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

Welcome back, everybody. And I hope everybody is staying engaged in what I know a very long day, but hopefully, a really, really productive one. So for our last fireside of today, we're going to welcome back to our stage, B&G Foods. With us today are newly appointed President and CEO, Rob Mills; and CFO, Bruce Wacha. Thank you both for joining us.

Thank you.

And congratulations, Rob.

Thank you.

Yes. Maybe a good place to start, perhaps a natural place to start is your decision to step into the CEO role. You've served on the B&G Foods Board for the past 8 years. So unlike many incoming CEOs, you already have a fairly deep understanding of the company's brands, capabilities and challenges. What ultimately attracted you to the opportunity and as you move from the boardroom into the CEO seat, I guess where do you think the greatest disconnect may exist between sort of B&G Foods underlying potential and its recent performance?

Yes. So I was on the B&G Foods Board for about 8.5 years. Been in the role for 4 weeks now. And what I will say is, fundamentally, I think the strategy is on track. I had the opportunity to oversee kind of the governance and then move into kind of the execution of running the day-to-day operation. And to me, that's what excited me because I saw tons of opportunities with B&G Foods. When I think about the first 4 weeks, we have really put a lot of focus on going brand by brand and understanding where are there opportunities to either grow the brand, stabilize the brand or is there investments that are fundamentally something that we have to do transformational with the brand. And I would kind of sum it up into 4 areas. One is there's an opportunity around profitable consumption. Over the last couple of years, it feels like the organization has gotten distracted and was not putting the place or the focus on consumption. So how do we shift our energy to profitable consumption? I think the team has done a great job of reshaping the portfolio. That's never ending, and that will continue to go on. But with that, how do we ensure that we're sharper on our priorities, drive better execution and then ultimately look at how do we drive EBITDA expansion, margin improvement through different type of initiatives. So all those are the themes that makes me really excited about taking on this role, but it's going to be about execution, speed of delivery, a sense of urgency and then leveraging my background coming from a retailer and knowing the retailer mindset as well as the digital mindset, how do you lean in to use data to make faster decisions.

And having been on the Board for a number of years, you presumably had a role in helping shape and overseeing the company's sort of existing strategy. And now you're responsible for executing it day-to-day, which elements of that strategy do you believe remain fundamentally right? And where do you think a different approach, maybe greater urgency or a higher level of accountability may be required?

Yes. So once again, I think the team has done a really good job of managing the portfolio. There's been a lot of changes over the last 3 years to strengthen our portfolio with the divestiture of Green Giant, cost, looking at our SG&A, rightsizing of the organization, all the above. And once again, that's going to be an ongoing effort that we're always going to look at. When I think about areas that we're going to double down on, it is going to be looking at how do we look and spend our marketing dollars. So today, we really take the approach of kind of major programs. I don't believe for a midsized cap company, we need to. What we need to do is really focus on clear priorities and how we're executing with great focus and taking the dollars that we have and really putting to work for us. And through retail media, through digital, all the above, how we could hone in and really drive around brand awareness, equity and then more importantly, contribute to the retailers around their digital strategy as well. So there's a little bit of a strategy shift there that will occur. And then the last component, it is going to be about operational excellence. And what I mean by that, I know that's a buzzy word, but it is about how we run our plants and our manufacture with strong productivity, labor standards that ultimately will improve our cost structure, but how do we drive volume back into the plants that will improve the profitability of our products and our plant operations.

As you think about the next 12 to 18 months, what are the sort of 2 or 3 operational or financial metrics that you think will matter most in assessing whether the business is beginning to move in the right direction? Is the immediate priority stabilizing branded retail consumption, improving cash generation, reducing leverage? Or do those objectives need to progress more or less simultaneously?

Yes. So there's going to be a lot of parallel efforts here to keep a focus on where we need to go. It's going to be really 4 key. One, profitable consumption, both for tracked as well as non-track metrics. We've over-indexed and kind of changed our messaging over the past couple of years to really focus on non-track, and we have to win in both. And so consumption profitable, EBITDA, how do we continue to grow and expand our EBITDA, which ultimately then leads into how we could pay down debt, deleverage at a faster rate and have a clear path to the acceleration of our deleverage position. And then lastly, our brand awareness, which ties right back into consumption. Do we have relevant brands? Are we priced right? Are we selling at the rate that we expect? And to me, it's a cylinder, it's a flywheel that will create that ultimately will grow better profitability, more sales and deleverage at a faster rate.

I know one of the more difficult aspects of evaluating B&G is the divergence, which you touched on just before, between measured retail trends and the total sort of base business. I think roughly 40% of the portfolio now sits outside traditional measured channels. In areas such as foodservice, Canada, private brand spices have generally performed better, but measured branded retail consumption rate remains challenged. How do you assess the underlying health of the business when those 2 pieces are moving so differently? And which one should investors view as the better leading indicator of future performance?

Yes. So it's pretty simple. We have to win in both. As you noted, we are doing extremely well in kind of the non-tracked channels, clubs, dollar, web, Canada, private label, et cetera. And this is an area that teams focused on over the last couple of years, and it's a key part of our strategy, and it will continue to be a key part of our strategy, especially when you look at plant utilization and where we can continue to take market share. With that being said, retail is the core of what our brands exist for, and we have underperformed there. We have to have a greater sense of urgency. We have to make sure our capital and our resource dollars. So allocation is going to be really key to the critical brands that will help accelerate our growth in that and specifically around consumption. And then more importantly, how do we take some of the smaller brands and play into that and lean into it for maybe just really small incremental dollars where we could have some wins. A great example of Grandma's, it is typically used for baking. We're very strong within the baking category. But is there extensions now into other seasons? So think about Easter or Father's Day for grilling, et cetera. So for very minimal marketing dollars, how do you actually shift that and drive more occasion using that brand with using better insights around marketing and marketing data.

