B&G Foods, Inc.

Good day and welcome to the B&G Foods fourth quarter 2018 earnings call. Today's call is being recorded. You can access detailed financial information on the quarter and the full year in the company's earnings release issued today, which is available at the investor relations section of bgfoods.com. Before the company begins its formal remarks, I need 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. We refer you to the company's most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. The company will also be making reference on today's call to the non-GAAP financial measures EBITDA, adjusted EBITDA, adjusted net income, diluted earnings per share, adjusted diluted earnings per share, and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release. Bob Cantwell, the company's current president and chief executive officer, will begin the call with opening remarks. Bruce Walker, the company's chief financial officer, will then discuss the company's financial results for the quarter, as well as its guidance for 2019. After that, Ken Romanze, the company's president and chief executive officer, effective April of this year, will discuss various factors that affected the company's results, selected business highlights, and his thoughts concerning the outlook for 2019 and beyond. I would like to turn the conference over to Bob.

Good afternoon. Thank you for joining us today. Believe it or not, today is my 82nd consecutive earnings call with B&G Foods dating back to our initial bond offering in 1997. As some of you know, I joined B&G Foods 35 years ago. Life was a lot simpler back then. We were basically a standalone pickle and pepper company owned by Sarah Lee. Over time, our ownership changed several times, and we ultimately were acquired by the private equity firm Ruckman Rosser Sherrill & Company, or BRS. And then life changed again when we went public in 2004. We have grown tremendously over my time at B&G Foods and since the IPO, building through acquisitions a diverse portfolio of nearly 50 brands. We increased our net sales and adjusted EBITDA from $374.8 million and $67.7 million at the time of the IPO to $1.7 billion and $314.2 million today. Our market cap and enterprise value were $245.5 and $625.5 million when we went public, compared to $1.7 and $3.3 billion today. We have also paid almost $830 million in dividends to shareholders during our time as a public company. While there have been challenges over time, we have remained committed to our core financial principles of generating shareholder returns through accretive M&A in unyielding focus on cash flows and a steady return of cash to our shareholders in the form of dividends. As we announced in late July, in January, I will be retiring from my role as President, Chief Executive Officer, and Director of B&G Foods in early April. In accordance with a succession plan established in 2017, B&G Foods Board of Directors has appointed Ken Romanze as my successor. We have been firmly committed to a smooth transition, and for all intents and purposes, Ken has been effectively in charge of B&G Foods sales, marketing, and operations since late 2017. So in large part, the transition is already complete. And while I'm retiring as CEO, I expect to remain actively involved at the company, both as a shareholder and in an advisory role on M&A and corporate finance transactions. I know that the company remains in good hands with its current management team, and I look forward to watching the company continue to grow for years to come. I now would like to turn the call over to Bruce and then to Ken, who will also lead the Q&A portion of the call. Good afternoon.

Thank you for your generous introduction. for hiring and mentoring me and for all that you've done to build this organization during your tenure. While there are many things that we did well in 2018, we missed on the margin side, which unfortunately depressed our adjusted EBITDA and adjusted EPS, two very important measures of our performance. Our net sales came in as expected. We grew our base business a healthy 1.6% for the quarter and nearly 1% for the year, despite a very challenging top-line environment for our industry. We had a very strong year for cash generation, generating more than $200 million in net cash provided by operating activities for the year. We nailed our inventory reduction plan target, reducing inventory by more than 100 million during the year from approximately 502 million at the beginning of the year to approximately 401 million today. We also reduced our long-term debt by almost 600 million for the year, from a little bit more than $2.2 billion at the start of the year to $1.6 billion today. In addition to our cash flows, our debt paydown efforts were also helped in large part by the sale of Pirate Brands during the year. As a reminder, this is a brand that we acquired in 2013 for $195 million and then sold in 2018 for $420 million, more than double the price we paid for the brand five years ago. In 2018, we generated company record net sales of $1.7 billion, company record EBITDA of $397.4 million, and diluted earnings per share of $2.60. After adjusting for certain items affecting comparability described in our earnings release, our adjusted EBITDA was $314.2 