Barclays Global Consumer Staples Virtual Conference

Sep 9, 2020

Good afternoon, everybody. We are pleased to once again have B and G Foods here with us at the Global Consumer Staples Conference. B and G has historically been an acquisition story, which has allowed the company to put together a portfolio largely focused on center store brands with defensible market share positions, that produce modest growth, solid EBITDA margins, and very strong free cash flow generation. As such, it should come as no surprise that B and G has seen some of the best top line growth performance across the consumer staples space since the start of the pandemic as well as meaningful cash flow generation, which has helped reduce leverage and solidify the dividend, not to mention to support continued reinvestment behind the business. So with us today to to further discuss B and G's playbook is president and CEO, Ken Romanzi, and CFO, Bruce Wacha. Welcome to both of you. Thank you. Thank you. Yeah. Thrilled to have you. And, you know, as, as planned, we'll do this, as sort of a back and in a fireside chat format. So maybe I'll I'll kick it off, guys with, the question. And, really, the the one is, an appropriate place to start is on cash flow and liquidity. You know, for some time now, there's there's been a concern over, B and G's dividend security. Part of this is due to the company's comfort level, frankly, with leverage to begin with. But the recent benefits from elevated at home consumption, you know, given that, can can you take us through the company's cash flow outlook, cash flow position, liquidity, and sort of comfort level at this stage with the dividend just to kind of get that one behind us? Sure, Andrew. Great question. Obviously, we've had accelerated and elevated sales, which has led to elevated EBITDA and and more importantly, cash production. We've long thought of of our cash flow model, as an EBITDA less cash interest, cash taxes, CapEx, and then typically not a lot of changes in working capital. But as we mentioned on our fourth quarter earnings call, this would be a year where we'd also optimize some of that working capital. On a trailing twelve month basis, we're close to $345 $350,000,000 of of adjusted EBITDA, after noncash comp is removed from that. We then have another $150,000,000 between cash interest, cash taxes, and CapEx, kind of is how to think about the business. That is a massive cushion, particularly when you think about our guidance for lowering inventory this year and optimizing working capital with only 120,000,000 or so of dividend. So we're that, you know, almost 2x, when you think about it. So really, the dividend question, I know it's been asked. We've always been committed to the dividend, but I think with the levels of cash that we're generating and expect to continue to generate, that probably should come off the table. When you think about leverage, we started this year a little bit north of six times net debt to EBITDA, potentially levels that we're comfortable with, but we recognize for equity investors, people like to see a little bit lower. We've got a stated guidance target of 4.5 to 5.5 times net debt to EBITDA over the long term. We're less than 5x net debt to EBITDA at the end of the and that number probably continues to decline. Generating cash, there's a healthy amount of cash sitting on the balance sheet. We repaid all the revolver draw that we did at the beginning of the pandemic. And then and then we also paid down our term loan by about $75,000,000, last month. We expect to continue to generate cash this year. Very helpful perspective. Thank you for that. Maybe we pivot a bit to recent consumer behavior and consumption patterns. I guess, of all, many have described, you know, this crisis as the greatest CPG trial experiment of our lifetime. I guess, what can you tell us about, you know, thus far how it's playing out for B and G in terms of repeat purchase, what that might mean for how sticky some of this recent trial by new or lapsed users could well be? What's fascinating is that, I've I've been I've said publicly and privately that we think in as a consumer marketer, new households is like a fountain of youth for a brand. We worked for years to try to get a point increase on on household penetration. And we have seen, we have detailed data. We have over 50 brands, as you know, many of them small. So we have detailed data on 28 of our brands. And really, there's no one answer. We're really all across the board. There are some businesses that all of the growth is through just existing users. And then we have several of our business that up to 50% of the growth, but only 50% of the growth through new users, other 50% of the growth through existing users. And that makes sense because the brands had established franchises, those people stayed home as much as the new users stayed home. So we believe a lot of the increased consumption and the stickiness is due to consumer changes in behavior. And as you and I were talking a little bit before, it's really all about whether there's a vaccine or not. The stickiness will come from the fact that if there's gonna be any more work from home economy post COVID than there is pre COVID, that's the stickiness. And we have great categories, whether it's