B&G Foods, Inc.

Good day and welcome to the B&G Foods third quarter 2019 earnings call. Today's call is being recorded. You can access detailed financial information on the quarter and 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, adjusted EBITDA, adjusted net income, 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 on today's earnings release. Ken Romanti, the company's president and chief executive officer, will begin the call with opening remarks and discuss various factors that affected the company's results, selected business highlights, and his thoughts concerning the outlook for the remainder of 2019 and beyond. 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. I would now like to turn the conference over to Ken.

Good afternoon. Thank you all for joining us today for our third quarter earnings call. This afternoon I'd like to provide you a perspective on our third quarter results before I turn the call over to Bruce. provide more detail of our financial performance. Over many years, B&G Foods has had a strong track record of increasing sales, profitability, and cash flow through organic growth, disciplined acquisitions of complementary branded businesses, and new product development. Unfortunately, we have not lived up to our track record over the past two years. But I believe that our results this quarter show that we're making the necessary improvements to our business and that we're beginning to return our company to a path that will allow us to achieve our short and long-term goals. Highlights of the third quarter, which I'll discuss more fully in a few minutes, include, first, the ongoing integration of Collabagirl, which is proceeding very well. Second, the successful completion of the largest debt refinancing in company history at very attractive interest rates. Third, continued success of our new product innovation. Fourth, achievement of price increases in a typical marketplace. Through the first three quarters of 2019, we've generated approximately $16 million in price increases, which is trending at the high end of our expected range. Fifth, increasing momentum behind our cost savings initiatives, projected to be $20 million for the year, primarily in logistics costs. And sixth, continued strengthening of our organizational capability, including organizational redesign, personnel enhancements, and system improvements, such as our new Oracle JEE ERP system and trade spend management system. In the third quarter of this year, Net sales and adjusted EBITDA declined primarily due to the divestiture of pirate brands in the fourth quarter of 2018. Excluding that divestiture, our net sales increased 2.6%, mostly driven by the acquisition of Cloud Girl, which is performing very well in line with our acquisition model. The integration of Cloud Girl continued to proceed smoothly during the third quarter of As we began transitioning Clabber Girl to our sales team, we expect to fully integrate Clabber Girl's sales and distribution in January of 2020. Base business net sales, which excludes the impact of the Pirate brand's investor, the Clabber Girl acquisition, and an extra two weeks of McCann's Irish oatmeal, declined 2.5%, mostly due to Green Giant and our spices and seasonings business. While much of this was planned, sales performance for the quarter was at the low end of our expectations. Our spices and seasoning business declined 3% versus last third quarter, primarily driven by promotional timing, modest price declines in our commodity spice business, particularly garlic and pepper, and some lost distribution of low-margin private label business. Green giant net sales declined 4.9% versus the third quarter of 2018, primarily due to the implementation of our trade promotion optimization strategy that increased the promotional price point of our bag-in-a-box product line. Much of this was planned, although in certain customers, the promotional volume sensitivity was greater than we expected. However, we will continue this strategy in non-holiday timeframes as it contributes to our overall net price realization and we believe will help improve our margins for these products. We also experienced supply shortages of our frozen corn on the cob products from the poor crop in 2018. We believed we could stretch the limited supply we had on hand, but it just didn't last until the new crop came in. We're now back in full inventory position to fill in customer orders from the 2019 harvest. And lastly, Canadian Thanksgiving was later this year, which negatively impacted the third quarter but should positively impact the fourth quarter. We recognize this is the first time in seven quarters, dating back to 2017, that Green Giant hasn't shown growth, but we're confident that it will return to growth in the fourth quarter, the kind of growth we've come to expect from Green Giant. In the fourth quarter, we're executing our traditional holiday promotional practices on our bag-in-a-box line, so that should not be a drain than it was in the third quarter. In addition, as I mentioned earlier, we expect Green Giant to benefit from the later Canadian Thanksgiving. However, we believe the real driver of expected Green Giant growth in the fourth quarter will come from our 2020 innovation product launches that have already begun shipping to customers that represent about a third of the ACV. We're very excited about these products. They include Green Giant pizza with cauliflower crust, green giant cauliflower and spinach gnocchi, green giant vegetable hash browns, building off the terrific success of our