B&G Foods Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the B&G Foods First Quarter 2024 Earnings Call. Today's call is being recorded and is scheduled to last about 1 hour, including remarks by B&G Foods Management on the question and answer session. I would now like to turn the call over to A. J. Schwab, Senior Associate, Corporate Strategy and Business Development for B&G Foods.

Operator

A. J?

Speaker 1

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.

Speaker 1

We refer you to B&G Foods' most recent Annual Report on Form 10 ks and subsequent SEC filings for more detailed discussion of the risks that could impact our company's future operating results and financial conditions. 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, segment adjusted EBITDA, adjusted net income, adjusted diluted earnings per share, adjusted gross profit, adjusted gross profit percentage 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 the various factors that affected our results, selected business highlights and his thoughts concerning the outlook for the remainder of fiscal 2024.

Speaker 1

Bruce will then discuss our financial results for the Q1 2024 and our guidance for fiscal 2024. I would now like to turn the call over to Jason.

Speaker 2

Good afternoon. Thank you, A. J, and thank you all for joining us today for our Q1 2024 earnings call. In my remarks, I will address 3 topics on the call today. 1st, an overview of Q1 results.

Speaker 2

Bruce will provide more detail and color later in the presentation. 2nd, the reporting of segment results for the first time by our 4 business units. And 3rd, an update on our portfolio reshaping plans and activity. Quarter 1 results. 1st quarter net sales of $475,200,000 and adjusted EBITDA of $75,000,000 were slightly below expectations.

Speaker 2

Base business net sales adjusted to exclude the year over year impact of lower Crisco oil pricing decreased by approximately 17,000,000 dollars or 3.4% compared to the year ago period. Much of the decline within our foodservice and industrial businesses across spices and seasonings, Maple Grove Farms Syrups, baking powders and oils and Ortega cheese and other sauces. The declines reflect an overall slowdown in out of home traffic and volumes compared to fiscal year 2023 trends. Net sales to retail customers across the business units were slightly down, approximately 1.5%, with relatively flat volumes offset by a modest increase 90 basis points in trade and promotional spending. Adjusted EBITDA for the Q1 decreased by $7,400,000 compared to the Q1 of 2023.

Speaker 2

The divestiture of the Green Giant U. S. Shelf stable product line was responsible for approximately $1,500,000 of the year over year decline. Adjusted EBITDA as a percentage of net sales for the 15.8%, largely in line with the 16.1% achieved in the prior year period. On a consolidated basis, gross profit as a percentage of net sales for the quarter was up 60 basis points versus last year.

Speaker 2

We continue to see moderating inflation and some favorability in transportation and warehousing. Although these were offset by increased G and A costs for insurance and salary wages as well as higher advertising and marketing investment in the quarter versus last year. Segment reporting. This is the Q1 P&G Foods is reporting results by operating segments, providing greater visibility into the underlying performance of the company's business units. The segments represent the 4 operating business units that recently reorganized the company structure into.

Speaker 2

Business units are now fully established, running their businesses and actively managing the business unit P and Ls. Across the 4 business units, we maintain a lean corporate structure, approximately 4% to 5% of net sales to maintain oversight and efficiency in shared transactions and operations, I. E. Sales, distribution, order processing, etcetera. The 4 business units are Spices and Flavor Solutions.

Speaker 2

This segment represents approximately 20% of our consolidated net sales and has our highest segment adjusted EBITDA as a percentage of net sales at 30%. B&G Foods is a leader in the spices and seasoning category with key brands Dash, Weber Grilling, Spice Islands, Accent, etcetera. During the Q1, spices and flavor solutions net sales were depressed by a significant decline in food service business with key distributors and customers. Sales to retail customers were up slightly in the quarter. We are also launching a new line of licensed seasoning and grilling blends under the Four Sixes brand, which is the new show and ranch featured in the Yellowstone television franchise.

Speaker 2

Meals. The Meals segment represents approximately 25% of our consolidated net sales with segment adjusted EBITDA as a percentage of net sales of 21.4%. The key components of this business unit are Mexican Meals, Ortega Las Palmas and Hot Breakfast, Cream of Wheat, McCann's Maple Grove Farms Syrups. We see growth opportunities in Mexican meal preparation as consumers expand their Mexican cuisine options in the home. The 1st quarter meal segment net sales decline was driven by lower foodservice sales, while net sales to retail customers were roughly flat.

Speaker 2

Specialty. The specialty segment represents approximately 33% of consolidated net sales with segment adjusted EBITDA as a percentage of net sales of approximately 24%. The primary focus of this business unit is baking staples, about 70% of business unit sales, with leading number 1 brands such as Crisco Oil and Shortening, Clabber Girl Baking Powder, Grandma's Molasses, etcetera. Baking both from scratch and mix has remained relatively stable over time with more consumers learning to bake from scratch during COVID lockdowns. The specialty segment's key objective is to maintain strong stable cash flow and margins.