million, and our adjusted diluted earnings per share was $1.85. While we are disappointed with these numbers, we have an action plan in place that Ken will walk you through shortly that makes us confident that our expectations to grow the business in 2019. In the fourth quarter of 2018, we generated net sales of $458.1 million, EBITDA $188.6 million, diluted earnings per share of $1.70, adjusted EBITDA of $58.5 million, and adjusted diluted earnings per share of $0.34. Our net sales of $458.1 million represents an increase of $9 million compared to the fourth quarter of 2017 after adjusting for the sale of Pirate Brands. Our core brands performed very well during the quarter, led by Green Giant, whose net sales increased by approximately $7.3 million or nearly 5% during the quarter, seeing growth in net sales of both frozen and shelf-stable products at the same time for the first time under our ownership. Ortega Net Sales grew by approximately $2.4 million in the quarter, or 7.2%. New York Style grew by approximately $0.8 million, or 8.8%. Cream of Wheat grew by approximately $0.8 million, or 4.3%. Maple Grove Farms grew by approximately $0.5 million, or 2.8%. Our Spices and Seasons business in the aggregate, including brands like Mrs. Dash, Accent, and the Spices and Seasons business, that we acquired in late 2016 had a strong turnaround in the fourth quarter, growing by $6.5 million, or 8.4%. Back to nature, during the quarter, we trimmed unprofitable skews such as cereal, juices, and soups, and we were negatively impacted by some distribution losses, which resulted in a decrease in net sales of $5.5 million, or 27%. Victoria was down $2.5 million or 20.3% for the quarter, primarily due to the shift in timing of a key promotional event with one of the brand's largest customers to the third quarter of 18 where we benefited from the fourth quarter of 2017. All other brands in the aggregate decreased by $8.6 million or 6.8%. First profit was $49.9 million for the fourth quarter of 2018 or $86.8 million after excluding the negative impact of $36.9 million of certain items affecting comparability described in earnings release. Gross profit was $93.9 million for the fourth quarter of 2017. Gross profit as expressed as a percentage of net sales after excluding the items affecting comparability that I just mentioned was 19% for the quarter. Gross profit as a percentage of net sales was 20.1% in the fourth quarter of 2017. Gross profit as a percentage of net sales was negatively impacted by industry-wide and anticipated increases in freight expenses, as well as negative product mix, which was partially offset by procurement savings, a decrease in warehousing expenses, and an increase in net pricing. Selling general and administrative expenses decreased by 4.4 million, or 8.4%, to 47.6 million in the fourth quarter, of 2018 from $52 million in the fourth quarter of 2017 due to a decrease in acquisition and divestiture related expenses. Expressed as a percentage of net sales, selling general and administrative expenses improved by 70 basis points to 10.4% from 11.1% in the fourth quarter of 2017. We generated a company record EBITDA of $188.6 million during the fourth quarter of 2018 with a large benefit from our gain on the sale of pirate brands in October. After adjusting for the sale of pirate brands and that of certain other items affecting comparability detailed in our earnings release, we generated $58.5 million in adjusted EBITDA during the quarter, a decrease of approximately $10.4 million from 4Q 2017. The sale of Pirate Brands was the primary driver for this shortfall and accounted for a little bit more than $7 million of the decline in adjusted EBITDA. Outside of Pirate Brands, and similar to the first three quarters of the year, we witnessed elevated freight costs as well as increased promotional costs associated with our canned vegetable business and some negative product mix that we were unable to offset entirely with our sales price increases and cost savings initiatives. During our third quarter conference call, we outlined our expectations for an incremental $14 to $15 million or so of adjusted EBITDA benefit for the fourth quarter versus the prior year period to achieve the bottom of our full year adjusted EBITDA target of $338 million. Unfortunately, while our base business remained stable, we were unable to achieve these incremental benefits. This was primarily due to five factors. First, we achieved approximately $2.1 million in pricing on our base business during the quarter, a step in the right direction, but less than the $10 million that we hoped for. We captured the benefit that we expected to achieve from our list price increases that we implemented last April, but we were unable to get sufficient benefit from our planned reduction to trade and promotional spending that was required to hit our full $10 million target for the quarter. Customers supported our trade deals very well, which illustrates their positive support for our brands, but we sold more on volume on promotion than we planned, which negatively impacted margins. Second, while we grew volumes sufficiently to achieve the bottom end of our sales guidance, some of these gains were driven by our green giant can business, which tends to have