green giant veggie tots, and green giant marinated and grilled vegetables. As part of our continuing mission to make green giant the plant-based food brand of the future, these innovative new products will expand green giant's reach into areas of the frozen food case beyond vegetables, including frozen potatoes, frozen pizzas, and frozen pasta. And in 2020, we expect Green Giant will continue to expand its reach both in the frozen food case and the dry grocery area of the store. So the outlook for Green Giant continues to be a very bright green. Year-to-date, our total company sales have increased 1.7%, excluding pirate brands, driven by Green Giant, Maple Grove Farms, Ortega, McCann's, Las Palmas, and New York Style. partially offset by Back to Nature, Snackwells, Mama Mary's, and Bear Creek, another brand in which we're raising promotional price points to improve margins. Excluding the impact of the divestiture of pirate brands, we estimate that our adjusted EBITDA for the third quarter increased by approximately 2% to 3% versus last year. Driven by the continuation of price realization of $5 million, and the success of our cost savings initiatives totaling nearly $8 million for the quarter. Year-to-date, we estimate that our adjusted EBITDA, excluding the impact of pirate brands, was relatively flat to 2018 as our plan to take pricing and implement cost savings to ward off inflation has been fully implemented. In fact, we expect to deliver both pricing and cost savings at the top end of each expected range of $15 to $20 million for the year. However, our earnings were hampered a bit in the third quarter and will continue to be in the fourth quarter by higher costs than anticipated. Therefore, despite delivering the high end of our budgeted pricing and cost savings, we're lowering our full-year adjusted EBITDA guidance to $295 to $310 million. This reduction is primarily driven by two factors. One, higher grain giant 2019 vegetable pack costs and the acceleration of the use of the new more expensive pack due to last year's short vegetable crop that did not last as far into the calendar year as it normally does. And two, higher import tariffs, particularly garlic, and the effect of steel tariffs on domestic steel pricing. While we had increases in those for the year budgeted, The increases are coming in higher. I do not like lowering our earnings projections and disappointing our investors. But when I took this role, I promised as much transparency as possible as early as possible. And I believe you should know our business expectations as soon as we do. But despite these newly identified costs, we have even more conviction in our plans moving forward. Our expectations moving forward remain to drive 0% to 2% base business growth, deliver pricing and cost savings to ward off inflation and improve margins, and add accreted acquisitions to our business. In addition to the reasons for optimism highlighted at the beginning of my discussion, we believe this is achievable for the following reasons. One, we compete in growing categories. A substantial majority of the categories in which we compete are healthy and growing. Two, we have strong brands. A B&G Foods brand is in over 80% of U.S. households, and many of our brands have the number one or two national or regional market share in the categories in which we compete. Three, we have geographic distribution expansion opportunities. Many of our brands have relatively low geographic distribution, around the 50% mark. Brands like McCann's, Victoria, Mama Mary's, and Back to Nature. have solid growth potential by expanding geographic retail distribution. And lastly, we have a robust innovation pipeline. We have a very strong track record of new product innovation and a great pipeline of new products hitting the shelves over the next 12 to 24 months that we're excited about, particularly on Green Giant. And we've extended much of the innovation approach from Green Giant to several of our other brands, which we're also very excited about. On the cost of manufacturing, we've made great progress reducing our logistics costs. Going forward, we plan to step up our asset rationalization and repatriation of products in and out of our manufacturing facilities for the best low-cost solution. We plan to continue to reduce product and packaging costs wherever possible and expect to continue to drive trade spend optimization as we implement a new go-to-market trade program and systems to manage it in 2020. Regarding our capital structure, we were very pleased with the successful refinancing of $1 billion of our long-term debt, securing our balance sheet for the foreseeable future. This was our largest debt refinancing in company history. Our new senior notes were issued at one of the lowest interest rates in our company history. We secured an attractive 4.8% blended cost of new debt and the refinancing eliminated all near-term maturities. Furthermore, we remain committed to returning cash to our stockholders. Yesterday, we paid our 60th consecutive quarterly dividend, and two days ago, our Board of Directors declared our 61st quarterly dividend, which will be paid in January 2020. During the third quarter, we also returned cash to our stockholders through our repurchase of approximately 1.3 million shares of common stock at an average price of $18.55 or $24.7 million in the aggregate. And lastly, as always, we remain very active in evaluating acquisition opportunities. So now I'd like to call the turnover to Bruce to discuss the details of our third quarter financial performance.