baking breakfast, spices and seasoning, vegetables, both canned and frozen. Those are the places that are gonna continue to benefit. As long as the eye can see that people are going to be working home a little bit more than the past, that means they'll be cooking and eating more at home. We're we're and from a brand standpoint, the brands that have high increases in household penetration and new users, we now have the data to be able to go market to those new users, and that's what we're doing to try to create those stick that stickiness. But a lot of it's gonna be driven by consumer behavior regardless of what we do in terms of whether people are gonna be cooking and eating home at more, and we firmly believe they will be even if there's a vaccine tomorrow, as well as the shift to online. I know personally, I'm, you know, while I would have shopped for paper goods and peanut butter online, I I thought I'd never shop for fresh fruit and vegetables and and meat online, and the companies have made it so easy to do. I may not I may not do it a 100% like I'm doing it now, but I'm not gonna go back to a 100% visiting the store. It's just too darn convenient to do it on my phone thing in the morning or last thing at night, and it's delivered within hours. So it's that type of behavior that I think is long term. Online shopping behavior as well as working from home, cooking from home, those are the things that will create the most stickiness for and and our category really nicely positioned for that. Yeah. You know, B and G among others has discussed consumers looking for, you know, comfort, and brands they know and trust as as part of the reason that, you know, some of these well established brands have been winning market share during the pandemic. There are others that think maybe big brand success is really more tied to simply having advantaged supply chains and really better availability on the shelf right now. I'm curious how you view this dynamic and, you know, if you've seen, let's say, any benefit from certain competitors maybe just not having the supply chain resiliency, and are they beginning to catch up or how how you're seeing that play out? Yeah. I would I would have to say that that and I've been saying in in weekly video kind of broadcast to the organization, we are we are, we are just lucky and blessed with, number one, a portfolio of brands and categories that are right for this time in a very, very difficult time in the dark cloud of the pandemic. Are are we have been fortunate to have the right brands. We also are fortunate to have the right supply chain. And I have to say that as much of our growth was due to a terrific reaction from our supply chain, jumping in early March on many, many ways to keep our employees healthy. We have had no spreading of the virus at work. I think one or two cases out of out of over 3,000 employees. We have kept production, we have kept people safe, which was on our mormon priority. We've kept production strong and ramped up to drive that growth. So I would say that supply chain is a good hefty contributor to our growth. Fascinatingly, not only have we seen big brands grow at the expense of small upstart brands that don't have well mature and well seasoned supply chains, we've been benefiting in some of our larger categories against well seasoned supply chains and have been gaining share as a result. So no one's no one was protected during this. We knock on wood. We we we benefited. So both large and small, we've seen customers come to us and ask for help when other supply chains fail them, both mature and and new. I'd have to say that they're they're that that might, you know, I don't wanna venture a guess, but let's just say half of the success of big brands with supply chain. But there's the other half has got to be through trusted brands. I mean, have consumer learning. We've talked to consumers. You know, when you think about all the all the young adults and millennials, I mean, they're known in our household, our son's college education and senior senior year lacrosse season came to an abrupt end in March. We weren't expecting him home. And so we're seeing millennials are now into all these brands. Millennials are into all these brands because mom's saying, I have if you want hot cereal, I have cream of wheat in the cupboard. I'm not going out shopping for more. Eat what's in the cupboard. So I think all the young adults and millennials were introduced to the old brands because they're home more and eating home more where they weren't before. I know a lot of people, a lot of young adults that are living with their parents during the pandemic, they were off on their own, but they were living in New York or Boston and they decided to leave that and go to the comfort of home because they can be with their family. So I think a lot of this, this stickiness was driven by and this newfound exploration of old brands where these brands, you know, B and G brands are in we're approaching 90% of households. Yeah. And all those households had a lot more people in them that we were already in. And so maybe the households we weren't in are the ones that were left vacant in the Manhattan in Manhattan apartments. Right. Up to the suburbs to visit mom, and that's where all the B and G brands