B&G Foods Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the B&G Foods, Inc. 2nd Quarter 2024 Financial Results Conference 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 A. J.

Operator

Schwab, Senior Associate, Corporate Strategy and Business Development for B&G Foods. 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 under 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 a more detailed discussion of 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, 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.

Speaker 1

Casey will begin the call with opening remarks and discuss various factors that affected our results, selected business highlights and his thoughts concerning the outlook for the remainder of fiscal 2024. Bruce will then discuss our financial results for the Q2 of 2024 and our guidance for fiscal 2024. I would now like to turn the call over to Casey.

Speaker 2

Good afternoon. Thank you, A. J, and thank you all for joining us today for our Q2 2024 earnings call. Q2 results. 2nd quarter net sales of $444,600,000 and adjusted EBITDA of $64,000,000 were in line with expectations.

Speaker 2

Excluding Crisco, whose net sales were impacted by lower net pricing to reflect a decrease in soybean oil costs, Base business net sales decreased by approximately 1.5% compared to the year ago period. Base business trends improved relative to the 1st quarter, but we continue to experience softer trends in the center of the store consistent with the rest of the industry. Foodservice sales also declined 3%, but much less than in Q1 and more consistent with overall restaurant traffic patterns. Net sales for the highest margin Spices and Flavor Solutions business unit increased by 4.9% versus last year. Q2 adjusted EBITDA of $64,000,000 decreased by $4,500,000 compared to the Q2 of 2023.

Speaker 2

The Green Giant U. S. Shelf stable product line represented approximately $2,000,000 of the year over year decline with foreign exchange from Mexico operations on the Green Giant frozen business representing another $2,000,000 Adjusted EBITDA as a percentage of net sales for the 2nd quarter was 14.4%, down slightly from the prior year period. In quarter 2, we continued to see moderating inflation and some favorability in transportation and warehousing. Corporate central expenses were also down in quarter 2 versus last year, reflecting a moderation in insurance and other fixed costs.

Speaker 2

Segment reporting. As of the Q1, B&G Foods is reporting results by operating segments, providing greater visibility into the underlying performance of the company's 4 operating business units. Spices and Flavor Solutions. 2nd quarter net sales increased 4.9 percent with segment adjusted EBITDA up 5.9% versus the Q2 of fiscal year 2023. This segment remains B and G Foods' highest segment adjusted EBITDA as a percentage of net sales.

Speaker 2

B and G Foods is a leader in spices and seasonings and we continue to see healthy trends in the overall category. Foodservice sales declines moderated this quarter to reflect overall restaurant trends. We also launched the new line of licensed seasoning and grilling blends under the Four Sixes brand featured in the Yellowstone TV franchise. Overall customer service levels have been restored from some isolated issues in fiscal year 2023. Meals.

Speaker 2

The key components of this business unit are Mexican Meals, Ortega Las Palmas and Hot Brefix, Cream of Wheat, McCann's Maple Grove Farms Syrups. The Meals segment increased quarter 2 segment adjusted EBITDA by 3.9%, although net sales were down approximately 5.5%. We have made good progress on controlling costs and driving productivity in this segment. Skinnygirl salad dressings continued high growth behind new items, increased capacity and expanded distribution. Ortega net sales were impacted by competitive activity from Taco Bell in the taco category, although we have a strong pipeline of channel and product innovation in the back half of this year.

Speaker 2

Food service sales in syrup were also down behind weak trends in a major syrup customer. Customer service levels have remained strong at over 99 percent. Specialty. The Specialty segment's key objective is to maintain strong, stable cash flow and profit dollars with a primary focus on 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. Based on our Crisco commodity pricing model, quarter 2 net sales for specialty were down mostly behind lower soybean oil pricing versus last year reflected through to customers.

Speaker 2

We believe that soybean oil prices have largely stabilized in the near term and expect that the level of year over year decline will decrease in the back half. Specialty segment adjusted EBITDA was down modestly 3%, reflecting slight delays in getting some customers to reflect lower oil pricing on all Crisco SKUs, which has now been rectified. The Specialty segment continues to deliver strong customer service at 98.5%. Frozen and vegetables. The frozen vegetables business unit includes the U.

