B&G Foods, Inc.

Good day and welcome to the B&G Foods fourth quarter and fiscal 2019 earnings call. Today's call is being recorded. You can access detailed financial information on the quarter and 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, under due 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 references on today's call to the non-GAAP financial measures and 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 measures are provided in today's earnings release. Ken Romanzi, 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 fiscal 2020 and beyond. Bruce Wacca, the company's chief financial officer, will then discuss the company's financial results for the fourth quarter and fiscal 2019, as well as the guidance for 2020. I would now like to turn the call over to Ken.

Good afternoon. Thank you all for joining us today for our fourth quarter and full year 2019 earnings call. Today I'd like to cover three topics. First, I'll provide a quick recap of fourth quarter and full year 2019 performance. Second, I'd like to share my perspective on B&G Foods' performance in 2019 against the plan we developed as a new management team as of April of this past year and how I view this in the context of our stock performance over the past year And third, I'll provide an outlook of where we expect to go in 2020 and beyond. First, a quick recap of our fourth quarter and fiscal 2019 results. During the quarter, we reported net sales of $470.2 million, an increase of 2.6% versus last year, leading to full-year net sales of $1,660,400, a decrease of 2.4% versus prior year, primarily driven by the sale of pirate brands. Excluding that sale, full-year net sales increased 2.1%. Adjusted EBITDA was $69.5 million for the quarter, an increase of 18.8% versus the year-ago quarter. This resulted in full-year adjusted EBITDA of $302.5 million, a decrease of 3.7% versus last year, also primarily driven by the sale of pirate brands. and was at the midpoint of our latest guidance. Excluding pirate brands, adjusted EBITDA grew 2.8% versus full year 2018. So all in all, we delivered stable, expected performance. I view this as very important because after many years of industry-leading performance, our earnings stumbled in 2017 and 2018 with fourth quarter earnings surprises, even while growing sales. So delivering what was expected in 2019 was critical for our new leadership team. Our plan in 2019 was to deliver modest sales growth and cover inflationary input costs with pricing and cost savings initiatives. And that's exactly what we did. While we needed some help from the addition of Clabber Girl, we grew net sales 2.1%, excluding the pirate brand's divestiture, while we also reduced low-margin trade promotion activity and SKUs. we delivered pricing of $20.3 million on the high side of our planned range of $15 to $20 million. We did this through a combination of list pricing earlier in the year and the removal of very low-margin trade deals in the second half of the year. And while we saw consumption declines in the third and fourth quarter, much of that was planned, and we did not significantly hurt our bottom line. While taking price is never easy to achieve, particularly in today's competitive environment, I believe our efforts over the past two years demonstrate our ability to take price when needed to help offset input cost inflation. On the cost savings front, we delivered $20 million, again at the high side of our planned target of $15 to $20 million for the year, primarily driven by terrific work in our logistics infrastructure plus some other areas. In 2020, we'll dig deeper into our cost structure and expect to drive another $15, $20 million in cost savings and should be in a position to provide more detail on those opportunities in the coming months. Key highlights and accomplishments from 2019 include in April of this year, last year, we realigned our executive leadership team with new heads of sales, marketing, and supply chain. It's a terrific complementary combination of new team members and and B&G Veterans. We completed the successful implementation of our new Oracle JD Edwards ERP system, and I'm pleased to report that the system is up and running with minimal disruption. We're looking forward to taking advantage of the many benefits of the system, which we expect will help us streamline operations, drive efficiencies in our finance and accounting processes, and improve our operational planning and financial forecasting. the Green Giant brand continued to march against its vision to be the plant-based veggie brand of the future by delivering its mission to get people to eat more vegetables with continued growth of category reinventing innovation. While Green Giant's growth slowed in 2019, primarily due to the reduction of low-margin trade deals on legacy product lines and less innovation than in 2018, new products launched under Green Giant since P&G Foods acquired the brand in 2015 are now at an annual run rate of more than $200 million in retail sales, while delivering more than $1.5 billion cumulatively over that time period. In addition, Green Giant has almost single-handedly revolutionized the frozen vegetable category, and we've only just begun. In 2020, we're launching a range of innovation across both the frozen food and dry