After base business sales increased 2.8% in the first quarter, supported by positive volume, it declined 2.9% in the second as volume fell 4.3%. Some of that reflected the holiday shipping calendar, but you also acknowledge that performance in the retail branded portfolio needs to improve. What do you see as the principal causes of that deterioration? How much is attributable to the consumer and category environment versus B&G specific issues around assortment, distribution, pricing or execution?

Yes. So the whole category, the whole industry is under a lot of pressure and the consumer is too. And I'm a firm believer, own what you can control and make sure we execute that very well. And that's where we need to double down. I think when it comes to pricing and having clear pricing architecture strategies for some of our brands, that's an opportunity for us. In some cases, we might be raising price. In other cases, we might need to look at a price decrease to balance both EBITDA as well as sales and driving overall consumption. I wouldn't say there's a silver bullet for one, and you're not going to see a major transformation that will occur or a big project that's going to solve this. It is all about being hyper focused, clear priorities for the team that somewhat has been distracted over the last couple of years for various reasons, but on what brands we're going to invest in, where we're going to double down and how do we drive that consumption.

And Andrew, just another piece because you mentioned it. We had a pretty strong first quarter. Second quarter, from a sales standpoint, there were some timing nuances. But through the first 6 months, we're flat on a base business concept. For 8 months, we're actually up a little bit on a base business concept. We're tracking very comfortably to where our guidance is at $1.735 billion to $1.775 billion, which is premised on being kind of flattish to the base. We're on track for that. And so one of the things that we want to make sure people understand is there may be this concept of a malaise in the center of store. We're performing from a top line standpoint. There are pieces that are performing better. There are pieces that are -- need to work, as you asked and as Rob answered. But I think we're making progress in terms of stabilizing that top line.

And just one last to add on to that. We don't fundamentally believe that the center store is dead. We absolutely feel like there are challenges, and there's been some decreases, but we could do better. And you look at College Inn and Kitchen Basics, which, by the way, I'm very excited, and I think that's another great example of how we're leveraging our -- making smart investment decisions and the teams have done a great job. But those categories, those brands are very much alive and well in the center store.

Packaged food volumes overall have been challenged now for longer than I think most companies in the industry or investors initially expected. As you evaluate B&G's portfolio, how do you distinguish between brands experiencing maybe more cyclical pressure from a constrained consumer and brands that maybe have a more structural relevance or competitiveness issue? And does that distinction change how willing you are to invest behind harvest or potentially exit an asset?

So to me, that is the number one question for all our brands. We have to go brand by brand and understand, is it structural? Or is it a moment in time? Is it macro? And more importantly, what's driving? What's the household penetration? What are the trends in the brand? What are the trends in the category? Are we priced correctly? Is there innovation? And ultimately, through this process that we're going through, you're going to see us make a decision on there's going to be specific brands or categories. Baking could be a great example. We're going to double down. And because we can win, we have that right to win in that category. And it's something that we can control and we could execute well, where there might be different trends within certain other categories or products that we'll pull away from.

Spices & Flavor Solutions has been one of the better performing parts of the portfolio at different points, supported by foodservice, club and private brand relationships as well as investments in manufacturing capacity. At the same time, measured branded trends have been more mixed, including some distribution shifting from brands such as Tone's and Weber into partner brand products. How do you think about the right long-term balance between growing the branded, private brand and foodservice pieces of the business, particularly given the different margin and brand equity implications of each?

So private label plays a big part of our spice portfolio. And ultimately, it's doing great. It's having strong growth. We believe that private label within some of those categories makes a lot of sense. It drives up productivity. So there's an offset to the margin. But also at the same time that we feel that we could double down and look at our branded products and compete very successfully with them. So I think it's going to be a balance between where we're going to go deeper in and how we look at private label, pricing and having a strong pricing architecture for each of the brands and the categories is what's going to allow us to win there.

Because College Inn and Kitchen Basics were acquired in March, the upcoming fall and winter period will certainly represent the first meaningful peak season under B&G ownership. I guess what have you learned during the integration so far where you needed to repair or rebuild capabilities following the prior owner's bankruptcy process? And what would you be watching to assess whether the first full season has been successful?

So this business is extremely promotional for -- I'm sure everyone is aware. And as we enter this season, I mean, broth are in stock, are bought all year round, but Q4 is an area that you see heavy seasonal promotion. We feel like we're priced right with the right promotions going into the season. For College Inn, it's #2 brand in the Northeast, and we have to defend and maintain that position. And some of it might come with our pricing and architecture and how we're thinking about promotional opportunities. associated with that brand. And then what I would say with Kitchen, it's a premium brand. It has grown under our watch over the last few months. And we also see a tremendous opportunity to expand that and potentially take the brand into other categories.

Second quarter adjusted EBITDA margin improved despite the sales decline. But the quarter also benefited from portfolio mix, SG&A reduction and the tariff refund. If we strip away, I guess, some of those discrete and sort of transitional items, how would you characterize the underlying earnings power of the current portfolio? And what are the most important drivers of sustainable margin expansion from here?