Speaker 2

S. Green Giant frozen business, the Canadian Green Giant frozen and canned businesses, a major portion of our company's consolidated Canada sales and LaSueur canned vegetable product line. Net sales excluding the impact of the U. S. Green Giant can divestiture were down 2.3%, an improvement from the 1st quarter trend but still sluggish behind negative overall category trends.

Speaker 2

The premium price LaSueur Petitpees can business is showing strong growth in Q2 year to date versus last year. Frozen and Vegetables segment adjusted EBITDA was down significantly, but reflected the loss of the U. S. Green Giant shelf stable business $2,000,000 and the impact of foreign exchange, another $2,000,000 from the transfer of finished goods to the U. S.

Speaker 2

And Mexican pesos. This segment remains our lowest segment adjusted EBITDA margin business. This fall, we plan to launch a strong innovation pipeline of veggie ramen and premium sides. Customer service levels have remained strong in this segment. Portfolio shaping.

Speaker 2

B&G Foods is continuing 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 Back to Nature brand in January 2023. As discussed last quarter, we are conducting a strategic review of the frozen and remaining canned vegetable businesses for a possible divestiture and sale of some or all of the assets in the frozen and vegetables business unit.

Speaker 2

Green Giant remains a strong brand with broad awareness and distribution and the frozen vegetables category is on trend with health and dietary trends. It just may not be the right fit with B&G Foods' focus and capabilities, particularly since there are no plans to add more assets in the frozen portfolio given the opportunities in our core shelf stable businesses and overall capital constraints. As previously disclosed, we have been evaluating working on other smaller divestitures that represent around 10% of total company net sales. That process with some lesser brands is moving forward. Thank you.

Speaker 2

And I will now turn the call over to Bruce for more detail on the quarterly performance and outlook for the remainder of 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 Q2 of 2023 results, which included Green Giant U.

Speaker 3

S. Shelf stable net sales of $13,700,000 and approximately $2,000,000 of contribution. In the Q2 of 2024, we generated $444,600,000 in net sales, approximately $64,000,000 in adjusted EBITDA adjusted EBITDA as a percentage of net sales of 14.4 percent and $0.08 and adjusted diluted earnings per share. Base business net sales, which excludes the Green Giant U. S.

Speaker 3

Shell Stable product line, decreased by $11,300,000 or 2.5 percent in the Q2 of 2024 compared to the Q2 of 2023. $1,800,000 or 0.4 percentage points of the base business net sales decline was driven by lower net pricing. Dollars 9,300,000 or just under 2 percentage points of the decline was driven by decreased volumes and a little bit less than $200,000 of the decline was driven by unfavorable FX. Net sales of our Crisco brand decreased by $4,600,000 for the Q2 of 2024 as compared to the Q2 of 2023, primarily as a result of our commodity pricing model for the brand, which drove a decline in net pricing of approximately $6,500,000 to reflect lower soybean oil commodity costs, partially offset by an increase in volume of approximately $2,000,000 Excluding the Crisco brand, base business net sales decreased by $6,700,000 or 1.5% in the Q2 of 2024 compared to the Q2 of 2023. Gross profit was $92,000,000 for the Q2 of 2024 or approximately 20.7 percent of net sales.

Speaker 3

Adjusted gross profit, which excludes the negative impact of $1,200,000 of acquisition divestiture related expenses and non recurring expenses included in cost of goods sold during the Q2 of 2024 was $93,200,000 or 21 percent of net sales. Gross profit was $102,300,000 for the Q2 of 2023 or 21.8 percent of net sales. Adjusted gross profit, which excludes the negative impact of $400,000 of acquisition divestiture related expenses and non recurring expenses included in cost of goods sold during the Q2 of 2023 was $102,700,000 or 21.9 percent of net sales. While we are continuing to see input cost inflation with regards to material costs across our basket of inputs and in our factories, the cost increases have mostly been modest thus far this year. Helping to mitigate those cost increases, our continued favorability in some of the areas that saw the most extreme input cost inflation in 20222023 such as soybean oil, cans and logistics as well as through our continuous improvement efforts and cost savings initiatives in our factories.