Speaker 2

Specialty segment adjusted EBITDA was up slightly in the Q1. Frozen and vegetables. The frozen and vegetables segment represents approximately 22% of our consolidated net sales with the lowest segment adjusted EBITDA margin as a percentage of net sales of 7.5%. The frozen and vegetables business unit includes the U. S.

Speaker 2

Green Giant frozen business, the Canada Green Giant frozen and canned businesses, a major portion of our company's consolidated Canada sales and the LaSueur canned vegetable product line. The primary focus of our frozen vegetable business unit is to improve gross profit margins, strengthen the innovation pipeline, streamline the frozen distribution network and grow volumes in our Irapuato, Mexico and Yuma, Arizona manufacturing facilities. 1st quarter frozen and vegetable segment net sales reflect overall softness in the frozen vegetables category with much of the segment adjusted EBITDA decline year over year attributed to the divestiture of the U. S. Green Giant can business last November.

Speaker 2

Portfolio shaping. D&G Foods has continued and will accelerate the reshaping and restructuring of our portfolio to sharpen focus, improve margins and cash flow and maximize future value creation. The divestiture of the Green Giant U. S. Canned vegetable business was completed last fall following the sale of the Vaxa Nature brand in January 2023.

Speaker 2

As previously disclosed, we have been evaluating and working on divestitures that represent between 10% to 15% of total company net sales. That process on smaller brands is proceeding and we expect to possibly sell some assets before the end of fiscal year 2024. Beyond those efforts, the larger decision on whether to remain in frozen long term has been an open question. After careful analysis, we are placing the frozen and remaining canned vegetable businesses under strategic review and are evaluating a possible divestiture and sale of some or all of the assets in the frozen and vegetable business unit. Green Giant remains a strong brand with broad awareness and distribution and the frozen vegetables category is on trend with long term health and dietary trends.

Speaker 2

However, I believe the frozen vegetable business may not be the right fit with B&G Foods' focus and capabilities, particularly since we have no plans to add more assets in the frozen portfolio, given the opportunities in our core shelf stable businesses and overall capital constraints. More to come as we further evaluate our options and plans. Thank you. And I will now turn the call over to Bruce for more detail on the quarterly performance and outlook for the year.

Speaker 3

Thank you, Casey. Good afternoon, everyone. As a reminder and before I get into our results, we sold our Green Giant U. S. Shelf stable product line last fall, and so we are lapping the Q1 2023 results that had that business.

Speaker 3

The Green Giant U. S. Shelf stable line had $14,600,000 of net sales and approximately $1,000,000 to $2,000,000 of contribution in last year's Q1. In the Q1 of 2024, we generated $475,200,000 in net sales, dollars 75,000,000 in adjusted EBITDA, adjusted EBITDA as a percentage of net sales of 15.8 percent and $0.18 in adjusted diluted earnings per share. Base business net sales, which excludes the Green Giant U.

Speaker 3

S. Shelf stable product line, decreased by $22,000,000 or 4.4 percent in the Q1 of 2024 compared to the year ago period. The decrease in base business net sales was driven by approximately $5,000,000 from the execution of our Crisco pricing model that reflected a decrease in soybean oil costs and allowed us to pass this benefit back to consumers in the form of lower pricing. Approximately $10,000,000 was from lower foodservice and industrial net sales across multiple business segments and brands. And the remaining $6 plus 1,000,000 of the decrease was partially driven by lower net sales to our retail customers that were largely the result of modest increases in promotional trade spend and relatively flat volumes.

Speaker 3

Gross profit was $108,900,000 for the Q1 of 2024 or approximately 22.9 percent of net sales. Adjusted gross profit, which excludes the negative impact of the $1,000,000 of acquisition divestiture related expenses and non recurring expenses, included in the cost of goods sold during the Q1 of 2024 was $109,900,000 or 23.1 percent of net sales. Gross profit was $114,200,000 for the Q1 of 2023 or 22.3 percent of net sales. Adjusted gross profit, which excludes the negative impact of $700,000 of acquisition divestiture related expenses and non recurring expenses included in the cost of goods sold during the Q1 of 2023 was $114,900,000 or 22.4 percent of net sales. While we are continuing to see input cost inflation with regards to material goods and our factory production, the cost increases have been modestly flat thus far this year and offset in part by continued moderation in certain costs like soybean oil and tomatoes that saw the greatest increases in 2022 and 2023.

Speaker 3

Separately, we are also continuing to see favorability in our logistics costs, although these benefits are much more modest on a rate basis than they were a year ago. Selling, general and administrative expenses increased by $1,900,000 or 4 percent to $48,600,000 for the Q1 of 2024 from $46,700,000 for the Q1 of 2023. The increase was composed of increases in general and administrative expenses of $2,000,000 consumer marketing expenses of $1,600,000 and acquisition, divestiture and non recurring expenses of $100,000 partially offset by decreases in selling expenses of $1,000,000 and warehouse expenses of $800,000 Expressed as a percentage of net sales, SG and A expenses increased by approximately 110 basis points or 10.2 percent for the Q1 of 2024 as compared to 9.1% for the Q1 of 2023. The increase in general and administrative costs was largely driven by modest inflation in wages, insurance and other professional services. As I mentioned earlier, we generated $75,000,000 in adjusted EBITDA or 15.8 percent of net sales in the Q1 of 2024 compared to $82,400,000 or 16.1 percent in the Q1 of 2023.

