Good afternoon, everybody. We are pleased to once again have B&G Foods here with us at the Global Consumer Staples Conference. B&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&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. With us today to further discuss B&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. As planned, we'll do this as a back and forth in a fireside chat format. Maybe I'll kick it off, guys, with the first question. Really, the first one is, an appropriate place to start is on cash flow and liquidity. For some time now, there's been a concern over B&G's dividend security. Part of this is due to the company's comfort level, frankly, with leverage to begin with. The recent benefits from elevated at-home consumption, given that, can you take us through the company's cash flow outlook, cash flow position, liquidity, and comfort level at this stage with the dividend, just to get that one behind us?
Sure, Andrew. Great question. Obviously, we've had accelerated and elevated sales, which has led to elevated EBITDA and more importantly, elevated cash production. We've long thought 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. 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 12-month basis, we're close to $345 million, $350 million of adjusted EBITDA after non-cash comp is removed from that. We have another $150 million between cash interest, cash taxes, and CapEx, 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 million or so of dividend. We're covering that almost 2x, when you think about it. Really the dividend question, I know it's been asked. We've always been committed to the dividend, 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 6x net debt to EBITDA.
Potentially levels that we're comfortable with. We recognize for equity investors, people like to see a little bit lower. We've got a stated guidance target of four and a half to five and a half times net debt to EBITDA over the long term. We're less than five times net debt to EBITDA at the end of the second quarter. 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. We also paid down our term loan by about $75 million 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 first of all, many have described this crisis as the greatest CPG trial experiment of our lifetime. I guess, what can you tell us about, thus far, how it's playing out for B&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 said publicly and privately that we think as a consumer marketer, new households is like the fountain of youth for a brand. We work for years to try to get a point increase on household penetration. We have detailed data. We have over 50 brands, as you know, many of them small. We have detailed data on 28 of our brands. 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.
We have several of our businesses that up to 50% of the growth, but only 50% of the growth through new users, the other 50% of the growth through existing users. That makes sense because the brands had established franchises. Those people stayed home as much as the new users stayed home. We believe a lot of the increased consumption and the stickiness is due to consumer changes in behavior. 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 going to be any more work from home economy post-COVID than there is pre-COVID, that's the stickiness. We have great categories, whether it's baking, breakfast, spices and seasoning, vegetables, both canned and frozen.
Those are the places that are going to 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. 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 that stickiness. A lot of it's going to be driven by consumer behavior, regardless of what we do, in terms of whether people are going to be cooking and eating home 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, while I would have shopped for paper goods and peanut butter online, I thought I'd never shop for fresh fruit and vegetables and meat online. The companies have made it so easy to do. I may not do it 100% like I'm doing it now. I'm not going to go back to 100% visiting the store. It's just too darn convenient to do it on my phone first thing in the morning or last thing at night. It's delivered within hours.
Yeah.
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. Our categories are really nicely positioned for that.
Yeah. B&G, among others, has discussed consumers looking for comfort in brands they know and trust as part of the reason that 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 advantage supply chains and really better availability on the shelf right now. I'm curious how you view this dynamic and 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 are you seeing that play out?
Yeah, I would have to say that, and I've been saying in weekly video kind of broadcasts to the organization, we are just lucky and blessed with, number one, a portfolio of brands and categories that are right for this time in a very difficult time in the dark cloud of the pandemic. 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 ways to keep our employees healthy. We have had no spreading of the virus at work. I think one or two cases out of over 3,000 employees. We have kept people safe, which was on our number one priority. We've kept production strong and ramped up to drive that growth.
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. No one was protected during this. Knock on wood, we benefited. Both large and small, we've seen customers come to us and ask for help when other supply chains failed them, both mature and new. I'd have to say that might, I don't want to venture a guess, but let's just say half of the success of big brands was supply chain. The other half has got to be through trusted brands. We have consumer learning. We've talked to consumers.
When you think about all the young adults and millennials, I mean, I know in our household, our son's college education and senior year lacrosse season came to an abrupt end in March. We weren't expecting him home. We're seeing millennials are now into all these brands. Millennials are into all these brands because Mom's saying, "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.
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.
Yeah.
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. I think a lot of this stickiness was driven by, and this newfound exploration of old brands, where these brands, B&G brands, we're approaching 90% of households.
Yeah.
All those households had a lot more people in them that we were already in. Maybe the households we weren't in are the ones that were left vacant in Manhattan apartments.
Right.
Out to the suburbs to visit Mom. That's where all the B&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&G held up? I know it probably differs by brand. You've got a lot of them.
Very good. Yeah.
Broadly speaking.
We track that very closely. At last check, 12 weeks ending end of July, 2/3 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.
Yeah.