grocery aisles. More on that a bit later. We acquired Klabergirl, fully integrating the business into our sales and distribution network. We are very pleased with the results of this acquisition to date and Klabergirl's dedicated employees who have joined the B&G Foods family. I'd also like to thank the B&G integration team for their tremendous efforts to make the transition as smooth as possible. We completed a successful $1 billion debt refinancing, the largest in our company's history and at very attractive interest rates. that included the second lowest coupon in company history of 5.25%. We returned $123.7 million of cash to our shareholders in the form of dividends during fiscal 2019, which is consistent with our longstanding dividend policy that has served our shareholders very well since our IPO back in 2004. And our board management remained committed to returning cash to our shareholders. We also returned an additional $34.7 million to our shareholders in the form of share repurchases during fiscal 2019. While share repurchases have not historically been a primary piece of our capital allocation strategy, management and our board of directors both recognize that our share price is undervalued, and people should not be surprised to see us step into the market to buy back our shares from time to time. So stepping back, the elephant in the room and the question everybody asking is, why is our stock so low? Well, in my first year as CEO, I have listened to many investors, debt holders, bankers, and advisors, and there are clearly three large issues depressing our stock over the last year. First, there's been concern that after two years of disappointing investors with fourth quarter earnings results, we would disappoint again in 2019. given the large increase we needed in Q4 to hit our guidance. And more recently, our stock has been under greater pressure due to concerns over fourth quarter Nielsen consumption trends. Second, there's investor fear that we'll cut our dividend driven by our high yield and concern that we don't generate enough free cash flow to cover it. And third, our leverage is too high at 6.1 times pro forma adjusted EBITDA before share-based compensation to net debt. hampering our ability to continue our long-term successful strategy of growth through accretive acquisitions. So I'd like to address each and every one of these issues. First, I hope our fourth quarter and full year 2019 earnings announcement shows we can get back to growth through accretive acquisitions and deliver what we say we will deliver. And while our volumes were on the low side of our expectations in fourth quarter, pricing was on the high side. This is always a delicate balance, and we'll continue to balance these two important levers as we move forward. So while we are not declaring victory yet, we see 2019 as the first year of many in improved expected performance. Second, we have no plans to cut the dividend under our current operating model and assumptions. We continue to believe in the dividend because that is the vehicle upon which this company was built. We also believe that under normal operating conditions, we generate enough cash flow to cover the dividend. However, as you'll see from our net cash from operations in 2019, and as Bruce will discuss in more detail, we had several one-time uses of cash in 2019, including a very sizable tax bill related to a gain on sale from the sale of private brands, share repurchases, and investments in working capital that increased our debt. But we do not see these same uses of cash continuing in 2020. And Bruce will share our cash flow plan that should give you the confidence in our dividend as we. Lastly, we understand investor concern over our debt leverage. We're committed to create excess cash flow to help reduce leverage. Later, Bruce will share our plan to get our leverage below six times in our 2020 plan. In addition, we do not believe we're shut out of acquiring more businesses. The M&A pipeline is active, and we believe opportunities remain to acquire businesses without increasing leverage, and that in some cases may actually help reduce leverage. So in summary, we realize we have to deliver consistent results to gain investor confidence in B&G Foods. The B&G model has worked for a very long time, and we believe it can continue to work for a long time to come. We see 2019 as the start of a new era here at B&G. So now on to 2020. For 2020, our long-term strategic imperatives remain the same. Drive organic growth of 0% to 2%, improve margins, make accretive acquisitions, and building a winning workplace. We plan to drive organic growth through key brands like Green Giant, Ortega, Mrs. Dash, and McCann, amongst others, while maintaining a large portfolio of stable brands and managing our remaining brands for cash flow. In 2020, we expect our net sales to grow about 1% as we drive growth on several of our key brands, but our growth will be tampered down a bit as we continue to reduce low-margin trade promotion and SKUs and overlap the loss of some low-margin private label spice businesses. We expect Green Giant to lead the charge again in 2020 through the introduction of a range of innovation across frozen food categories outside of frozen vegetables, including cauliflower hash browns, cauliflower