B&G Foods, Inc.

Good day and welcome to the B&G Foods first quarter 2019 earnings call. Today's call is being recorded. You can access detailed financial information on the quarter in the company's earnings release issued today, which is available in 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 be making references on today's call to non-GAAP financial measures, adjusted EBITDA, adjusted net income, adjusted diluted earnings per share, and base business net sales. Reconciliations of these financial measures to most directly comparable GAAP financial measures are provided in today's earnings release. Bruce Walker, the company's chief financial officer, will begin the call with opening remarks and then discuss the company's financial results for the quarter, as well as its guidance for 2019. After that, Ken Romanzi, the company's president and chief executive officer, will discuss various factors that affected the company's results, selected business highlights, and his thoughts concerning the outlook of the remainder of 2019 and beyond. I would now like to turn our conference over to Bruce.

Good afternoon. Thank you for joining us today for our first quarter 2019 earnings call. During the quarter, we generated $412.7 million in net sales, $75.8 million in adjusted EBITDA, and 44 cents per share in adjusted diluting earnings per share. Adjusted EBITDA as a percentage of net sales was 18.4% for the quarter. The $19 million decrease in net sales was primarily attributable to our divestiture of prior plans during the third quarter of 2018. Pirate Brands had generated net sales of $21 million in the first quarter of 2018. The negative impact on net sales from the Pirate Brands divestiture was partially offset by an incremental $3.3 million of net sales from McCann's, which was acquired during the third quarter of 2018 and therefore not part of our results during the first quarter of 2018. Face Business Net Sales which excluded the impact of M&A and discontinued brands with $409.5 million, essentially flat on the first quarter of 2019 compared to $409.3 million in a prior year quarter. Our base business net sales benefited from $7.3 million in net pricing, which included the impact of our spring 2018 list price increase, as well as improved trade span utilization. We expect to start seeing additional pricing benefits from our 2019 price increase in the second quarter, as well as the third and fourth quarters. Base business volumes were down by $7.1 million in the first quarter, largely driven by a drag from the negative elasticity effects of our price increase. Our base business net sales also had a small negative impact from the shift of Easter to late April. and from a limited voluntary recall of certain Victoria products. Green Giant has been a wonderful net sales growth engine for the past couple of years for B&G Foods, helping to drive growth in net sales quarter after quarter. First quarter 2019 was no different, with net sales of all Green Giant products in the aggregate, including the store, increasing by $6.9 million, a 5.4% versus the year-ago quarter. The growth in net sales was driven by a second consecutive quarter of growth for both our frozen and our shelf-stable green giant products. The rest of our portfolio had a series of pluses and minuses with regards to net sales for the first quarter of 2019 compared to the first quarter of 2018. For example, net sales of New York style increased by $1.3 million, or 16.4%. Maple Grove Farms increased by $0.9 million of 5.5%. Net sales of the company's spices and seasonings businesses increased by nearly 1% or $0.7 million from the quarter. Net sales of Back to Nature decreased by $3.3 million as we are cycling loss distribution of certain non-core items. Victoria decreased by $1.4 million or 11.2% due in part to the recall. Cream of wheat decreased by $1 million or 5.5% as a result of warmer winter. Ortega decreased by $5.6 million or 1.6%. And net sales of all other brands decreased by $3.3 million or 4.1% for the first quarter of 2019. We generated $75.8 million in adjusted EBITDA for the quarter, which is down $13.6 million from the year-ago quarter and slightly short of our guidance range. The primary driver for the decrease in adjusted EBITDA was the divestiture of tire brands, which accounted for approximately $8 million of lost EBITDA for the quarter, inclusive of overhead under absorption. We remain comfortable with our full-year estimate of an negative adjusted EBITDA impact of $21 million from the divestiture of higher brands, but the negative impact was approximately $1 million greater for the first quarter than we had anticipated. We also estimate that the Victoria recall negatively impacted adjusted EBITDA by approximately $1 million for the quarter. Another factor affecting comparability includes the first quarter of 2018 facet of approximately $2 million from a Mexican peso currency gain. We saw a net cost increase in our POGs during the first quarter of approximately $7 million inclusive of procurement, mix, freight, and warehousing, a portion of which is due to the timing of when certain costs and cost savings flow through our P&L. We expect to see these benefits to begin to show in our second quarter results and the remainder of the year. Our pricing strategy, inclusive of the wraparound benefit of the spring 2018 price increase and improved trade span utilization, benefited adjusted EBITDA by $7.3 million, which helped offset the COGS increase. This benefit was partially offset by a decrease in base business volumes of $7.1 million, resulting in