were. Yeah. By the way, knowing that consumption has been so phenomenal across so many of your brands, how has market share for B and G held up? I know it probably differs by brand, and you've got a lot of It could. Yeah. We track that we track that very closely. We last last check, twelve weeks setting, July, we were two thirds of our brands were gaining market share. Many brands just holding our own and a small percentage of our brands losing share. A lot of that was they were growing. They just weren't growing as fast. So we're gaining share in a good healthy portion of our of our brands. Yeah. It's funny. A number of food companies, I don't know if this is the case for B and G at all, but have been losing some share more because they just have been producing all they can, and yet the category is still growing more quickly. So they're losing share even though they're basically manufacturing all they can. So it's, you know, I view that as a share loss. It's a little different than, you know, some competitor comes in, obviously, and there's a structural thing. I don't know if you've you sort of experienced any of that because your some of your categories have grown at pretty heavy levels. Yeah. It's a few of our brands, yeah, remarkable share sales growth, but and losing a little bit of share. So we're not as concerned about that long term as things settle back down. But obviously, we're doing everything we can to expand our supply chain. Really we have been stressing our supply chain quite some time. It was on a two and a half hour call just this morning to to, you know, to look out over the next six months where we're still of 50 brands, we have three or four product categories that are still constrained. And so that's not good enough. We can't live with 85 customer service levels for the next six to nine months. That Right. That's just not, you know, customers won't stand for it. We have to figure out supply solutions. Not as easy, right? We've already we and the industry has sapped up every last ounce of excess supply. We have to come up with more creative solutions than we are. Some of it's gonna be repatriating product into six repatriating product into reinvented sections of some of our own facilities. Some of it will be continued to search for co manufacturing partners to supplement supplement production on products we never produce outside, always produce inside. But if it's not enough, we need more. We wanna meet our customer and consumers' needs. It's funny. We we've obviously focused a lot as investors around the the potential top line opportunity that that could come from that has come and could welcome continually from this crisis. We're hearing many packaged food companies also beginning to talk a little bit about, you know, ultimately taking some of the learnings from this pandemic and thinking about some longer term structural changes on the cost side as a result of all this. So I was hoping maybe you could, provide us sort of your your perspective on this, whether it's, travel, real estate, consulting fees, things of that nature. And then also maybe use as an opportunity to just kind of update us on where sort of B and G's cost productivity plan was sort of pre pandemic and if there are any changes to it as a result of the crisis. Yeah. From from our standpoint, B and G has always run very, very lean. Our SG and A as a percentage of sales are on the very low end of of of other major food companies. So so we don't see you know, it's not like we spend a lot in real estate. Yeah. We'll do the necessary travel that we need to do. We're really taking our lead from from our customers. If they're gonna have virtual meetings, then our cost then our then our salespeople will have to have virtual meetings, and that will save. But I don't think there's gonna be a big margin play. We don't have enough room in our SG and A to have it be a significant driver of improved margins. From our biggest opportunity really is in our cost of goods. We've been on a multiyear effort to save $20,000,000 a year. The only thing the pandemic did for us was just delay a little bit the start of some of our asset rationalization. We've done things in logistics. We've done things in product and packaging. We've done lots of good stuff over the last few years to get to that 20,000,000 over the last year or two. The next step really is to rationalize assets, both repatriating things in and out of our facilities. Some of that's been delayed only because we've just been so focused on producing everything we can possibly produce. So when things calm down a little bit, we'll get back to our next phase of cost productivity. That will be our our way to offset inflation in our cost of goods. That's our largest largest expense. So we we you know, hopefully, we'll get a little bit of margin improvement going forward, but at the very least, we try to use that productivity to offset any inflationary pressures on the on the gross margin line. B and G's sort of longer term guidance, if you will, calls for, call it, stable base business net sales growth, maybe 0% to 2%, EBITDA margins between 18% to 20%, and then the kicker of the M and A that you do historically. And I'm just trying to get a sense of do you think that's still the right way to think about the