B&G Foods, Inc. (NYSE:BGS) Q1 2023 Earnings Conference Call May 4, 2023 4:40 AM ET

Company Participants

Michael Bauer - Director, Corporate Strategy and Business Development

Casey Keller - President, Chief Executive Officer and Director

Bruce Wacha - Executive Vice President of Finance and Chief Financial Officer

Conference Call Participants

Hale Holden - Barclays

Carla Casella - JPMorgan

Operator

Good day, and welcome to the B&G Foods First Quarter 2023 Earnings Call. Today's call, which is being recorded, is scheduled to last about 1 hour, including remarks by B&G Foods management and the question-and-answer session.

I would now like to turn the call over to Michael Bauer, Director, Corporate Strategy and Business Development for B&G Foods. Mike?

Michael Bauer

Good afternoon, and thank you for joining us. With me today are Casey Keller, our Chief Executive Officer; and Bruce Wacha, our Chief Financial Officer. You can access detailed financial information on the quarter in the earnings release we issued today, which is available at the Investor Relations section of bgfoods.com. Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to B&G Foods annual report on Form 10-K and subsequent SEC filings for a more detailed discussion on the risks that could impact our company's future operating results and financial condition. B&G Foods undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We will also be making references on today's call to the non-GAAP financial measures, adjusted EBITDA, adjusted net income, adjusted diluted earnings per share and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release. Casey will begin the call with opening remarks and discuss various factors that affected our results, selected business highlights and his not concerning the outlook for the remainder of fiscal 2023. We Bruce will then discuss our financial results for the first quarter of 2023 and our guidance for fiscal 2023.

I would now like to turn the call over to Casey.

Casey Keller

Good afternoon. Thank you, Mike, and thank you all for joining us today for our first quarter 2023 earnings call. First quarter results continued strong pricing recovery against inflationary costs. Adjusted EBITDA increased plus 12.9% versus last year to $82.4 million. Margins improved significantly with adjusted EBITDA as a percentage of net sales at 16.1%, increasing plus 240 basis points from Q1 2022. Excluding items affecting comparability, gross profit as a percentage of net sales improved to 22.4% in Q1 2023, increasing plus 300 basis points versus 19.4% last year. Base business net sales, which excludes net sales from the recently divested Back to Nature brand, were down slightly at minus 1.2% versus Q1 2022, but up substantially plus 3.8% versus the 2-year comparison to Q1 2021. Last year, Q1 sales were elevated, plus 5.4% growth by the higher at-home demand and retailer inventory resulting from the Omicron partial lockdowns in January and February 2022. Some key perspectives on the results, inflation. Q1 inflation across packaging and commodities was above last year but has moderated from Q4 levels. Total fiscal year '23 input costs are projected to remain higher than average cost throughout 2022, particularly in the first half. However, we are seeing declines in key commodities, including soybeans, corn, wheat and fuel versus the highs reached in the middle of 2022. Soybean oil is now trading on the spot market in the $0.50 to $0.55 per pound range relative to the high $0.70 range in late spring 2022. Pricing. In total, pricing realization, including product mix, contributed $63.2 million in Q1 versus Q1 last year, reflecting pricing actions taken across the portfolio in 2022. We implemented new pricing actions in February to recover higher costs on tomatoes, glass and starches, specifically on pasta and taco sauces and baking powder. At this point, we expect that the vast majority of pricing actions are complete to recover expected inflation in 2023. I volume. Q1 sales volumes compared to a relatively high base period in Q1 2022, which experienced higher demand and retailer pipeline behind the Omicron partial lockdowns. Crisco oil volumes also declined as a result of higher elasticities, greater than 1 as the average price point crossed a key $5 per bottle threshold following baking season in Q4. We have now lowered prices in the market to reflect lower soybean all costs, consistent with our commodity pricing approach with customers and expect to return below the key $5 threshold in the back half of the year. Finally, Green Giant volumes continue to reflect the exit of low to no margin dollar channel can business last summer and the discontinuation of low-margin innovation in the Pozen portfolio. Despite these volume declines, Green Giant gross profit dollars and gross profit margin were up substantially in the first quarter. Supply and service. Customer service and fill rates improved during the quarter, reaching over 96% in March and sequentially increasing from 94% to 95% in Q4. Last year, Q1 2022 service levels were less than 90%, impacted by disruptions from the Omicron COVID variant in the supply and distribution network. Spices and seasonings, the higher-margin spices & seasonings business experienced strong growth in Q1 with net sales increasing plus 9.6% versus last year, led by year-over-year growth in DASH, Spice Islands, Foodservice and new growth from license seasoning toppings, including Cinnamon Toast Crunch, Einstein Brothers, et cetera. Service levels and production reliability also improved versus last year with fill rates reaching 96%. Spices & easing is a key platform for future growth and expansion with solid category growth and higher margins relative to the rest of the B&G portfolio. In terms of capital structure, we continue to bring down leverage in the first quarter. Pro forma net debt to adjusted EBITDA before share-based compensation expense is now 7.2x, down from 7.64x at the end of Q4. We believe we are on track to reduce leverage below 7x by year-end, a critical focus in a rising interest rate environment. Bruce will discuss the balance sheet in more detail, but leverage was reduced by lower inventory and working capital and prepaying term loan debt with excess cash flow and the proceeds from the back-to-nature divestiture. As we move forward, we expect to deliver continued year-over-year margin and adjusted EBITDA recovery in Q2 and to some extent in Q3. Inflation is projected to moderate from historic highs in 2022 with some new inflation already covered by executed price actions. We also expect to achieve low single-digit net sales growth behind easier COVID comps, service recovery, restored promotional activity and lower vegetable oil pricing below key thresholds at higher volume elasticity. Further, we are continuing to reshape the B&G portfolio. The sale of the Back to Nature brand to Burl America was completed in early January and is a proactive step to exit the small, fragmented lower-margin snacks portfolio that is outside of the future B&G Foods core. We are actively evaluating other divestiture possibilities to sharpen the portfolio focus and reduce debt. We will keep you updated as plans progress. Finally, the transition to 4 business units: spices and Flavor Solutions, meals, frozen and vegetables and specialty is proceeding well and beginning to drive future performance. As discussed, these units clarify the portfolio focus and future platforms for acquisition and push accountability down to improve management and decision-making. Business unit leadership is working to drive improved margins, better manage supply and demand, build stronger growth and innovation plans and optimized product lines. As previously communicated, we expect to be in a position to share business unit financial performance later this year -- thank you, and I will now turn the call over to Bruce for more detail on the quarterly performance and outlook for the year.