crust pizza, cauliflower gnocchi, and cauliflower breadsticks, frozen breadsticks made with 40% cauliflower. And we're not stopping there. Building on the tremendous success of Green Giant Rice Veggies in the frozen aisle, which is now an $80 million business annually, we are launching Green Giant Rice Veggies in the shelf-stable rice aisle. Shelf-stable rice is a large $3 billion category with little innovation. Our shelf-stable Green Giant Rice Veggies are made from 100% veggies featuring blends of legumes and veggies like cauliflower, peas, lentils, and chickpeas. Green giant rice veggies taste and perform like regular rice, but are chock full of vegetables with less carbohydrates and more protein. We expect green giant growth to be driven even further by the acquisition of FarmWise, which we just announced last Wednesday. FarmWise is a small but very prolific, forward-thinking frozen veggie brand that will allow us to quickly commercialize products from their innovation pipeline and and introduced them under the Green Giant brand in the traditional food channel and under the FarmWise name in the natural channel, where the Green Giant brand isn't a good fit. We are very excited about this small acquisition with quick scale-up capability and a good example of what I meant when I said it's a new era at B&G. All in all, we expect $20 million in new sales from Green Giant Innovation in 2020. But Green Giant won't have to carry the load alone. Our second largest brand, Ortega, has grown steadily under B&G Foods' ownership since 2003, and we remain very bullish on the Mexican food category. As leaders in veggie-forward, plant-based innovation, we are bringing some of the magic of Green Giant to Ortega through the introduction of Ortega Cauliflower Taco Shells and Ortega Cauliflower Tortillas. made with over 25% cauliflower. Now Ortega can help people get more vegetables in their diet while they enjoy Taco Tuesdays. In addition, we'll launch a line of Ortega Street taco sauces, each with a unique and contemporary flavor, capitalizing on the current food truck craze. We expect further growth to be driven by the continued distribution expansion of McCann's Irish Oatmeal, the small acquisition we made in 2018. We've been expanding McCann's in both the U.S. and Canada throughout 2019 and are receiving terrific retailer acceptance. McCann's consumption accelerated to 6.5% in the latest quarter. Our second strategic imperative is focused on improving margins. And while inflation appears to be more modest in 2020 than it has been over the last two years, we still expect to see increased costs, whether it be for inputs, tariffs, or labor. To help offset these continued pressures and to work toward improving our margins, we have extended our cost reduction program beyond our original goal of $50 million. To date, we have taken out approximately $25 million in costs since 2017 when we set our goal, and our goal going forward is to reduce costs by $15 to $20 million per year over the next three years. We expect to do this by continuing to optimize our logistics network, reducing product impacting costs, and stepping up the efforts to optimize our manufacturing network. We plan to announce several initiatives in this area throughout 2020. As far as pricing goes, we have achieved significant pricing over the past two years and should continue to benefit from some pricing overlap in 2020. We'll continue to refine the delicate trade promotion plans to optimize price-volume mix And for 2020, we expect pricing to be $3 to $5 million. Our third imperative is continue our strategy of accretive acquisitions. Acquiring integrating businesses has been a part of the B&G strategy since the beginning, and we expect that to continue well into the future. We are always on the lookout for branded food products with defensible market positions and center store opportunities with high, stable margins and good cash flow. We also focused on acquiring like products to facilitate sales, manufacturing, distribution, and G&A synergies, and importantly, acquiring brands at accretive multiples. We were able to achieve this in 2019 with Clavigirls, and an active M&A market in the industry should give us the opportunity to acquire businesses without pressure on our leverage. And last but not least, B&G wouldn't be B&G without the incredible team members we have. our focus remains on building a winning workplace to make sure we're always operating at our best. We've been investing a lot in people, process, and systems to improve our execution. We strengthened our organization in 2019, including an organization redesign, talent enhancements, and systems improvements, such as our new ERP systems integration. In 2020, we'll begin to reap the benefits of the new system through better financial planning and forecasting and inventory management. In addition, this year, we're implementing a new trade promotion management system that should allow us to better manage our large trade promotion spend. So in closing, 2019 was a year to get B&G Foods back on track, and we're confident that we will continue to make progress in 2020 against improved sustainable performance. Now I'd like to turn the call over to Bruce to discuss the details of our fourth quarter and full year financial performance. Bruce?