We're gaining share in a good, healthy portion of our brands.
Yeah. It's funny, a number of food companies, I don't know if this is the case for B&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. They're losing share even though they're basically manufacturing all they can. I view that as a share loss, like a little different.
Yeah
Some competitor comes in, obviously, and there's a structural thing. I don't know if you sort of experienced any of that, because some of your categories have grown at pretty heady levels.
Yeah. A few of our brands, yeah, remarkable sales growth, and losing a little bit of share. We're not as concerned about that long term.
Yep
As things settle back down, obviously we're doing everything we can to expand our supply chain. We have been stressing our supply chain quite some time. I was on a two-and-a-half-hour call just this morning to look out over the next six months where we're still. Out of 50 brands, we have 3 or 4 product categories that are still constrained, that's not good enough. We can't live with 85% customer service levels for the next 6-9 months.
Right.
Customers won't stand for it. We have to figure out supply solutions.
Yeah.
Not as easy, right? We and the industry has sapped up every last ounce of excess supply, so we have to come up with more creative solutions, and we are. Some of it's going to be repatriating product into reinvented sections of some of our own facilities. Some of it will be continued search for co-manufacturing partners to supplement production on products we never produced outside, always produced inside. If it's not enough, we need more. We want to meet our customer and consumers' needs.
It's funny. We've obviously focused a lot as investors around the potential top-line opportunity that has come and could well come continually from this crisis. We're hearing many packaged food companies also beginning to talk a little bit about 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. I was hoping maybe you could provide us your perspective on this, whether it's travel, real estate, consulting fees, things of that nature. Also maybe use it as an opportunity to just update us on where B&G's cost productivity plan was pre-pandemic and if there are any changes to it as a result of the crisis.
Yeah. From our standpoint, B&G has always run very, very lean. Our SG&A as a percentage of sales are on the very low end of other major food companies. It's not like we spend a lot on real estate. We'll do the necessary travel that we need to do. If they're going to have virtual meetings, then our salespeople will have to have virtual meetings, and then we'll save. I don't think there's going to be a big margin play. We don't have enough room in our SG&A to have it be a significant driver of improved margins. Our biggest opportunity really is in our cost of goods. We've been on a multi-year effort to save $20 million 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 million 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. When things calm down a little bit, we'll get back to our next phase of cost productivity. That will be our way to offset inflation in our cost of goods. That's our largest expense.
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 gross margin line.
Got it. B&G's sort of longer-term guidance, if you will, calls for, call it stable base business net sales growth, maybe 0%-2%, EBITDA margins between 18%-20%, and then the kicker of the M&A that you do historically. 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 given you reason to think maybe differently, or that the base business portion of that could potentially be a little bit better? Just trying to get your thoughts on that part.
Yeah. I think from a long-term guidance standpoint, that's probably the appropriate way to look at the business.
I really do think that over the near or medium term, we're going to be in a much more favorable environment for food companies like B&G and for brands like the brands that we have in our portfolio. If there were some challenges 2017 through 2019 for the industry, we just think that you're going to see a long-lasting effect in many of our brands, many of the channels, many of the ways that people eat at home and where they're eating. Over the long term, I think that's the appropriate way to look at the business.
Yeah. The company strategy has not changed at all. This company's value was built through a stable base 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. Over the long term, this company grew sales and earnings 12%-13% top and bottom line growth through accretive acquisitions. What COVID did was accelerate that cash flow, get the balance sheet in shape so that we can get back to accretive acquisitions. I would say that while we had a little bit of lumpiness going into the COVID period of whether or not we could 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 going to become a high growth food company through the base. We want to be the high growth food company this company has always been through accretive acquisitions, COVID just firmed up the base. It firmed up the base volume, certainly firmed up the balance sheet, Now we're ready to roll. 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 integrated within six, seven months and delivered great results. 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. Scanner trends show retail sales growth up 20% or so for B&G through the, let's say, the first eight weeks of the quarter. I don't know if that's a fair approximation or if there are some discrete reasons that reported sales might differ, whether it's alternative channels or food service piece. 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?
Yeah. I'll be careful around the leading third quarter question around what's the right manufacturer or shipment sales growth. I will point out, 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. 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.
Just before you go on, Bruce, just to be careful before you get onto margin. Just to 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.
Yeah.
Sorry.
Yep. No, Ken, like you said, it's a smaller portion of our business than some others have, and so we're benefiting from these trends in our base. Obviously, you're right, you can't ignore it.
Yeah.
Then from the margin standpoint, nothing's really changed. There's a lot of reason why we're seeing elevated sales and why that's turning into 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. 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.
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 appeared to be losing a bit of momentum following a few years of obviously very strong double-digit growth and share gains. I'm just trying to get a sense of, 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? I'm just trying to get a sense of where you were 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.