Speaker 3

Selling, general and administrative expenses decreased by $4,800,000 or 9.9 percent to $43,100,000 for the Q2 of 2024 from $47,900,000 for the Q2 of 2023. The decrease was composed of decreases in consumer marketing expense of $3,400,000 selling expenses of $1,900,000 and warehousing expenses of $100,000 partially offset by an increase in general and administrative costs of $600,000 Expressed as a percentage of net sales, selling, general and administrative expenses improved by 0.5 percentage points to 9.7% for the Q2 of 2024 as compared to 10.2% for the Q2 of 2023. As I mentioned earlier, we generated approximately $64,000,000 in adjusted EBITDA or 14.4 percent of net sales in the Q2 of 2024 compared to $68,500,000 or 14.6 percent in the Q2 of 2023. Approximately $2,000,000 of the decrease in adjusted EBITDA for the quarter was the result of the divestiture of the Green Giant U. S.

Speaker 3

Shelf stable product line, which we sold last fall. An additional $2,000,000 or so of the adjusted EBITDA decline resulted from the negative impact of foreign currency on our cost of goods sold for our Green Giant frozen business that were manufactured in Mexico. The remainder of the decline was largely driven by the decline in our net sales, a modest increase in our raw material costs and some negative mix. Net interest expense was $37,800,000 in the Q2 of 2024 compared to $35,800,000 in the Q2 of 2023. The increase was primarily due to higher interest rates on our long term debt during the Q2 of 2024 compared to the Q2 of 2023, partially offset by a reduction in average long term debt outstanding during the Q2 of 2024 compared to the Q2 of 2023.

Speaker 3

The Q2 of 2024 net interest expense also includes $500,000 of non cash expense due to the accelerated amortization of financing fees that resulted from the early retirement of approximately $22,000,000 principal amount of long term debt during the quarter, whereas the year ago period includes an $800,000 gain on extinguishment of debt. Depreciation and amortization was $17,300,000 in the Q2 of 2024, which is in line with the $17,300,000 in the Q2 of last year. We had net income of $3,900,000 or $0.05 per diluted share and adjusted net income of $6,600,000 or $0.08 per diluted share in the Q2 of 2024 compared to $10,600,000 or $0.15 per diluted share and adjusted net income of $10,700,000 or $0.15 per diluted share in the Q2 of last year. Adjustments to our EBITDA and net income are described further in our earnings release. Now I'd like to touch on the results by business unit.

Speaker 3

Net sales for Specialty decreased by $7,200,000 or 4.7 percent in the Q2 of 2024 to $146,600,000 from $153,800,000 in the Q2 of 2023. The decrease was primarily due to lower Cresco pricing, driven by decreased commodity costs, coupled with modest declines in volumes across the rest of the business unit in the aggregate, which were offset in part by higher Cresco volumes. Specialty segment adjusted EBITDA decreased by $1,000,000 or 3.1 percent in the Q2 of 2024 compared to the Q2 of 2023. Net sales for meals decreased by $6,300,000 or 5.5 percent in the Q2 of 2024 to $107,900,000 from $114,100,000 for the Q2 of 2023. The decrease was primarily due to lower volumes across the business unit, partially offset by a modest increase in net pricing.

Speaker 3

Meal segment adjusted EBITDA increased by $900,000 or 3.9 percent compared to the Q2 of 2023. Excluding the impact from the divestiture of the Green Giant U. S. Shelf stable product line, which we sold last fall, net sales for frozen and vegetables decreased by $2,400,000 or 2.6% compared to the Q2 of 2023. Frozen and Vegetables segment adjusted EBITDA decreased by $7,000,000 compared to the Q2 of 2023.

Speaker 3

Approximately $2,000,000 of the decline was due to the divestiture of the Green Giant U. S. Shelf stable product line, approximately $2,000,000 from the negative impact of foreign currency and the remainder from the decrease in net sales, increases in material costs and some unfavorable product mix. Net sales for spices and flavor solutions increased by $4,600,000 or 4.9 percent in the Q2 of 2024 to $98,500,000 from 93.9 $1,000,000 in the Q2 of 2023. The increase was primarily due to higher volumes across the business unit.

Speaker 3

Slices and Flavor Solutions segment adjusted EBITDA increased by $1,500,000 or 5.9% in the Q2 of 2024 compared to the Q2 of 2023. Now moving on to our balance sheet. As you likely saw, we were busy in the capital markets this summer. In late June, we launched a 3 part financing effort, which included a $475,000,000 revolver, a

Speaker 4

a $475,000,000 revolver, a $450,000,000 term

Speaker 3

loan and a $250,000,000 add on to our existing senior secured notes due 20.28. The transactions priced in late June, but did not close in late June. The transactions priced in late June, but did not close until early July and thus are not reflected on the face of our 2nd quarter financial statements. Instead, they will be reflected in our Q3 financial statements. Further details regarding the refinancing transactions have previously been disclosed by press release and 8 ks filings and are described in the footnotes to the financial statements that we filed earlier today as part of our 10 Q.