Speaker 3

Approximately $1,000,000 to $2,000,000 of the decrease in adjusted EBITDA was the result of the divestiture of the Green Giant U. S. Shelf stable product line, which we sold last fall. The remainder was largely driven in proportion by a decline in our net sales. Net interest expense was $37,800,000 in the Q1 of 2024 compared to $39,400,000 in the Q1 of 2023.

Speaker 3

The decrease was primarily attributable to in average long term debt outstanding and the accelerated amortization of deferred financing costs related to long term debt prepayments during the Q1 of 2023, partially offset by slightly higher interest rates on our long term debt compared to the Q1 of 2023. Depreciation and amortization was $17,200,000 in the Q1 of 2024 compared to $18,000,000 in the Q1 of last year. We had a net loss of $40,200,000 or 0.51 dollars per diluted share and adjusted net income of $14,400,000 or $0.18 per diluted share in the Q1 of 2024 compared to net income of $3,400,000 or $0.05 per diluted share and adjusted net income of $19,100,000 or $0.27 per diluted share in the Q1 of last year. The net loss and diluted loss per share in our GAAP results were driven by a write down of goodwill that was allocated to our frozen and vegetable business unit as part of our reorganization into 4 operating segments and as described further in our press release and 10 Q. Casey already described the units, and I recommend investors review our press release and 10 Q for additional information.

Speaker 3

I would like to now touch on the results. Net sales for the Specialty segment decreased $7,900,000 or 4.9 percent for the Q1 of 2024 to $154,700,000 from $162,600,000 in the year ago quarter. The decrease was primarily due to lower Cresco pricing, driven by softening commodity costs, coupled with declines in foodservice and industrial sales. Specialty segment adjusted EBITDA increased by $700,000 or 1.9 percent for the Q1 of 2024 compared to the Q1 of 2023. Net sales for the Meals segment decreased $1,900,000 or 1.6 percent for the Q1 of 2024 to $120,000,000 from $121,900,000 for the Q1 of 2023.

Speaker 3

The decrease was primarily due to lower net sales in Foodservice. The Meal segment adjusted EBITDA decreased by $600,000 or 2.3% compared to the Q1 of 2023, which was in line with the decrease in net sales. Excluding the impact of the divestiture of the Green Giant U. S. Shelf stable product line, which we sold last fall, net sales of the frozen and vegetables segment decreased by $6,700,000 or 6%.

Speaker 3

Although increased promotional trade support helped grow our Bag in a Box or BIB product line during the quarter, some of the other parts of the frozen business fared less well. Frozen and Vegetable segment adjusted EBITDA decreased by $2,700,000 compared to the prior year period. Approximately $1,000,000 to $2,000,000 of that decline was due to the divestiture of the Green Giant U. S. Shelf stable product line, with the remainder driven by the decline in net sales.

Speaker 3

Net sales for the Spices and Flavor Solutions segment decreased by $5,400,000 or 5.4 percent in the Q1 of 2024 to $95,600,000 from $101,000,000 in the Q1 of 2023. The decrease was primarily due to lower net sales in Foodservice. The Spices and Flavor Solutions segment adjusted EBITDA decreased $2,000,000 or 6.6 percent in the Q1 of 2024 compared to the Q1 of 2023. Now I'd like to spend some time on our cash flows and balance sheet. We generated $35,100,000 in net cash from operations in the Q1 of 2024 compared to 69 $500,000 in net cash from operations generated in the Q1 of last year.

Speaker 3

Our net cash from operations was actually quite strong despite the year over year decrease when compared to the Q1 of 2023. While we are continuing to bring inventory down, our net cash from operations benefited from a more modest decrease in inventory of $8,200,000 during this year's Q1, while net cash benefited from a decrease in inventory of $28,200,000 in the year ago period. As a reminder, last year's Q1 benefited from a sell down of the seasonal pack for the Green Giant U. S. Shelf stable business that we divested last fall.

Speaker 3

We finished the Q1 of 2024 with approximately $560,600,000 of inventory compared to $569,000,000 in inventory at the end of 2023 $700,900,000 at the end of the Q1 of 2023. The timing of interest payments also affected our cash flows for the quarter. The new senior secured notes that we issued last fall had an interest payment in Q1 of this year, while the 2025 unsecured notes, which were then partially refinanced, have an interest payment in Q2. We reduced debt by a little bit more than $10,000,000 during the Q1 of 2024, and we have now reduced net debt by approximately $250,000,000 since the end of the Q1 of 2023. Our pro form a adjusted net leverage ratio, as defined in our credit agreement, was approximately 6.35 times at the end of the Q1 of 2024, in line with our year end results and significantly better than the 7.2 times at the end of last year's quarter.