business longer term? Has the pandemic sort of given you reason to think maybe differently or that the base business portion of that could potentially be a little bit better? And just trying to get your thoughts on that part. Yes. I think from a long term guidance standpoint, that's probably the appropriate way to look at the business. But I really do think that over the near or or medium term, we're going to be in a much more favorable environment for food companies like B and G and for brands like the brands that we have in our portfolio. And so if there were some challenges 2017 for 2019 for the industry, we just think that it's it's you're gonna see a long lasting effect, in many of our brands, many of the channels, many of the ways that people eat at home and and where they're eating. But over the long term, I think that's the appropriate way to look at the business. The company's strategy has not changed at all. This company's value was built through a stable based business with accretive acquisitions, got into a little bit of trouble on the bottom line with rapid growth and a little bit of lumpiness on the bottom line. But over the long term, this company grew sales and earnings 12 and 12 to 13% top and bottom line growth through accretive acquisitions. So what what COVID did was accelerate that cash flow, get the balance sheet in shape so that we can get back to accretive acquisitions. And I would say that while we had a little bit of lumpiness going into the COVID period of whether or not we can actually keep the base business stable, I think now it firms up that base business stability of very, very low digit growth. We're not all of a sudden gonna become a high gross growth food company through the base. We wanna be the high growth food company this company has always been through accretive acquisitions, and COVID just firmed up the base. It firmed up the base volume, certainly firmed up the balance sheet, and now we're ready to roll. And and last year was a great example of that with the acquisition of Clabber Girl. We took that business in in full stride. We had it fully fully integrated within six, seven months and delivered great results. And then bam, COVID hit and we took advantage of all that upside to the business, doing more business than anybody ever predicted on that acquisition. I'm thinking a little bit closer in. The scanner trends show retail sales growth up 20% or so for, B and G through the, let's say, the eight weeks of the quarter. I don't know if that's, like, a fair approximation or if there are some discrete reasons that reported sales might differ, whether it's alternative channels or foodservice piece. And then from a profit standpoint, I think during 2Q, the company noted it expected EBITDA margins in the second half to be roughly in line with year ago levels. Do you still think that's the right way to think about it? Or has elevated demand maybe resulted in better than planned operating leverage? Yes. So I'll be careful around kind of the leading third quarter question around what's the right manufacturer shipment sales growth. But I will point out, you know, we did give pretty good detail when we gave our second quarter results that if you took the average of June growth and July growth, you had, call it, 10%, 30% averages out to be about the 20% that you saw in consumption, that you may see some lumpiness or unevenness, but but generally speaking, we are trending to about those levels, wild card being food service, although it's a small portion of our business. From a margin standpoint, nothing to change. Bruce, just just to be careful from before you get on to margin. But just to be be clear, you can't take the consumption growth of retail and say that's going to be net sales growth. There will be a haircut. Even though we're lower than the average food company, there is a haircut because of declining food service business. Sorry. Yep. But but, Ken, like you said, it's it's a smaller portion of our business than some others have, and so we're benefiting from these trends in our base. But obviously, you're right, you can't ignore it. And then from the margin standpoint, nothing's really changed. Mean, there's a lot of reason why we're seeing elevated sales and why that's turning to elevated EBITDA. When we think about the margins, there are reasons to think margins should be improving with all the operating leverage you're getting. I would remind people that about 50% of our manufacturing is us and about 50% is through co packers, which limits some of that upside. Some of the other part where we truly are really seeing operating leverage and increased margins, there's also a giveback on that because of all the precautions that we're taking in the factories in terms of testing, in terms of quarantining, paying people while they're quarantining, and as well as the incentive pay, getting people coming into the factories and working in the current environment. And so, there are definitely benefits, but there are costs that are going hand in hand with those benefits as well. Got it. Thank you for that. Prior to the pandemic, Green Giant in the frozen space know, appeared to be losing a bit of momentum following a few years of obviously very strong double digit growth and and share gains. And