Speaker 3

After giving effect to the recently completed refinancing and our planned repurchase or redemption by the end of fiscal 2024 of our remaining $265,000,000 of 5.25 percent notes due 2025, which we expect to fund with cash from operations and revolver draw, we will have successfully pushed into the future the maturity dates for the majority of our long term debt with our nearest maturity being our 5.25% senior notes due September 2027. And finally, as we noted in our earnings press release, we are revising our fiscal 2024 guidance to $1,945,000,000 to $1,970,000,000 for net sales, dollars 300,000,000 to $315,000,000 for adjusted EBITDA and $0.70 to $0.90 for adjusted diluted earnings per share. We believe that the revised guidance better reflects the continued industry wide challenges in consumer activity, which has dampened volumes in both retail consumption and foodservice channels. 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 lap our increased trade promotional spending in Q3 of this year. Our net sales guidance is based on our first half twenty twenty four net sales of approximately $920,000,000 and projected base business net sales growth for the second half of twenty twenty four, which excludes approximately $36,000,000 of 20 23 net sales from the Green Giant U.

Speaker 3

S. Shelf stable business, in a range of approximately negative 2% to plus 5% plus 0.5%. Excuse me. Additionally, we expect full year 2024 net interest expense of $150,000,000 to $155,000,000 including cash interest expense of 143 $1,000,000 to $148,000,000 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 $30,000,000 to $35,000,000 Over the long term, we continue to expect to use approximately 50% of our excess cash to pay dividends and the remaining 50% to pay down debt. Now I will turn the call back over to Casey for further remarks.

Speaker 2

Thank you, Bruce. In closing, B&G Foods is laser focused on the few critical priorities. 1, improving the base business net sales trends of the core business to the long term objective of +1 percent to 2 percent 2, reshaping the portfolio for future growth, stability, higher margins and cash flows as well as structuring key platforms for future growth and 3, reducing leverage below 5.5 times through divestitures and excess cash flow to facilitate strategic acquisitions. Our 2nd quarter results demonstrated improving trends from the Q1 with base business net sales, excluding Cresco, moderating at minus 1.5% and foodservice sales showing more consistent declines with restaurant industry trends. We expect the gradual improvement to continue in the back half.

Speaker 2

Further, we are prioritizing efforts to reshape and clarify the portfolio and are actively reviewing and working on possible divestitures, including our ongoing strategic review of our frozen and vegetables business. This concludes our remarks and now we would like to begin the Q and A portion of our call. Operator?

Operator

Thank And our first question will come from Andrew Lazar with Barclays. Please go ahead.

Speaker 5

Good afternoon, Casey and Bruce.

Speaker 2

Good afternoon, Andrew.

Speaker 5

How are you doing? Spices and seasonings have been as a category one of the sort of better highlights, if you will, or better growing categories in the sort of the center of the store. You're seeing some of the benefits of that as well. The theory is as more consumers look to do a little more scratch cooking and purchase items around the perimeter of the store or maybe as they look to sort of stretch the food budget, they need to flavor what they cook. And in your results, I guess you're seeing some of that similar trend, right?

Speaker 5

Spice and seasonings have been strong. Some of the meals and center store parts of the portfolio for you like others have been a bit weaker. Is that what you're seeing sort of drive that dynamic? Or are there other things that play there? And then how would you

Speaker 2

I mean, we see some of the yes, no, we're that is what we're seeing in our business right now. And I think it's tied to what you mentioned. We see growth in the perimeter store or in the fresh or the fresh produce or the fresh proteins. And we know that spices and seasonings is one of the ways that people flavor prepare that. And so we've seen that kind of flavor solutions kind of part of the market continue to be strong based on its kind of correlation to the perimeter sales.

Speaker 2

And we've seen more weakness in the center store kind of prepared food market, which you referenced in our meals. So I think people have and then in terms of baking, we've seen scratch baking stay relatively stable over time. So people learn to bake in the pandemic and they've continued that habit. It's not growing, but it's staying stable. And so our shortening baking powder business and everything has been pretty consistent.