Speaker 3

We expect to continue to reduce our net debt and pro form a adjusted net leverage ratio throughout fiscal 2024 and beyond as we diligently work toward achieving our long term target of 4.5x to 5.5x. As noted in our earnings press release, we are revising our fiscal 2024 guidance to $1,955,000,000 to $1,985,000,000 for net sales $300,000,000 to $320,000,000 for adjusted EBITDA and $0.75 to $0.95 for adjusted diluted earnings per share. We believe that the revised guidance better reflects the emerging challenges in foodservice and a more gradual recovery in net sales to retail customers with improvement expected in the second half of this year. We do expect continued volume improvement throughout the year in our sales to retail customers and less of a drag on net pricing as we will lap our increased trade promotional spending efforts beginning in Q3 of this year. Additionally, we expect for full year 2024 interest expense of 145 dollars to $150,000,000 including cash interest expense of $138,000,000 to $143,000,000 depreciation expense of $47,500,000 to $52,500,000 amortization expense of $20,000,000 to $22,000,000 an effective tax rate of 26% to 27% and CapEx of $35,000,000 to $40,000,000 We expect to use approximately 50% of our excess cash to pay our dividend and the remaining 50% to pay down debt.

Speaker 3

Now I'll turn the call back over to Casey for further remarks.

Speaker 2

Thank you, Bruce. In closing, our Q1 results demonstrated consistent margins and moderating inflation with declines in net sales driven by foodservice trends and increased promotional spend. We expect foodservice trends to be soft through the first half of the year with a corresponding pickup in at home consumption trends in the back half. We are also accelerating efforts to reshape and clarify the portfolio through the reporting of business unit segments and the strategic evaluation of the remaining Green Giant frozen and canned vegetable business in the U. S.

Speaker 2

And Canada. This concludes our remarks. And now we would like to begin the Q and A portion of our call. Operator?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer And your first question is from William Reuter from Bank of America. Please ask your question.

Speaker 4

Good afternoon. My first question, it sounds like really the majority of the weakness is in the foodservice components of the business. What percentage of that does foodservice represent of total sales?

Speaker 2

About 14% on average. In an average quarter, it would be about 14% of our sales, foodservice.

Speaker 4

Okay. And I guess, you made some commentary about expectations that we'll kind of see improving trends in retail as the year goes on. Is that on a unit base or on a dollar basis? And I guess, is that from conversations with retailers or just expectations about economic recovery?

Speaker 1

So there's a couple of things going

Speaker 3

on, on the retail side of the business. The first one is volumes have stabilized, right? And so we're seeing in consumption kind of flattish volumes. We believe there will be a pickup over time, particularly if you see continued softness in food service. And so that's part 1 and that's probably not as strong as we initially expected it to be at this point, but it's hanging in there fine.

Speaker 3

And then the other part, pricing, which in this case is promotional trade spend and people are relaying that spend back into the business. It's still below pre pandemic levels, but it's inching higher. And we really started to dial that up last year beginning in Q3. And so we're lapping Q1 and Q2 this year where we had very big pricing benefits last year and now a higher level of trade spend. But we'll be lapping a lot of that activity that we layered in last year as we work towards the back half of this year.

Speaker 4

Got it. And then just lastly for me. I don't think you've disclosed this thus far, but the frozen and canned veggie business that remain in the U. S. And Canada that you're now evaluating, can you share what the sales or EBITDA of those are?

Speaker 2

It's essentially it's in the segment reporting. It's essentially the almost the entire frozen and vegetables business unit.

Speaker 3

So a little bit less than $400,000,000 in annual net sales. We haven't disclosed profits for the full year yet. We're just rolling on the segment profits as we execute quarter by quarter.

Speaker 2

So we reported basically $105,000,000 of net sales for the frozen vegetables business unit in the Q1.

Speaker 4

Got it. I guess were the 1st quarter margins representative of what they are for the year or is there seasonality?

Speaker 3

We disclosed the Q1 margins. We haven't disclosed for the remainder of the year And part of this is we're not we haven't operated the business on a full year on these business units. And so this is an evolution for us and we're share the quarterly information as the year rolls through.

Speaker 2

Yes. It's not too far up being reasonably represented within a certain range.

Speaker 1

Got it. Okay. That's all for me. Thank you.

Speaker 5

Thank

Operator

you. Your next question is from Michael Lavery from Piper Sandler. Please ask your question.

Speaker 6

Thank you. Good afternoon.

Speaker 7

Just was curious how

Speaker 6

to think about Canada if hypothetically you were to divest frozen and vegetables. Is there enough scale excluding that piece of the business? Is there some way that how you think about one gets tied to the other? Where does sort of Canada get left after a potential sale?

Speaker 7

Yes.

Speaker 3

We've had a Canadian business that predated Green Giant. We continue to have one after this transaction. Obviously, Green Giant is a significant portion of the sales in Canada, but we still expect to have a Canadian business.