I'm just trying to get a sense if you could remind us of what was driving that sort of relative weakness. What actions have you been able to take to regain the footing knowing that, obviously, during the crisis, things have changed pretty dramatically? So I'm just trying to get a sense of what you know, where where where you were sort of on that key brand heading into the crisis and then where you think you'll be, on the way out. I'm sorry. I had a little noise in the background. Which brand were you asking about? Sure. Green Giant in the frozen vegetable space. So Green Giant in the frozen vegetable space, really, if you look at the long term, Green Giant has been gaining share ever since B and G purchased the brand over the long term. In fact, recently, we had share our our high share ever since we purchased the brand. Hold on a Let me get rid of some of that noise. Sure. Sure. Sorry about that. No problem. So Green Giant was at a high in terms of frozen vegetable share just over the last twelve weeks, since we own the brand, and had consistently been gaining share from the February all the way through mid last year. It was only about the last half of last year and early into this year where we we we lost a little share. And that was designed because we gave up some very, very unprofitable low price promotions on a segment of the business that we we actually have almost to ourselves. We were promoting at a very, very aggressive price point. So there is that period of time where we we gave up very aggressive promotional price points to to optimize our trade spending, and therefore, that turned into share loss. But other than that period of time, since the February 2017, the brand has been gaining share. And no at no time was that share loss period due to weakness in the brand or less than stellar innovation. It was really getting rid of very, very low price promotional volume. And we're past all that, and certainly as soon as we got past that, the business started to grow and COVID hit at the same time. But we won't have that drain from dramatically reduced promotional volume. That was self self inflicted and and expected, and we're past it now ready to continue growing into the future. With with how elevated consumption trends have been, has there been any ability to start to sort of replenish inventory at retail such maybe that the either the gap between shipments and consumption is less moving forward or maybe that shipments even at some point ultimately start to trend ahead of consumption as you kind of get retailers caught up on inventory? All in all, for most of our businesses, our retail retail inventory and consumption out of stocks are in good shape. It's only a handful, just a few of our product lines where retail inventory will be will be soft only because we don't we can't produce any more than we're producing. And we've given up, in some cases, you know, shut off promotion because if we have supply issues, we don't wanna promote and make it worse. In several of the cases, that's driven by businesses that usually have a a seasonality spike in the fourth quarter. Where we're normally building inventory in the third quarter for that fourth quarter spike, but we couldn't build inventory. We were selling everything we can make. So we didn't have a chance to build inventory. Therefore, we can't we can't promote in the fourth quarter at elevated levels like historically. But other than that, we don't see any big differences in retailer inventory, so to speak. Got it. Maybe you could comment a little bit on, broadly speaking, where you see the trend around promotional levels, maybe since the start of the second half. We know that there is probably less of that industry wide through the second quarter just as the pandemic hit and there was no need to incentivize consumers that when you were already selling all you could make and retailers weren't as interested, obviously, in executing in store promotional activity when they're just trying to keep product on the shelf. But maybe how are you seeing that start to trend more recently? We're seeing it coming back more to normal. We'll be at normal promotional levels on most of our businesses. The places where we won't see normal promotional levels are the places where we we we weren't able to get ready for that promotional spike because we've been selling as much as we can. So or making as much as we can sell. So we are seeing promotional activity pick up. The retailers want to promote. They are still very price conscious. Obviously, you know, while everybody's seeing the stock market go crazy, there's still very high unemployment. So being price there's still more shopping in dollar channels, and value is still very important. So while the supply chains can handle it, promotions should go back to normal. Great. And maybe how, if at all, has the pandemic impacted the company's ability to implement innovation? Because I know you've got a of interesting and compelling things in the pipeline. And just curious how it's impacted that, if it has, and sort of where the innovation pipeline looks like moving into the back half of the year. Yeah. In in one of the silver linings in this dark cloud of the pandemic has been the innovation pipeline because we were ready to go with a full