Thank you, Ken. Good afternoon, everyone. As Ken just outlined, we had a strong finish to 2019 with a solid fourth quarter that continued the momentum that we saw in the business in both the second and third quarters of our fiscal year. We reported net sales of $470.2 million and adjusted even to $69.5 million in the fourth quarter, leading to full-year net sales of $1.66 billion and and adjusted EBITDA of $302.5 million for 2019. Adjusted EBITDA as a percentage of net sales was 14.8% for the quarter, which represents a 200 basis point improvement over the prior year period. And separately, we generated adjusted EBITDA as a percentage of net sales of 18.2% for full fiscal year 2019, which was in line with our expectations. After adjusting for approximately $74.9 million in net sales for Pyro Brands in fiscal 2018, our fiscal 2019 net sales represented an increase of $34.5 million, or 2.1% over last year. The acquisition of Clabber Girl in May 2019 benefited the company and contributed approximately $53.6 million to fiscal 2019 net sales. Base business net sales which excludes the impact of M&A, decreased by $22.2 million, or 1.4%. Fiscal 2019 net sales benefited from approximately $20.3 million in pricing, inclusive of our spring 2019 list price increase and our trade spend optimization program. These pricing benefits were offset by approximately $42.4 million from reduced volumes in our base business that were driven in part by our trade optimization program, as well as an active effort to reduce unprofitable and lower margin skews. Among our larger brands, Green Giant was up $7.8 million, or 1.5%, with a strong first half of the year that was driven by both our new 2019 innovations, as well as continued growth by previous year innovations like Green Giant Rice Veggies, and Green Giant veggie spirals, plus distribution gains in the dollar channel for our shelf-stable Green Giant products. These gains were offset in part by reduced volumes of our frozen bag and our frozen bag-in-a-box products in the second half of the year as we altered some of our key trade programs during the non-holiday portion of the year. As we have stated previously, Green Giant saw just one wave of innovation launches in 2019, compared to two in 2018. We also believe the reception of our 2020 launches will be more in line with some of the other successful Frozen Innovation launches. We think we have some big ideas in store for 2020. Among our other larger brands, New York Style had another successful year, and net sales increased by 2.1 million, or 5.7%. Maple Grove farms increased by 2.6 million or 3.7%. Ortega and Victoria were essentially flat or down by 0.6% and 0.7% respectively. Cream of Wheat, following a strong 2018 performance that was driven by a cold winter, was off by 2.6 million or 4.2%, driven in part by a much more mild winter season. Net sales for our spices and seasonings business, inclusive of Accent, Mrs. Dash, Sassone, and the business that we acquired in 2016, was down $4.6 million, or 1.4%. Both Accent and Mrs. Dash were up modestly, while the rest of the business was negatively impacted by lower pricing of some commodity spices as a result of decreases in commodity input costs, primarily garlic and black pepper, as well as some losses in certain low-profit private label contracts. Despite the lower sales, profits in our spices and seasonings business remain strong and have outperformed our original M&A model. Our recently acquired brands also performed well in 2019, with Clover Girl, which was acquired in May 2019, generating some $53.6 million in net sales, slightly ahead of plan, and McCann's Irish Oatmeal, which was acquired in July 2018, generating approximately $12.1 million in net sales in 2019. McCann's had generated approximately $5.3 million in net sales during the period that we owned the business in 2018. While we have spent a lot of time discussing CollaborGirl's performance in 2019, McCann's has also done well as we continue to expand distribution and net sales for the brand. McCann's net sales were up 7.5% in the fourth quarter of 2019 when compared to our first full quarter of ownership for the business in fourth quarter 2018. Gross profit was $383.1 million for fiscal 2019, or 23.1% of net sales, excluding the negative impact of approximately $22 million of acquisition to investor-related and non-recurring expenses during fiscal 2019, the company's gross profit would have been $405.1 million, or 24.4% of net sales. Gross profit was $349.5 million for fiscal 2018, or 20.5% of net sales. Excluding the negative impact of $76.3 