lost profits of approximately $2.7 million, largely driven by price elasticity. While we continue to see inflationary pressures in our input costs and our freight expense, the increases have been more manageable this year, and we're actively addressing them. After a strong first quarter of pricing with nearly $7.5 million of benefit, we expect to continue to see pricing benefits throughout the year. Earlier this year, we communicated another round of price increases to our customers, and we should begin to see the benefit of those price increases during the second quarter. We therefore remain confident in our ability to achieve our full year target of $15 to $20 million in pricing, consistent with our previous guidance. Our cost savings initiatives, which Ken will address in more detail in a few minutes, are also on track. And we expect to see these benefits accelerate throughout the year as they begin to impact our P&L. On freight, for example, as a result of the realignment of our dry and frozen distribution centers, we are already seeing favorable costs in our P&L from our customary delivery costs versus the prior year. Some of the freight benefit, however, was needed as our inbound freight and our transfer costs, which are also coming down year over year due to our efficiency efforts, impact our P&L in a roughly one-quarter lag until we will realize these benefits beginning in the second and third quarters of the year. Our G&A rationalization has also been implemented. However, due to the timing of the restructuring, we only felt that that fits for a little less than one month of the quarter. As a result of these efforts, we are also confident that our cost cutting will deliver the full year $15 to $20 million in cost savings benefits. We generated 44 cents in adjusted diluted earnings per share in the first quarter of 2019, compared to 55 cents per share in the first quarter of 2018, with the decline largely driven by lower adjusted EBITDA on the quarter, as we just discussed, offset in part by a reduction in net interest expense of approximately $5.2 million for the quarter due to reducing our long-term debt by approximately $460 million over the past year. Under our prior stock purchase authorization, we repurchased and retired from March 15, 2018 through March 15, 2019, approximately 1.4 million shares of common stock at an average price per share, excluding fees and commissions of $26.41, or $36.9 million in the aggregate. This includes 407,000 shares of common stock at an average price per share or $10 million in the aggregate during the first quarter of 2019. In March 2019, our board of directors authorized an extension of the stock repurchase program through March 15, 2020. In extending the repurchase program, the board also reset the repurchase authority up to $50 million. Our balance sheet remains strong. with just $1.6 billion in net debt at the end of the first quarter of 2019 compared to $2 billion in net debt at the end of the first quarter of 2018. We also continue to manage our inventory more effectively. We further reduced our inventory to $375.4 million at the end of the first quarter of 2019 compared to $401.4 million at the end of the fourth quarter of 2018 and $455.4 million at the end of the first quarter of 2018. We generated more than $50 million in net cash provided by operating activities in the first quarter of 2019, and we spent a little bit more than $8.5 million in capital expenditures during the quarter, more than ample to support our current business and to better position us to pursue our growth through acquisition strategy. Based on the midpoint of our 2019 financial guidance that I will outline in a moment, we expect to be approximately 5.2 times net debt to pro forma justitiva da at the end of the year. Now, as we mentioned a little while ago in our earnings release, we are reaffirming our full-year 2019 guidance. As a reminder, our 2018 results included a little bit more than three-quarters of Pyrobrand's net sales of $74.9 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 offline growth model. We expect adjusted EBITDA of $305 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. An 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 25 to 25.5%. Cash taxes, excluding the tax effects from the gain on sale of pirate brands, to be approximately $5 million or less for the year. 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 plus CapEx, cash taxes, including tax effects from the gain on sale of pirates, and cash interest will be approximately $175 to $180 million. The Pirate Grand Sylvester resulted in a pre-tax gain on sale of $176.4 million during the fourth quarter of 2018. A large majority of the tax payments resulting from that gain on sale will be made during the second quarter of 2019. Finally, from a quarterly modeling perspective, I remind folks that the second and third quarters of this year will have a similar drag from the divestiture of Pirate Brands of about $6 to $7 million of adjusted EBITDA per quarter and a limited impact during the fourth quarter, given that we only have owned the business for about a month during that period. We expect info costs to remain elevated, as inflation certainly appears to be here to stay. But we also expect to see more benefits from our pricing initiatives throughout the remainder of the year, with a small benefit in the back half of the second quarter and a more full benefit in the third and fourth quarters. These benefits will be coupled with continued activity on the cost-cutting front. And now I turn the call over to Ken. Ken?

