foods. There being nothing further to come before the meeting, I declare this meeting adjourned. I hope that all of you and your families remain safe and healthy. Thank you.

Thank you. This concludes the meeting. You may now disconnect.