Speaker 2

We would probably not maintain the same infrastructure.

Speaker 6

Okay. Makes sense. That's helpful. And just at a high level on the portfolio, you've historically had a good track record of buying cash generative businesses that seemed at least a little bit category agnostic. You've identified now how frozen may not fit and you've got a segment view that's a little bit different.

Speaker 6

Maybe just at the total portfolio high level, is there sort of an end game of how you want to evolve? Is taking on a little bit more of a growth focus or still sort of value cash generative focus or somewhere in between, maybe just the latest on just the strategy of the portfolio in its entirety?

Speaker 2

Yes. So of the 3 remaining business units, if we were to sell off the frozen vegetables business unit, I mean, I think there is 3 different profiles here. So spices and seasonings, we said we wanted that to be a high margin, low single digit growth business and we believe that we can get there. The issues this quarter were really more around the foodservice business, but we think for the year we're going to be on track to driving growth in that business and maintaining strong margins. The meals business, we also want to see some low we want to see low single digit growth on the top line and we're getting there.

Speaker 2

Again, it was a little bit hampered by the foodservice trends this quarter, but our goal is to get that into low single digit growth as well. The specialty business, which is largely focused around baking staples, we want to just we want to that business is largely in a maintain mode and making sure that we maintain cash flows, stable margins, etcetera, Not expecting a lot of growth out of that portfolio, but stability over time. And if you think about those three business units, they fit our capabilities. We've got some scale, whether it's in spices and seasonings, meals with a Mexican focus or baking, we've got some scale. I think we could add acquisitions to those platforms and do good things with them and maintain strong cash flow.

Speaker 2

And in the cases of the spices business unit and the meals business unit, I think we can drive growth even with acquisitions over time. So it's a little bit of a mixed bag, but that's how we think about those three business units. Frozen vegetables, in the long term, I think frozen vegetables is a decent category to be in. The frozen category has historically been a good category, has not recently. The trends recently have been a little tougher, but it is on trend.

Speaker 2

It is vegetables. I just don't believe that frozen is the right fit for our capabilities and focus going forward.

Speaker 6

Okay, really helpful color. Thanks.

Operator

Thank you. Your next question is from William J. Mortensen from Jefferies. Please ask your question.

Speaker 6

Good afternoon. When we look at the flat volume with a modest step up in promotion, Is that the consumer just kind of coming to expect the promotional cadence to increase looking for value? And what's the private label response been for you guys?

Speaker 2

I think the step up in promotion and as Bruce said, it's really going to be probably more of a first half phenomenon because we did begin to step up promotion activity or promotion spend in the back half of last year. I think it's 2 things. 1 is a little bit more competitive promotion environment out there. I think you're probably hearing that from other players too. It's not higher than it was pre pandemic, but it's getting back to kind of a normal cadence of where it was there.

Speaker 2

In some categories, it's there and some categories, it's still a little bit lower than it was pre pandemic. But we're seeing the resumption of normal promotion activity that's been kind of gradually building over the last 18 months to 24 months. The second thing is that in that extreme pricing environment, we're also trying to manage in a couple of our categories the gap to private label. So like in for instance, in Green Giant frozen vegetables, in our core bags and bag in a box, we want to maintain a certain kind of gap or price gap to private label. So we've been kind of refining and honing that and large of that we've been doing that with a little bit of trade spend to get to the right price points, either in promotion or in everyday price.

Speaker 2

So I think it's really those 2 things, kind of a resumption of normal promotion activity in the environment. And second, just managing our price gaps in a couple of categories, principally Green Giant Frozen Vegetables and Crisco, although Crisco were kind of just passing through the change in oil price up and down. But we watch that gap pretty closely in Crisco as well, particularly on the shortening side.

Speaker 6

Okay. And then when we look at the other potential divestitures, that 10% to 15% of sales, What's the kind of the time horizon you mentioned, hopefully get some of those done? Just wanted to get a sense of the scale or magnitude that you're looking at here?

Speaker 3

Yes. I think probably less is more here. We're working on a couple of things, but M and A is just always tricky to predict from a timing or exactly what. So a little bit stay tuned and it's probably things that would make sense after announced, assuming that there were anything just like the Back of Nature and the canned Green Giant business in the U. S.

Speaker 2

But we are working on 1 or 2 smaller divestitures that we would like to move along at some point. But that's a much smaller scale, not even the 10% to 15%, probably even less than that beyond the larger Green Giant discussion we had today about putting it under review.

Speaker 6

Thank you very much guys. Appreciate it.

Operator

Thank you. Your next question is from Robert Moskow from Janney Cowen. Please ask your question.

Speaker 8

Hey, thanks for the question.

Speaker 9

I just want to clarify that the back half of the year, you're assuming just easier comparisons on your pricing. You're not expecting any kind of change in the consumer behavior like a stronger consumer that will boost volumes?

Speaker 3

Just wanted to make sure that's primary. Yes, Rob, on the margins, maybe yes, but not in a big way. Okay.