Yeah. With Green Giant in the frozen vegetable space, really, if you look at the long term, Green Giant has been gaining share ever since B&G purchased the brand over the long term. In fact, recently, we had our high share ever since we purchased the brand. Hold on a second. Let me get rid of some of that noise.
Sure.
Sorry about that.
No problem.
Green Giant was at a high in terms of frozen vegetable share just over the last 12 weeks, since we owned the brand, and had consistently been gaining share from the first part of 2017, all the way through mid last year. It was only about the last half of last year and early into this year where we lost a little share. That was designed because we gave up some very unprofitable, low price promotions on a segment of the business that we actually have almost to ourselves. We were promoting at very aggressive price points. There is that period of time where we gave up very aggressive promotional price points to optimize our trade spending, and therefore, that turned into share loss. Other than that period of time, since the first part of 2017, the brand has been gaining share.
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 low priced promotional volume. 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. We won't have that drain from dramatically reduced incremental promotional volume that was self-inflicted and expected, and we're past it, and now ready to continue growing into the future.
With how elevated consumption trends have been, has there been any ability to start to replenish inventory at retail, such maybe that 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 get retailers caught up on inventory?
All in all, for most of our businesses, our retail inventory and consumption and out of stocks are in good shape. It's only a handful, just a few of our product lines where retail inventory will be soft, only because we can't produce any more than we're producing. We've given up, in some cases, shut off promotion, because if we have supply issues, we don't want to promote and make it worse. In several of the cases, that's driven by businesses that usually have a seasonality spike in the fourth quarter. Well, 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 promote in the fourth quarter at elevated levels like historically.
Other than that, we don't see any big differences in retail or 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 was 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. 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 weren't able to get ready for that promotional spike because we've been selling as much as we can. Making as much as we can sell. We are seeing promotional activity pick up. The retailers want to promote. They are still very price-conscious. Obviously, while everybody's seeing the stock market go crazy, there's still very high unemployment.
Right.
There's still more shopping in dollar channels, and value is still very important. While the supply chains can handle it, promotions should go back to normal.
Great. Maybe how, if at all, has the pandemic impacted the company's ability to implement innovation? I know you've got a lot 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 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&D and our commercialization people a six to nine-month breather, if you will. We did not stop development. Things that were supposed to be launched in the spring of 2020 got delayed to the fall of 2020, even the spring of 2021. Things that were supposed to launch in the fall of 2020, now into 2021. Things that are in 2021, now into 2022. The pandemic basically, with the shift of six to nine months or so, it just made our pipeline more robust with no extra effort.
Yep.
Just because everything was delayed. 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.
Yeah.
We'll be ready to ship it when they're ready.
Yeah.
We'll be even more ready to ship it when they're ready.
Got it. Maybe the last couple. One would be just a lot of food companies obviously have pulled back through the crisis around SKUs and sort of tail brands. Then, of course, some of that's starting now to make its way back, of course. I think most companies feel that it's unlikely that 100% of these SKUs make it back on the shelf, which is ultimately probably a good thing for everybody involved in the ecosystem. Where does B&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. 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. 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, Underwood Deviled Ham's a great example. There's two sizes, there's small size and a larger size. The larger size is the predominant part of the business. We haven't been making the 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 size at Walmart. It's an important size with the dollar channel. It's an entry point size, entry price point. We don't want to kill that SKU. We'd rather have it if it doesn't hurt our situation. Now that Underwood growth is slowing a little bit, we should be able to get back to producing it.
Finally, on M&A specifically, has the landscape changed over the last couple of months, in terms of what you're seeing, number of potential deals, the pipeline, if you will? I don't know whether this is an opportunity or not for a company to maybe simplify its portfolio of brands. I think there was some discussion of that, admittedly pre-pandemic. I don't know how that's changed, if at all.
Certainly at the onset of the pandemic, you saw M&A virtually dry up, right? 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&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.
Interesting.
You're starting to see people launch things right now. We'll see. 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 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. The deals have to make sense. The price has to make sense. We're going to continue to be very disciplined as we look at M&A, 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 very attractive price for a brand, we'll run the math and make a decision on whether or not that makes sense for us. Over the long term, our goal is to grow through M&A, not to shrink through M&A. We're focused. It's part of our business, part of our DNA, where we've created a lot of value, and we'll continue to do so.
Great. Well, I think that does it for us from a time perspective. I want to thank you both, Ken and Bruce, for your time today. Hopefully we can do this in person, physically, next year. 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. All right. The live stream has concluded. You guys are all set. Great. Thank you both.
Thanks so much.
Yep. Take care.
You stay safe.
Yep, you too. Bye-bye.