million of acquisition divestiture-related and other non-recurring expenses during fiscal 2018, the company's gross profit would have been $425.8 million, or 25% of net sales. Our plan in 2019 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 happened. For full year 2019, gross profit benefited from an increase in net pricing of $20.3 million, just ahead of our full year target, of $15 to $20 million. Likewise, our cost savings initiatives also came in at the high end of our $15 to $20 million plan for the year, with approximately $20 million of cost savings realized in 2019. The successful realignment of our dry and frozen distribution networks was the largest contributor of the savings as we took more than 19 million miles out of our network. We also saw benefits from improved procurement, packaging, and waitouts, as well as the G&A rationalization that we implemented earlier in the year. These initiatives, in addition to the private brands divestiture, help lower our cost of goods sold, inclusive of the cost of materials, labor, overhead freight, and warehousing, from $1.35 billion in 2018 to $1.28 billion in 2019. Cost of goods sold as a percentage of net sales was 76.9% in 2019 compared to 79.5% in 2018, despite increased input costs that we faced, particularly driven by a second consecutive short agricultural crop that negatively impacted our green giant margins, increased tariffs, and increased can prices resulting from higher steel and aluminum prices. Selling general and administrative expenses decreased $6.7 million, or 4%, to $160.7 million for fiscal 2019 from $167.4 million for fiscal 2018. The decrease was composed of decreases in consumer marketing expenses of $5.7 million, warehouse expenses of $2.7 million, selling expenses of $2.5 million, and acquisition to investor-related and non-recurring expenses of $0.2 million, partially offset by an increase in other general and administrative expenses of $4.4 million. Expressed as a percentage of net sales, selling general and administrative expenses improved by 0.1 percentage point to 9.7% for fiscal 2019, compared to 9.8% for fiscal 2018. We generated $302.5 million in adjusted EBITDA in fiscal 2019 compared to $314.2 million in the prior year. As a reminder, 2018 adjusted EBITDA included roughly $20 million in contribution from Pirate Brands, which was sold during the fourth quarter of 2019. As we first highlighted nearly a year ago when we initially laid out our guidance for 2019, we expected to see reduced sales and adjusted EBITDA in each of the first three quarters as we lapped the sale of pirates. We then expected to see a favorable fourth quarter finish to the year, with pirates generating just $2 million or so in net sales during the fourth quarter of 2018. And this is exactly what happened. We generated $69.5 million in adjusted EBITDA in the fourth quarter of 2019, an increase of $11 million, or 18.8% from the year-ago period. Adjusted EBITDA as a percentage of net sales was 14.8% in the fourth quarter of 2019, which represents approximately 200 basis point increase from the 12.8% generated in the fourth quarter of 2018. Full year 2019 adjusted EBITDA as a percentage of net sales was 18.2%, which is largely in line with our expectations and the 18.5% generated in the prior year. We generated $1.64 in adjusted diluted earnings per share in fiscal 2019 compared to $1.85 per share in 2018. The decrease was primarily driven by the lost contribution resulting from the sale of Pirate Brands in late 2018, offset in part by incremental contribution from the acquisition of Clover Girl in mid-2019, the lower interest expense resulting from our reduction in debt following the sale of Pirate Brands, and a small reduction in our share count resulting from our share repurchase efforts. Despite the overall interest savings for the year, interest expense was negatively impacted in the fourth quarter of 2019 by approximately $512,000, or nearly a penny per share, following our fall 2019 debt refinancing by the negative carry of both our four and five-eighth notes that we retired and our newly issued five-and-a-quarter notes which occurred for about 14 days during the mandatory call notice period before the four and five-eighth notes were ultimately retired. The B&G Foods management team and our board of directors remained true to our commitment to return excess cash to shareholders, which in 2019 consisted of $123.7 million in cash dividends paid to our shareholders, or $1.90 per share, as well as share purchases that we made in the open market. During fiscal 2019, we repurchased $34.7 