slate of innovation this year, and it got delayed. We certainly didn't need the volume from that innovation. So we just gave our r and d and our commercialization people a six to nine month breather, if you will. We did not stop development. So things that were supposed to be launched in the spring of twenty twenty got delayed to the fall of twenty twenty, even the spring of twenty twenty one. Things that was supposed to launch in the fall of twenty, now into '21, things that are in '21 now into '22. So the pandemic basically with this shift of six to nine months or so, it just made our pipeline more robust with no extra effort just because everything was delayed. So we're feeling very good about the pipeline. Our customers received our innovation very well. They're still very excited about it. They're just moving their resets for when they can handle it. The the We'll be ready to ship it when they're ready. So we'll we'll be even more ready to ship it when they're ready. Got it. Here are the last couple. One would be just, you know, a lot of food companies obviously have pulled back through the crisis around SKUs and and sort of tail tail brands. And then, of course, starting some of that starting now to make its way back, of course. But I think most companies feel that it's unlikely that a 100% of these SKUs make it back on the shelf, which is ultimately probably a good thing for everybody involved in in the ecosystem. Where does B and G stand on that, at this stage? Most of what we did was to trim up SKUs to stop producing one to be able to have more capacity for another. So that's really where we focus. In most cases, we'll bring them back, but there will be some SKU rationalization as a result of this, particularly on low margin SKUs that we were making and this has forced us to look more closely at everything. So we'll come out of this with less SKUs. I don't believe it will be a huge factor in our business other than help us just run a little bit better going forward. There are some SKUs, you know, Underwood Devil Hands a great example. There's two sizes, small size and a and a and a larger size. The larger size, the predominant part of the business. We haven't been making a small size for, like, four months. That's to give us a 20% capacity increase on the large size. We think we need that small size. It's an important it's just and it's important size at Walmart. It's an important size with with the dollar channel. It's a it's an entry point size, entry entry price point. So we we we don't wanna kill that skew. We'd rather have it if we can if it doesn't hurt our our situation. And now that Underwood growth is slowing a little bit, we'll we should be able to get back to producing it. Finally, on M and A specifically, has the landscape changed over the last couple months, you know, in terms of what you're seeing, number of of potential deals, the pipeline, if you will? And and I don't know whether this is an opportunity or not for the company to maybe simplify its portfolio of brands. I think there was some some discussion of that admittedly pre pandemic. I don't know how that's that's changed, if at all. Yeah. So so certainly, at the onset of the pandemic, you saw m and a virtually dry up. Right? And and even if you think outside of food, there were some large transactions that were announced and then were pulled. When you think back to what was going on from a behind the scenes in m and a, it was quiet. People who launched processes were trying to keep them alive, but there really wasn't a lot of activity. You are starting to see people dip their toe back in the water. Oh, shoot. So you're you're starting to see people launch things right now. We'll we'll see. I mean, it'll be interesting to see what happens with the large owners of brands around assets that they've historically talked about potentially selling that are, you know, doing very well in the current environment. That's the kind of stuff that we like to buy. And we're a buyer of assets. Our balance sheet is primed and ready to go from an acquisition standpoint. But the deals have to make sense. The price has to make sense. We're gonna continue to be very disciplined as we look at m and a, but but also very focused on it. On the potential divestiture standpoint, we're a financially driven business. And so both buying and being disciplined and potentially selling, if somebody shows up on our door with a with a, you know, very attractive price for a brand, we'll run the math and make make a decision on whether or not that makes sense for us. But over the long term, our goal is to grow through M and A, not through not to shrink through M and A. So we're it's part of our business, part of our DNA where we've created a lot of value. We'll continue to do so. Well, I think that, that does it for for us from a time perspective. I wanna thank you both, Ken and Bruce, for your time today. And, hopefully, we can do this in in person physically next year. And really looking forward to tracking the company's progress as we go through the back part of the year. Thanks so much. Thanks, Andrew. Thank you, Andrew. Yep. Alright. The livestream has concluded. You guys are all set. Great. Thank you both. Thanks so much. Yep. Take care. You you stay safe. Yep. You too. Bye bye.