higher promotional spend and a lower margin profile than the rest of our base business. Our inability to hit the high end of our net sales target with volume gains, driven by our higher margin brands, further limited our ability to achieve our adjusted EBITDA targets for the quarter and contributed to our lower margin mix, costing us some $5 million in lost adjusted EBITDA opportunity. Third, procurement savings, primarily driven by tariffs, cost us $2 to $3 million more than anticipated. Fourth, while we managed to hold freight flat driven by some of our cost savings initiatives, These costs remained elevated compared to historical levels, and we did not achieve the $3 to $5 million in benefit that we had hoped for in the quarter. And finally, during the course of our $100 million inventory reduction process, we identified and wrote down some $5 million or so in inventory that was a hit to our adjusted EBITDA in the fourth quarter. As I mentioned previously, we finished the year with approximately $1.6 billion in net debt. We reduced our net debt to pro forma adjusted EBITDA to approximately 5.3 times at the end of the year. We remain firmly committed to maintaining our dividend policy and remain well positioned to opportunistically pursue M&A. Our Board of Directors reaffirmed its commitment to our dividend policy yesterday by declaring our 58th consecutive quarterly dividend since our IPO in 2004. At yesterday's closing stock price, our current dividend of $1.90 per share per year represents a dividend yield of 7.8%. During 2018, we paid our shareholders approximately $125 million in dividends. In addition, we repurchased and retired $8.4 million of common stock or 295,000 shares during the quarter at an average price per share of 28.39, bringing our total for the year at $26.9 million of common stock or approximately 1 million shares. We currently have $23.1 million of authorization to repurchase our common stock under the $50 million stock repurchase program approved by our board of directors last year. Before we move to our guidance for fiscal 2019, I would like to remind everyone that our 2018 results include a little bit more than three quarters of Pirate Bratton's net sales of $74.8 million. For 2019, we expect net sales to be in the range of $1.635 to $1.665 billion, or in line with our 0% to 2% long-term top-line growth model. We expect adjusted EBITDA of $305 million to $320 million, adjusted earnings per share of $1.85 to $2, net interest expense of $87.5 to $91.5 million, including cash interest expense of $84 to $88 million and interest amortization expense of $3.5 million. Depreciation expense of approximately $40 million. Amortization expense of approximately $18 million. An effective tax rate of approximately 24.5%. Cash taxes, excluding the tax effects from the gain on sale of pirate brands, would be less than $5 million. And finally, we anticipate CapEx to be approximately $45 to $50 million for 2019, which is in line with last year. Based on the midpoint of our adjusted EBITDA guidance range, we expect that our adjusted EBITDA, less CapEx, cash taxes after excluding the tax effects from the gain on Pirates brand sales, and cash interest to be approximately $180 million. Ascent acquisitions, we expect our net debt to adjusted EBITDA to be 5.0 to 5.1 times at the end of next year. Although we typically provide only annual guidance and do not typically provide quarterly guidance, given the sale of Pirate Brands, we thought that it made sense to provide guidance for the first quarter of 2019. In addition to the impact of the divestiture of Pirate Brands, which produced for us net sales of $74.8 million and adjusted EBITDA of approximately $20 million during our three quarters plus of ownership in 2018. We also expect to see a couple million dollars of incremental inflationary pressure during the quarter, consistent with our outlook for the remainder of the year. Our sales price increases and the majority of our cost savings initiatives for 2019 will not be effective until after the end of the first quarter. Additionally, due to the timing of Easter this year, we expect to see a small shift in some net sales from the first quarter of 2018 to the second quarter in 2019. Taking all of that into account, we expect the first quarter of 2019 net sales of $400 to $412 million, adjusted EBITDA of $78 to $82 million, and adjusted diluted EPS of $47 to $52 cents. As I mentioned earlier, we are disappointed with our 2018 margins and profits, and we expect better in 2019. However, our drop in adjusted EBITDA from $333 to $314 million in 2018 was $19 million, or just $12 million after excluding the estimated $7 million impact from the sale of higher brands. This decline was largely driven by industry-wide inflationary pressures that we were not able to fully offset with our price increases and cost-counting initiative in 2018. Despite the drop in adjusted EBITDA, we had a very strong cash flow year and generated nearly $210 million in net cash from operating activities. And we remain committed to our dividend as well as our growth by acquisition strategy. And now I would like to turn the call over to Ken to give a little bit more perspective on our 2018 results, as well as the roadmap to get to our 2019 forecast.