Speaker 5

And then

Speaker 10

the follow-up

Speaker 2

I think for the most part, we expect easier comps. We are historically, what's happened when foodservice traffic has gone down, you see a little bit of in home consumption pickup, but we're not counting on very much.

Speaker 9

Right. Okay. And then the other question was, I thought I heard you say that frozen is $400,000,000 in sales, maybe I misheard. But then the divestiture that you're evaluating is 10% to 15% of sales, which is less than $400,000,000 Yes.

Speaker 2

I see 2 different things. I think before we were talking about smaller divestitures that represented about 10% to 15%, which would have been things like Back to Nature, etcetera. And we're still working on a small list of those within that 10% to 15%. The news today is that we're considering a larger divestiture beyond that 10% to 15% pruning that would be the Green Giant or the frozen vegetables business.

Speaker 9

Okay. So I mean that when you're said and done, like it could be as much as 30% of the portfolio that you exit.

Speaker 2

Could be.

Speaker 9

Yes. Okay. And one last question.

Speaker 2

Probably a little probably a little less than that, Rob, but yes.

Speaker 9

Okay. And the last question is, within foodservice, are there any specific channels to kind of call out restaurants versus institutions or schools that are causing the decline? Or is it just kind of a broad foodservice decline?

Speaker 2

We're just seeing a broad decline in traffic and orders coming from we largely go through distributors. We do have 1 or 2 direct customers that we again, I don't want to specifically talk about some of our customers that we know they've had traffic declines and other things. But we're kind of following the general industry trend that you've probably seen about foot traffic being down a lot of out of home establishments.

Speaker 9

Yes, I agree. Okay, thank you.

Operator

Thank you. Your next question is from Farla Visalia from JPMorgan. Please ask your question.

Speaker 10

A couple of follow ups. On the foodservice, is one of your segments more concentrated in foodservice than another or are there any that don't really participate in foodservice?

Speaker 2

I think spices and seasonings is probably our largest concentration, but we also have some concentration in the meal segment with the Ortega sells cheese sauces, enchilada sauces, salsas, etcetera in that peppers. And then in our specialty segment, we do sell oils, baking powders and other things into foodservice. But the largest concentration would be in spices followed by these those other two business units.

Speaker 10

Okay. And so not much the frozen isn't so much?

Speaker 3

Not so much.

Speaker 2

No, not very much.

Speaker 10

Okay. Are you going to recast your put recast sales on the website? Or I mean, we can kind of, I guess, sum them up given the brands that you broke out in your old reporting, but have you or will you recast it?

Speaker 3

So this would be going forward, we would be disclosing the segment results, sales and actually profitability, but not the brand sales. Okay.

Speaker 10

But it looks to me like if I just add up the different brands that are included in Frozen, you said just under $400,000,000 of net sales for the year. I'm only getting like 365. I'm wondering if you're going to recast like the historical into the new segment reporting.

Speaker 3

Sorry. So Green Giant is just really the Green Giant brand plus the store.

Speaker 2

Canada. So Canada frozen and canned vegetable business and the L'Osor business.

Speaker 10

Okay. Okay, great. And then on the trade spend, you mentioned that it's kind of getting back to more normal levels. Is that retailers pressing more for it? Or is it being more driven by competition from the brands trying to get better space, new products, etcetera?

Speaker 2

I think it's a little bit of both. I think everybody's kind of going back to normal competitive levels from where they were in a pandemic. So the price is higher, so there's a little bit more pressure to have some promotional discounts to help consumers get back in stores and drive volume. So it's a little bit of both.

Speaker 10

Okay. And

Speaker 2

We kind of expected that that was we also expected that that was going to happen at some point because we've been seeing it gradually increase over time. And I think we've been saying that over the last couple of quarters, yes.

Speaker 10

Yes. I think that's pretty consistent. We were just trying to get more of a sense whether it's coming from the retailers pulling it or the pulling it or the manufacturers pushing it. And it sounds like from others we've talked to as well that it's both. Just on the if you were to sell frozen, how is that business, it's a different supply chain kind of?

Speaker 10

I mean is that integrated at all with your existing network for distribution or facilities?

Speaker 3

So from a manufacturing standpoint, no. We've got 2 main manufacturing facilities for Green Giant, which is one in Mexico and one in Arizona. A fair amount of that is still co packed. So there might be overlap in some relationships, but it's completely different from the manufacturing standpoint.

Speaker 2

No, actually, distribution logistics and manufacturing is completely distinct from the rest of the business, from the rest of the company.

Speaker 10

Okay. Okay, great. And then working capital, just you did give some color on it and I noticed that your payable days are a little bit higher. Is that a timing issue or is there any other working capital timing issues we should consider for the remainder of the

Speaker 3

year? I think it will all balance out. The couple of pieces that will be a little bit different, right, as we exited the Green Giant can business. And by the way, I think maybe your confusion in rolling up the numbers, if you're looking at our K for the sales. We sold part of the shelf stable business, but not all of it, right?