Thank you, Ken. Good afternoon, everyone. As Ken just outlined, we had solid performance in the third quarter as we reported net sales of $406.3 million and adjusted EBITDA of $86.2 million. Adjusted EBITDA as a percentage of net sales was 21.2% for the quarter. After adjusting for approximately $26.6 million in net sales for Pyrogrants in the third quarter of 2018, net sales increased by $10.3 million, year's third quarter. Net sales benefited in the quarter by $20.1 million, resulting from the acquisition of Clever Girl in May of 2019. Base business net sales decreased by $90.8 million, or 2.5%, largely driven by declines in Green Giant and our spices and seasonings business. Outside of Green Giant and the spices and seasonings business, nearly 60% of our brands were up for the quarter. Third quarter net sales benefited from approximately $5 million of price increases, which were largely driven by our list price increases as well as improved trade spend optimization, particularly for Green Giant. Unit volumes exclusive of the sale of higher brands and including our acquisition of Clever Girl increased by $5.3 million. As Ken mentioned earlier, Green Giant had a softer quarter than anticipated, with net sales down $6.1 million, or 4.9%, as the brand was negatively impacted by a couple of discrete events, including a trade optimization program that is designed to improve profitability on a recently remapped bag-in-a-box line, temporary out-of-stocks on corn on the cob following a second short crop, and the timing of the Canadian Thanksgiving, which shifted from the third quarter a year ago to the fourth quarter of this year. Each of these events cost us about $2 million in reduced Green Giant net sales for the quarter. On a year-to-date basis, performance remains strong for Green Giant, and net sales is up $9.1 million, a 2.5% increase year-to-date versus 2018. And we are very excited about the brand's prospects in the fourth quarter as we are introducing 11 new frozen innovation products which we expect to generate approximately $5 to $10 million in incremental net sales versus the year-ago fourth quarter. The new innovation launches include green giant cauliflower veggie hash browns, cauliflower and broccoli veggie hash browns, cauliflower gnocchi, spinach gnocchi, marinated mushrooms, eggplant, peppers, and zucchini marinated veggies, zucchini grilled veggies, cauliflower cheese and bacon veggie tops, margarita pizza, four-cheese pizza, and a 24-ounce value size of zucchini spirals. These new innovation products are also expected to positively impact green giant net sales in 2020. We expect 2020 to further benefit from another round of new innovation products that we plan to launch in the first half of 2020 and that we expect will further cement green giants as the preeminent plant-based brand in the frozen food aisle. Among our other large brands, net sales of maple grow farms increased by approximately $1.3 million, or 8.1%. Net sales of Ortega increased by approximately $1.1 million, or 3.2%. And net sales of New York style increased by $300,000, or 3.2%. Net sales of cream of wheat were down $200,000 at 1%. Net sales of our entire spices and seasonings business were down $2.5 million, or 3%, largely driven by lower pricing of some commodity spices, as well as a result of decreases in commodity input costs, primarily garlic and black pepper, and some losses in certain low-margin private label contracts. Profits in our spices and seasoning business remain strong, and net sales of our legacy spices and seasoning brands, including Accent, Mrs. Dash, and Sasson, were up 5.6%, 5.6%, and 1.7% for the quarter, respectively. Growth profit was $108.8 million for the third quarter of 2019, or 26.8% of net sales. Excluding the impact of $1.5 million of acquisition divestiture-related and non-recurring expenses during the third quarter of 2019, our gross profit would have been $110.3 million, or 27.2% of net sales. Gross profit was $115 million for the third quarter of 2018, or 27.2% of net sales. Excluding the negative impact of $3.2 million of acquisition-related and non-recurring charges during the third quarter of 2018, our gross profit would have been 118.2 or 28% of net sales. Our plan this year was to increase pricing and implement cost savings initiatives to offset inflation in order to maintain gross profit margins. And for the most part, that is exactly what is happening. For the third quarter of 2019, gross profit benefited from an increase in net pricing of $5 million bringing the year-to-date net