million in shares at an average price of $19.95 per share, which reduced our share count by 1.7 million to 64.04 million shares. The 2019 share repurchases followed our 2018 share repurchases of $26.9 million of common stock, or approximately 1 million shares, at an average price of $27.17 million. In fiscal 2019, we generated $120.4 million in net cash from operations after adjusting for the $73.9 million of negative tax impact from our gain on sale of Pirate Brands. As we highlighted during previous calls, we sold Pirates in 2018 for a great price, which resulted in a fantastic return on our investment, but also in a tax obligation that came due in 2019. Separately in 2019, we had a $70.4 million invested in net working capital or accounts receivable plus inventory less accounts payable. Net cash from operations after adjusting for the pirates gain on sale tax and assuming a flat net working capital number would have been approximately $190.8 million. While inventory crept back on us a little bit at the end of 2019, we think that this creates a nice opportunity for us in 2020. We expect normalized working capital levels to create an additional $35 to $45 million in net cash from operations and to provide a cushion for our expected $122 million of dividends during 2020. And now, I would like to review our guidance for 2020. We expect net sales to be in the range of $1.66 billion to $1.68 billion. We expect net sales to be positively impacted by a full year of Clavergirl. Clavergirl, which was acquired in May 2019 and generated approximately $50 to $55 million in net sales under our watch in 2019, should generate an additional $20 million or so in fiscal 2020. We also expect a strong year for Green Giant with a strong series of innovation launches this year, including Green Giant rice veggies, cauliflower hash browns, cauliflower crust pizza, cauliflower and spinach gnocchi, and cauliflower breadsticks. As Ken mentioned earlier, we expect our Green Giant frozen innovation efforts to also receive an extra boost this year and again in 2021 following our acquisition of FarmWise, which was just announced last week. FarmWise is the proud creator of veggie fries, veggie tots, and veggie rings. We think that the addition of these products to our frozen portfolio will be extremely comfortable entry to our efforts to revolutionize the frozen vegetable set. On the downside, we expect to see a reduction in our commodity spice sales by approximately $20 to $25 million as we continue to pare back certain lower margin private label and food service contracts. We also expect to see some softer sales at the company level in the first quarter of 2020 as a result of our trade spend optimization program. While pricing came in at the high end of our expectations in 4Q and full year 2019, our volumes were a little softer than we wanted. We expect a similar performance dynamic in the first quarter of this year from a sales standpoint. Trade spending may be an area that we tweak further throughout the year, as we may very well strategically invest in trade for some of our more elastic brands to optimize performance. Now back to the rest of our fiscal 2020 guidance. We expect adjusted EBITDA of $302.5 to $312.5 million, adjusted earnings per share of $1.60 to $1.80, a cash working capital benefit of approximately $35 to $45 million, net interest expense of $98 to $103 million, including cash interest expense of $94 to $99 million, an interest amortization expense of $3.5 million, depreciation expense of approximately $45 million, amortization expense of approximately $19 million, an effective tax rate of approximately 25% to 26%, cash taxes of approximately $10 to $20 million. And finally, we anticipate CapEx to be approximately $40 to $45 million in fiscal 2020, which is slightly below last year. Based on the midpoint of our adjusted EBITDA guidance range, we expect that our adjusted EBITDA, less CapEx, cash taxes, and cash interest will be approximately $150 to $155 million. We also expect to see an additional $35 to $45 million cash benefit from an anticipated reduction in working capital, taking this number closer to $185 to $200 million, which should leave us with a reasonable cushion from which to pay our annual dividend of approximately $122 million. Absent acquisitions, we expect our net debt to adjust at EBITDA before share-based compensation, as per our covenant calculation in our credit agreement, to be approximately 5.7 to 5.9 times by the end of fiscal 2020. This concludes our remarks, and now we would like to begin the Q&A portion of our call. Operator?