Speaker 2

The fluctuations in that business are all around the commodity pricing on Prisco behind soybean oil. So yes, I think that is what we're seeing right now in our business. But from our standpoint, if people begin to make more fresh food at home, we make enough in terms of the things that flavor it or enable people to bake from scratch that will ride just fine in that portfolio.

Speaker 5

And then you're operating a lot of different categories obviously in the store and some are going to be more promotional than others by nature, others less so. I guess could you characterize what you're sort of seeing broadly in the promotional environment? It sounds like you're expecting less of a drag from price primarily due to lapping some of the Crisco pricing actions. But maybe outside of that, what are you seeing from sort of a promotional perspective that gives you, I guess, some confidence that pricing can be less of a drag as you go into the back half of the year?

Speaker 2

So I mean, I think beyond just the Crisco pricing differential year over year, which we expect to not be as significant in the back half as it was in the first half. We started to return to sort of not quite but almost pre pandemic promotional levels last year at the end of Q3. So we begin to lap that in Q3 and Q at the end of Q3 and Q4 of this year. And we don't see the need to increase from where we moved to last year in terms of a rate spend or promotional depth. So what we're saying is we don't expect to have a promotional dip in the 3rd and 4th quarters that would show us spending at a higher promotion rate than we did last year.

Speaker 5

Last thing real quick, and there's probably not much more you can say on it. But in terms of the strategic review around Frozen, I guess how is that progressing or have you seen more or less similar amount of interest perhaps than you might have expected? Anything that you can say around it, understanding that there's sensitivity there? Thanks so much.

Speaker 3

Yes. And Andrew, I think the sensitivity is we try not to comment on M and A. I think as we discussed on our last call because of the size of Green Giant and the kind of the name recognition that it made sense for us to at least disclose that we were evaluating the process. But our goal is to not get into a quarterly update on where we are in the process. Just too fluid, it's early in the process and there's a lot of things going on in the world.

Operator

Thanks. Our next question will come from William Reuter with Bank of America. Please go ahead.

Speaker 6

Good afternoon. My first question, inventory has continued to decline on a year over year basis. Is there opportunity to reduce your inventory levels further over the next handful of quarters or into next year?

Speaker 3

So certainly on a year over year basis, you see it in the balance sheet. We significantly reduced our inventory from where it was at the beginning of last year. And so we're going to have favorability for a good portion of this year. As we get into the back half of the year, our expectation is to still drive favorability, but a lot of the easy lifting is probably done, but very much we expect to continue to reduce inventory from that kind of post pandemic level. Okay.

Speaker 3

And then You

Speaker 2

see the continuous improvement in our inventory levels. We'll show that, but more at a continuous improvement level versus the big year over year decline driven by exiting the canned vegetable business.

Speaker 6

Got it. And then similarly there was destocking by your foodservice customers earlier this year. Has that process now been completed and you feel like your sales trends will align with their kind of sell through and what we're kind of seeing more broadly from foodservice?

Speaker 3

We think that's the case.

Speaker 2

And that's certainly what our Q2 trend shows.

Speaker 6

Okay. Just lastly, in terms of non tracked channels, a lot of times the trends there, I guess over the last 6 or 9 months have been better I think than tracked channels. What percentage of your sales are through non tracked channels and how have those done versus tracked channels? And I'm referring more towards kind of Nielsen.

Speaker 2

Yes. So Nielsen only is capturing about 70% of our total sales. We have obviously foodservice and industrial sales, which aren't captured by Nielsen. There's probably about 5% that is untracked retail channels that Nielsen doesn't cover. And then we have a Canadian business, about 10% of our business is not covered by the Nielsen data in the U.

Speaker 2

S. So yes, so 70% is kind of correlates to Nielsen, 30% is outside. And so we Canada had a reasonably strong quarter. Our foodservice industrial business was slightly down as we've talked about, but not down that much, much more moderate kind of declines consistent with the industry. And we've continued to perform in 1 or 2 customers that are tracked by Nielsen reasonably well.

Speaker 6

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

Speaker 3

Thank you.

Operator

Our next question will come from Rob Dickerson with Jefferies. Please go ahead.

Speaker 4

Great. Thanks so much. I guess a couple of questions. Just first question, both kind of related to cadence for rest of the year. As we think through kind of the updated guide, Q3 relative to Q4, should we be thinking these are kind of fairly year over year or just more of the sequential improvement relative to what we're seeing in Q2?