Speaker 3

We sold the U. S. Part of it, of the shelf stable business, called Green Giant, but not the Canada piece. So that's probably just a small gap.

Speaker 10

Got you. Okay, great. That's all I had. Thank you.

Speaker 3

Thank you.

Operator

Thank you. Your next question is from Hale Holden from Barclays. Please ask your question.

Speaker 7

Thank you. I had 2. On the foodservice decline, I missed it if you gave sort of an aggregate percentage of what that was down across the portfolio, but it sounded like mid single digits. Is that the way to

Speaker 3

think about it?

Speaker 2

No, it's actually more like somewhere like 12%, 13%.

Speaker 7

Right, right. So 12%, 13% the decline is 12% to 13%?

Speaker 2

Yes. And it's about 14% of our sales.

Speaker 7

And then for the guide, as you took the reduction for the year, are you just sort of running that forward? Or do you assume that it stabilizes towards the back half of the year?

Speaker 3

It's probably going to be a little bit challenged throughout the year, hopefully not that bad. The real way to look at our top line guidance is we have a Q1 rate, so we know what that is. And then if you were to take the remainder of our business for the last three quarters of the year, As a reminder, the Green Giant can business that we sold was about

Speaker 2

$65,000,000

Speaker 3

of sales and you strip that out. There's another $10,000,000 of pricing around Crisco and normalization, we think. And so you take that core base business for the remaining 3 quarters of the year, and we're assuming up or down percent give or take.

Speaker 7

Okay. My second question was when companies put divisions up for review, lots of different things can happen over a long or short time horizon, but this is an asset that you've been thinking about for some time, I think. And I was wondering, in a sale process, what inning are you in? Or I don't want to pin you down on a time line, is it short, medium, long term kind of process to get to the other side of it?

Speaker 3

I'm going to politely dock that question and just say M and A is unpredictable. The commentary in the press release says we're evaluating strategic review of the business and we'll move forward and update as appropriate.

Speaker 2

We have been working on the review of the business before now.

Speaker 7

Okay. I mean, I gave you so many buckets first, but I understand. Thank you.

Operator

Thank you. Your next question is from Rob Dickinson from Jefferies. Please ask your question.

Speaker 5

Great. Thanks so much. Bruce, just curious, we were talking about the divestment potential of Green Giant Frozen, probably not a complete shock here. We've talked $400,000,000 in revenue, the margin profile. And then let's say like maybe sort of it's unpredictable, there could be another 10% or smaller brands, etcetera.

Speaker 5

But like at some point, the EBITDA does kind of add up a little bit relative to just what you're paying on the dividend.

Speaker 3

And I

Speaker 5

feel like it always comes up with B and G and also leverage. So I'm just curious like as we all think about kind of the portfolio reshaping and divestment potential, like how do you kind of want us then to be thinking about just overall capital structure if you were to sell these specific brands and businesses, clearly you get the cash in, that's multiple contingent. But at the same time, you would I guess, that Terry still have like less free cash flow generation absent future acquisitions. So kind of be comprehensive in the question, just kind of give you an opportunity to kind of talk about capital structure a little bit. That's all I have.

Speaker 5

Thanks.

Speaker 3

Yes. And I'm going to talk a little bit of that other than to say we are committed to a dividend. We are talking about potentially a couple of smallish divestitures and a potential larger one. Certainly, that would accelerate from a capital structure or deleveraging and bring us down closer to that 4.5 times to 5.5 times that we want to get to. And as part of that thinking through proceeds and what the right capital structure looks like, I think it's a little bit early to say exactly what that will be and when, but we are committed to a dividend and we're very much contributed to bringing our leverage down.

Speaker 2

All right.

Speaker 5

Good enough. I'll pass it on. Thank you, sir.

Speaker 2

Yes.

Operator

Thank you. Your next question is from David Palmer from Evercore. Please ask your question.

Speaker 8

Hi. Yes, I'm curious just on the announced strategic review and potential sale. It does feel like to Rob's point before, it does feel like there's a long time coming and for you to put it under review now. I'm just wondering why this communication now? And is there something about the timing that seems right for you to do this method of selling it now in this announcement?

Speaker 8

And then separately, I just wonder if you've done the pro form a math, how much better of a company would B and G be, not just with this the canned and the rest of the canned and the frozen business, but also the sale of the 10% to 15% that you're also contemplating sale. Like how much better of a company would this be? What does that do to pro form a maybe historic revenue growth rates and margin structure?

Speaker 3

Sure. So a couple of things in there, Brian. And part 1, this is our Q1 with our new business unit or segment results. We've been talking about getting to this stage for some time and sort of Casey has made a point as he came on board talking about the strategy and how he wants to run the business and grow the business going forward and what areas we want to invest in and what areas are maintained and drive cash. And so this is a natural culmination of that reorg of the business into segments in our first time reporting segment results.