pricing benefit to $16.2 million. Cost savings are also benefiting our margins, as our cost-cutting initiatives have helped to offset inflationary pressures that we are seeing across the industry. Our cost savings initiatives include the realignment of our dry and frozen distribution networks, improved procurement and packaging, and the G&A rationalization that we implemented earlier this year. These initiatives, in addition to the pirate brand's divestiture, helped to lower our cost of goods sold, inclusive of the cost of materials, labor, overhead, freight, and warehousing, from $307.6 million in the third quarter of 2018 to $297.5 million in this year's third quarter. Cost of goods sold as a percentage of net sales was 73.2% in the third quarter of 2019, compared to 72.8% in the third quarter of 2018. as increased input costs, particularly driven by a second consecutive short agricultural crop, negatively impacted green giant margins and offset these gains. Selling general and administrative expenses of $38.1 million were favorable by $1.9 million, or 4.7%, compared to $40 million for the third quarter of 2019. The favorability was driven by decreases in selling expenses of $1.6 million, warehousing of $0.8 million, and consumer marketing expense of $0.5 million. These improvements were offset in part by an increase in other general administrative costs of $0.8 million and acquisition divestiture-related and non-recurring expenses of $0.2 million. Expressed as a percentage of net sales, selling general and administrative expenses improved by 0.1 percentage points, to 9.4% for the third quarter of 2019, compared to 9.5% for the third quarter of 2018. We generated $86.2 million in adjusted EBITDA in the third quarter of 2019, compared to $91.9 million in the prior year quarter, which represents an increase of approximately $2 million after adjusting for the lost contribution following last year's divestiture of Pirate Brand. which we estimate contributed approximately $7.7 million in the year-ago quarter. Adjusted EBITDA benefited from improved pricing, trade optimization, product waitouts, packaging, and freight efficiencies driven by our distribution realignment plan, which has now been fully implemented in both our dry and frozen distribution networks. Net sales of our newly acquired CleverGirl provided some benefits, which also helped to offset declines in Green Giant and certain of our other legacy brands, as well as modest inflow cost inflation across the portfolio. Adopted EBITDA as a percentage of net sales was 21.2%, which was in line with the prior year third quarter and represents an increase from the 18.7% generated over the course of the first two quarters. Year-to-date adjusted EBITDA as a percentage of net sales is now 19.6%. We generated 54 cents in adjusted diluted earnings per share in the third quarter of 2019 compared to 57 cents per share in the third quarter of 2018. The decrease of 3 cents per share was primarily driven by the lost contribution resulting from the sale of private brands. Separately, While interest expense of $24.9 million was lower than the $27.9 million in interest expense in 3Q 2018, net interest expense was negatively impacted by approximately $1 million as a result of increased borrowings to fund the acquisition of Power Girl. Adjusted W earnings per share is also beginning to benefit from the recent share repurchases under our $50 million share repurchase authorizations. approved by our Board of Directors earlier this year. During the third quarter of this year, we repurchased approximately 1.3 million shares of common stock at an average price of $18.55, or $24.7 million in the aggregate. These share repurchases are in addition to the $36.9 million, or 1.4 million shares that we repurchased under our previous share repurchases authorization at an average price of $26. that were executed between March 2018 and March 2019. Now I would like to review our guidance for the remainder of the year. First, we are reaffirming our top line guidance range of $1.665 million to $1.7 billion, which updated last quarter after the announcement of the acquisition of Power Girl. As I mentioned earlier on the call, We have generated $233 million of adjusted EBITDA through the first three quarters of 2019. This is essentially flat to last year's adjusted EBITDA, $255.7 million, less the estimated $22.7 million in contribution that left the organization due to the sale of higher grants. We are currently trending at about $292 million in trailing 12-month adjusted EBITDA for the end of