Speaker 3

Maybe a slight bias towards a sequential improvement, but we always looked at first half of this year and second half of this year as two pieces. First half would be challenged from top line trends. 2nd half would show improvement. I think we still expect that to be the case. Our back half guide is to a base business down to plus 0.5 versus earlier in the year, we were thinking plus 1 minuteus 1.

Speaker 3

And then just as a reminder, we did sell Green Giant U. S. Can business last year. And so there's about a $36,000,000 drag from a non base business concept.

Speaker 4

Yes. Okay. Okay, cool. And then I guess just on the margin piece, gross margin was a little lighter than expected in the quarter. I mean, clearly, you had a great Q2 last year.

Speaker 4

And then at the same time, right, sales come down a little bit for the year, you lowered the high end of your EBITDA range a little bit, but the low end stays the same. So again, just kind of a cadence level, we saw it come down a little bit in Q1, but it was up a little bit year over year in Q1. We still be thinking maybe gross margin could be up a little bit in the back half? And then it also sounds like SG and A instead of maybe being up a little bit for the year given wages, it's maybe flat to down a little bit. And then just one quick add.

Speaker 4

It does sound like spice and seasonings growing more quickly, right? It's the highest margin business. Like are there other offsets that are just kind of came through Q2 that caused that margin to be down more than you expected? A lot in there.

Speaker 3

Yes. So a couple of things, I'll try to get them all. We give guidance on an EBITDA and implied EBITDA margin basis. Our guidance expects suggests somewhere between flat and somewhere up from last year's EBITDA margins in the back half of the year. Nothing Herculean, just sort of like a little bit of increase.

Speaker 3

If you think about gross margin and SG and A so far this year and EBITDA margins on a year to date, basically flat through the 1st 6 months of the year or the quarter on an EBITDA margin. I think we're within 20 basis points and we had these flip gross margin SG and A. Gross margin was down a little bit in the second quarter, but as you remember, it was up a little bit in the Q1 and I think it's flat on a year to date basis versus the prior year period and SG and A went in the opposite direction. So some of this I think is timing. The other thing to keep in mind, there is a little bit of noise from the Green Giant business that we sold.

Speaker 3

And then the other piece of that is we manufacture the majority, not all of, but the majority of our U. S. Frozen business for Green Giant out of our facility in Mexico. And we've got a drag just the way it works out currency translation. That was about $2,000,000 $2,500,000 of an impact in the Q2.

Speaker 3

It's probably something similar in the Q1. And that obviously impacts the gross margin a little bit.

Speaker 2

And so far the pesos kind of come back up. So we think that impact will be less in the back half of the year.

Speaker 5

Okay, perfect. All right, great.

Speaker 4

I'll pass it on. Thank you.

Speaker 3

Thanks, Rob.

Operator

Next question comes from Karru Martinson with Jefferies. Please go ahead.

Speaker 7

Good afternoon. I just wanted to get a sense on the competitive environment. Certainly, you have read about the more promotions. It doesn't sound like we're going to excessively promotional in the second half. But I was also curious on to your comments on the prepared meals saying Ortega was being challenged by Taco Bell and if there are others, kind of what's feeding that?

Speaker 2

I think in this particular case of Ortega, we've seen Taco Bell come in with a lot of new items and drive new distribution. And I feel like we're pretty competitive now. We've got some new kind of sauces and taco items coming in, in the back half of the year. But it's just another competitor or entrant coming back in. They've tried before and kind of retreated, but this time they're pushing again and pushing new items.

Speaker 2

So you've seen both us and old El Paso get impacted a little bit by the entry of a new competitor in that taco shell, taco sauce, taco kit area, taco seasonings. But I think we're going to hold up just fine. And I think you're going to see improved trends on the Ortega business in the back half. Okay. And then In terms of promotions, what I was trying to say before is that we brought promotion spending and promotional levels up last year at the back half of twenty twenty three at the end of Q3 and Q4 because we have a lot of baking promotional seasonality or baking and fall promotional seasonality.

Speaker 2

So we're going to lap that. So we're already kind of back to where we were in terms of promotion intensity at pre pandemic levels in the end of 2023 and we'll lap that this year, but I don't see us going beyond where we promotion intensity pre pandemic. I think we'll stay right there and we believe we're competitive with that kind of spend rate.