Thank you, Bruce. And thanks to all of you for joining us on the call today, with special thanks to the dedicated team at B&G Foods, for working so hard in a challenging operating environment to generate these results. I'm pleased that our first quarter net sales were on the higher side of our expectations. And while we had some discrete timing events negatively impacting our adjusted EBITDA, we're on track to meet our full year financial plan. And while historically we've grown through acquisitions, the optics of selling a business are sometimes less favorable on the P&L. However, as we have previously stated, the sale of pirate brands has left us much better positions to continue to grow through acquisitions, a strategy that has worked so well for our company and our shareholders over the years. As I stated in our February call, our 2019 plan is rooted in sales growth consistent with our stated long-term objective of 0% to 2% growth, a broader and more reliable pricing strategy, and the ramp-up of our multi-year cost savings program. Our first quarter results show traction in all three of these pillars of our 2019 plan. So today, I'd like to share key highlights from the first quarter. First and foremost, our new executive leadership team is fully in place, totally aligned and committed to our company strategy, and is working extremely well together. It's a strong, complementary combination of fresh blood and long-term B&G veterans. Also, I'm very pleased to report after more than two years of effort, we successfully went live with our new Oracle JD Edwards Enterprise Resource Planning System just last weekend, and I'm pleased to report that we are fulfilling customer orders and shipping through the system with minimal disruptions. We are very much looking forward to taking advantage of the many benefits of the system, which is expected to streamline operations, drive efficiencies to our finance and accounting processes, and improve our operational planning and financial forecasting. Our first quarter-based business net sales were basically flat to last year, which was encouraging given Easter shifted later into April this year. Consumption across the entire B&G Foods portfolio grew 1% for the quarter, and that included a decline of 1.7% in March due to the Easter timing shift. January through February consumption grew a solid 2.7% versus a year ago. Our sales performance, as Bruce mentioned, was again led by our largest brand, Green Giant. It's a testament to our team's efforts. that we are reporting the second consecutive quarter of net sales growth for both frozen and shelf-stable Green Giant. Shelf-stable is now benefiting from new distribution growth after a challenging period for the category that coincided with our purchase of Green Giant. Green Giant frozen continues its strong momentum behind our vision of making Green Giant the plant-based vegetable food brand of the future, fueled by continued success of our new product introductions. Our vision is to not only introduce new vegetable products in the traditional frozen vegetable category, but to help people get more vegetables in their diet by introducing new products made with vegetables. We are very encouraged by the successful launch of the latest generation of innovation, such as green giant cauliflower pizza crusts, green giant protein bowls, and little green sprouts organics. And we are very much looking forward to announcing our next wave of Green Giant frozen innovation later this year as we continue to facilitate America's healthy eating habits. Now, while not every brand in our portfolio is positioned for the same innovation-led growth that we're driving with Green Giant, we believe there are many exciting things that we can do to drive growth across the portfolio. We're excited about our snacking businesses, namely New York-style bagel chips and Back to Nature. New York style showed strong growth in the quarter with net sales up almost 16.5% driven by unique merchandising in the deli perimeter of the grocery store. And while we're still right-sizing the product portfolio distribution of Back to Nature, we're enthusiastic about its potential for geographic expansion. Consumption in Back to Nature's core product categories of better-for-you cookies, crackers, granola, and nuts remain solid in both the specialty food channel and several mainstream supermarket retailers. And now that our product line is cleaning up of non-core products, our plan is to expand this brand to a greater array of customers. We're also excited about the potential of Victoria pasta sauce. Despite a soft Q1 during the product recall, the brand has performed well over the past two years And we are enthusiastic about the prospects for Victoria as we look to take this leader in premium specialty pasta sauce national to build upon its successful position in the Northeast United States and throughout the club channel nationally. Our most recent acquisition, McCann's, is performing as expected. And although it's on the smaller side for us, it is exactly what we strive for when considering potential acquisitions. McCann's margins are strong. and it has proven additive to our cash flows. And we believe this little brand has the potential to be a bigger part of our portfolio over time. It holds a leadership position in the premium oatmeal category segment, and we are excited about the potential to drive new distribution growth as we fill in the still sizable distribution gaps and work to take this on-trend, better-for-you brand national over time. As Bruce mentioned, we realized nearly $7.5 million in improved pricing during the quarter driven by last year's actions, and we successfully sold into our customers a new round of pricing that is beginning to be implemented during the second quarter. As a reminder, this pricing action is based on more list pricing rather than trade promotion efficiencies on more brands and in more geography than we took last year. As a result, we believe we're on track to deliver the $15 to $20 million in pricing we planned for 2019. Our cost savings initiatives also started to deliver benefits in Q1. We implemented our G&A restructuring program, and the new leaner team is intently focused on delivering our 2019 plan. Additionally, we continue the work we began in 2018 to realign our dry and frozen distribution networks. These efforts are paying off today and helping us to better manage transportation costs in an inflationary environment. During Q1, as our new dry warehouse configuration was completely in place, we reduced our total freight miles during the quarter by approximately 20% below last year's levels, helping to offset higher transportation rates. We also continued to shift more freight to contract versus higher spot rates. And going forward, we will begin to see the added benefits of reconfiguring our frozen distribution network, which will take place throughout the second quarter. Further, our procurement group has finished contract negotiations for the year, and we secured better pricing than we originally forecasted for raw materials. While input costs are still elevated versus last year, our procurement team is doing a great job lessening the impact. And lastly, We're on track implementing the product and package weight reductions we discussed in February to secure our savings budget, mainly right-sizing several of our grain giant frozen products. All in, we're on track to deliver our 2019 plan of $15 to $20 million in cost savings throughout our procurement, logistics, manufacturing, packaging, and SG&A spending, which we expect will continue to deliver another $20 to $25 million in savings in 2020. In summary, we remain confident in our 2019 guidance that relies on 0% to 2% top line growth while maintaining flat adjusted EBITDA margins of approximately 18.5% despite being in an inflationary input cost environment. Our guidance assumes successful implementation of our price increase as well as our cost productivity initiatives, both of which are on track through the completion of the first quarter. Beyond that, we remain committed and ready to add to our business through creative acquisitions. That is what built this great company and that strategy will continue to fuel our growth in the future. In addition, we'll also look to opportunistically repurchase shares of our common stock from time to time as another means, in addition to our quarterly dividend, to return cash to our shareholders. This concludes our remarks today, and now we'd like to begin the Q&A portion of our call. Operator?