the third quarter of 2019, or essentially flat in 2018, just even that, after removing the contribution of higher grants. As we outlined earlier this year, we expect to see benefits for an increased pricing and cost savings initiatives that would offset increases in costs. We have executed on this plan, and we expect to continue to do so in the fourth quarter. Through three quarters, we have realized approximately $16 million in benefits from pricing, and so we expect to finish at the high end of our expected range of $15 to $20 million of pricing. We have also realized more than $20 million in logistics cost savings, year-to-date, largely driven by our dry and frozen distribution realignments, which have offset modest increases in rate. We are also on pace to achieve at least $5 million in and additional cost savings from other initiatives such as procurement, waitouts, and improved packaging. These benefits should have pushed us higher into our initial expected cost savings range. However, while we have executed our cost savings and price increases on the high side of our plan to offset inflation, we have experienced higher than expected costs in a couple of areas this year, including higher than anticipated vegetable costs, driven by a second straight short crop for vegetables, greater than anticipated increases in tariffs, and increases in our can prices, resulting from greater than anticipated steel and aluminum prices. As a result, we are revising our adjusted EBITDA guidance for the full year and tightening that guidance to $295 million at the low end of the range, with just a hair above our current LTN adjusted EBITDA. And we are tightening the high end of the range to $310 million in adjusted EBITDA, which would represent an increase of a little bit more than 5% to our 2018 adjusted EBITDA, excluding the estimated product contribution that we lost as a result of the higher grants investor. We are also updating our adjusted daily earnings per share guidance to $65 to $80, which reflects the change to adjusted EBITDA, as well as the incremental interest expense associated with the acquisition of CyberGrowth, our share repurchases, and our recent refinancing. I would also like to quickly walk through the rest of our P&L functions from the full year of 2018, which include net interest expense of 95.5 to 99.5 million dollars, including cash interest expense of 92 to 95 million dollars, and interest amortization expense of 3.5 to 4.5 million dollars. The increase in interest expense versus our original forecast is largely driven by $82 million of borrowings to finance the private girl acquisition, approximately $35 million spent on share repurchases, fees and expenses associated with our refinancing, and the partial double count of interest for a two-week period between the issuance of our new five-and-a-quarter senior notes and the redemption of our four-and-five-eighths. We also expect depreciation of expense of approximately $41 million, amortization expense of approximately $18.5 million, an effective tax rate of approximately 25.5 to 26 percent, cash taxes excluding the negative tax impact from the gain on sale of pirate brands to be $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. As a reminder, the higher brand semester resulted in a pre-tax gain on sale of approximately $176.4 million during the fourth quarter of 2018. The gain on sale negatively impacted our income taxes for 2019 by approximately $71.8 million. which included the cash tax payment that we made during the second quarter of 2019 of $43.2 million, and a cash tax refund we otherwise would have expected to receive of approximately $28.6 million. Excluding the negative tax impact of the gain on sale, our net cash provided by operating activities for the first three quarters of 2019 would have been approximately $73.1 million. As a reminder, the third quarter tends to be our softest from a net cash provided by operating activities perspective, as we typically build inventory during the large vegetable tax season. We then typically increase cash during our fourth and first quarters as we sell down inventory. Due to the timing of the pack this year, we had a slightly greater outlay in the third quarter than typical. And as a result, we expect to have a larger reduction in the fourth quarter, which will benefit fourth quarter cash from operations. Our fourth quarter typically generates the largest cash from operating activities. This concludes our prepared remarks, and now we would like to begin the Q&A portion of the call. Operator?