Speaker 3

And I think the whole concept here is improving the business. And so you're asking the right questions. Obviously, we're not in a position to disclose the outcome, but certainly you can see by the margins, we will improve our margin profile. From an inventory standpoint. This is a more inventory and working capital.

Speaker 3

Intensive business, a little bit more seasonality, less so since we already got rid of the can business, but more seasonality in the working capital. And we certainly would anticipate accelerating our deleveraging of the business. And at the end of the day, we want to get back to strong commitment to the dividend, using those free cash flows for a combination of paying a dividend and reducing leverage and going back to acquiring businesses that make sense for us and fit in our portfolio with a different strategy for each business unit that Casey's outlined.

Speaker 2

I mean, I think in simple terms, we want to get to a company that's capable of growing at 1%, maybe 2% on the top line. We want to get to a company that has closer to a 20% EBITDA margin. We want to get to a company that has stronger cash conversion. And we want a company with clear platforms that we can acquire on and drive value. And that's what we're trying to do And that's what this announcement and discussion is today.

Speaker 2

How do we get to that? We're pretty clear in those 3 other business units that we have platforms. We're pretty clear that we can get to that kind of performance that we're talking about in terms of growth and margins. And this, I think, is just the culmination of a lot of work to say what's the right structure long term for us to go back and acquire and build.

Speaker 3

Green Giant is obviously a great brand, it's iconic. At a point in time, it was one

Speaker 5

of the

Speaker 3

fastest growing brands in the grocery store. It's just very different from a lot of the other things that we own from a profiles standpoint. And we want to be a focused business as Casey said.

Speaker 8

And I want to just ask a follow-up. Thank you. That's all great color by the way. Thank you. I wanted to follow-up on the foodservice side.

Speaker 8

I mean the industry was obviously pretty lousy in restaurants in the Q1. Volume or traffic was down 2% as an Q1. Your number, I think you said down 12%, 13% or so. That's obviously not equivalent. But how much worse in a volumetric basis than the industry were you?

Speaker 8

And where did why would it be worse? I'm not really sure.

Speaker 2

I think it's just we see traffic numbers at least from our customer base a little bit lower than what you just quoted. So I think this is all really timing about people adjusting inventories. I mean, think about spices, right? So how much people are maintaining an inventory and our distributors, etcetera. So I just think it's a timing issue.

Speaker 2

It's reflecting the general slowdown. I'm going to we're going to keep watching it to see what we think the longer term trend is. But I think we're going to have and we have a tough comp, I think, in the Q1 versus last year. But we think we'll be down in the second quarter, probably a little bit better in the 3rd and the 4th based on the trend analysis we're seeing.

Speaker 8

Yes. I mean, I guess you probably over index some players that had a really rough. I mean, there were some chains out there that had rough going and I'll maybe offline We

Speaker 2

have 1 or 2 chains that we deal with directly that had much worse numbers. So it is what it is.

Speaker 3

The other part of it is some of this some

Speaker 2

of our

Speaker 3

food services markets through large distributors and sometimes that can be a little bit lumpy as opposed to following some trend.

Speaker 8

Yes, I think but I think that's going to be the story. That stuff you're talking about, there's much more math there than there will be for the industry trend is my comment back on that.

Operator

Thank you. Your next question is from Carla Gossala from JPMorgan. Please ask your question.

Speaker 10

Hi. I just had a couple of follow ups. I think I'm not sure if you said this in your prepared remarks, but I think you paid down $22,000,000 of the term loan B with the Green Giant proceeds in 4th quarter and there was another payment coming in Q1. Was that is that do I have that correct? I was assuming another $30 something 1,000,000 in Q1 or was there a payment?

Speaker 3

So there are 2 the way it works through our covenants and now that we've got the senior secured notes, there's got to be a payment to the term loan and then an offer to the new senior secured note holders. And then those new senior secured note holders don't have to take that payment. If they don't, it goes to the term loan. We kind of detail that in our Q in the subsequent events.

Speaker 10

So

Speaker 3

essentially, fair point to say, take what we paid down on the term loan and assume that essentially doubles.

Speaker 10

Okay. And in the Q, will the exact numbers on how big the term loan is?

Speaker 3

Yes. It's about $44,000,000 in total is what we needed to pay down. So again, half of that went to term loan investors right away. On the senior secured notes, very little came back to us. So it'll be more towards the term loan.

Speaker 3

The notes are trading well above par. So as expected, someone's not going to take that money back at par when it's trading at whatever 103, 104.

Speaker 10

Right. So when do you make that second term loan payment with whatever is left?

Speaker 3

In the Q2.

Speaker 10

Okay. Okay. So it wasn't made in 1st. That's what I was checking.

Speaker 1

It was

Speaker 3

not made in the first. No, early days of the second quarter.

Speaker 10

Okay, great. Thank you. That's all I had.

Operator

Thank you. There are no further questions at this time. That concludes the question and answer session for today. Ladies and gentlemen, the conference has now ended. Thank you all for joining.

Operator

You may all disconnect.

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Earnings Conference Call
B&G Foods Q1 2024
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