Speaker 7

Okay. And then when we look at spices and seasoning, is kind of that licensed line extension the model for growth there? Or are there products that you're developing on your own?

Speaker 2

I think a combination of both. We like the license model where we think we have the right properties like the 4 6s, I think is a great way for us to get into the seasoning blend business that's designed to kind of enhance proteins and kind of a Western barbecue kind of style. So we like licensed brands where they bring relevant equities and properties to our portfolio and put us in spaces that we're not really competing in that well. So, you'll continue to see some of that, but we will also look at ways to kind of either extend our current brands, drive our current brands or even maybe launch new items that aren't necessarily licensed properties. So, we like the spice and seasoning category.

Speaker 2

We think it's good long term growth. We think it's good margins. We've built up our capabilities there in development in culinary, and it's a place that we want to focus on long term, both organic and possibly inorganic.

Speaker 7

Thank you very much guys. Appreciate it.

Speaker 3

Thanks,

Operator

question comes from Michael Lavery with Piper Sandler. Please go ahead.

Speaker 7

Thank you. Good afternoon.

Speaker 5

Michael.

Speaker 7

You're a little bit better aligned with foodservice traffic now, But can you give us a sense of maybe how you're exposed there and just if you've got pockets that are particularly better or worse than some of the general trends and just how to think about translating some of the read through from bigger companies into how it affects you guys specifically? Yes.

Speaker 2

I mean, it's obviously, Michael, it's dependent on the portfolio. Our portfolio is about half spices and seasonings, so mostly sold through distributors. So that we've seen track pretty closely in the Q2 to restaurant traffic trends. We have a foodservice syrup business that with a major customer that's not healthy. So we've seen a little bit of decline there, but not that significant.

Speaker 2

So I think overall, our portfolio is kind of tracking with restaurant traffic patterns, call it, we read in Technomics and other places, kind of somewhere in the 2% to 4% range depending on the customer profile. And that's kind of what we think our business will continue to reflect for the remainder of the year until we see a turnaround in kind of restaurant trends, Because we're just going to reflect what traffic is doing in those channels. We're just supplying those channels with backend ingredients and components.

Speaker 7

Yes. No, that's helpful. And then just on the I know that's fairly complicated to give any update at all and Andrew touched on some of the frozen divestiture. But for some of the smaller brands that you touched on as well, would you kind of need to bundle those to avoid some of the dis synergies? Could you sell one offs here and there?

Speaker 7

Is that too much complexity or distraction? Just how do you think about how that process is going and does it have to take a certain shape?

Speaker 3

Yes. It's potentially a little bit of all of the above. So far what we sold has been one offs, but there could be other things and other ways that it could happen and it's very situation dependent.

Speaker 2

I mean, if you look at the business that we've already divested, the Green Giant canned vegetable business kind of had its own supply for that business. And then the Back in Nature business was a contract pack business that was kind of isolated itself. So we will have a combination as Bruce says, but a lot of our products we can carve out pretty easily without having a lot of structural issues or absorption or overhead problems.

Speaker 7

Okay. Thanks so much.

Operator

Our next question comes from Carla Casella with JPMorgan. Please go ahead.

Speaker 8

Hi, thank you.

Speaker 9

Good morning.

Speaker 4

On that

Speaker 8

asset sale of Green Giant Shelf, is there any stranded cost left from that that would work its way out over the next, I guess, year or 2? Or is that all behind you?

Speaker 3

Yes, not really. I mean, the business itself from just the business and the product line is pretty straightforward. It was U. S. Business, canned vegetables, 100% co packed, right?

Speaker 3

So you pretty much airlift that and take it away. Freight is what it is. There's less freight. Maybe there's a little bit structurally around like warehouse costs, but not really. I think that pretty much just gets airlifted out and it's nice and clean.

Speaker 8

Okay. And then did you say the pro form a

Speaker 4

Sorry.

Speaker 2

Taking out any resources that we're working directly on that business too.

Speaker 8

Okay, great. Do you get pro form a availability on your revolving credit facility post the financing that closed after the quarter end?

Speaker 3

Sorry, in what sense?

Speaker 8

I guess, so you paid down some of the revolver after quarter end, but you also downsized it. I'm just wondering how much of it is available today. If it was at the end of the quarter, you announced $600,000,000 about $605,000,000 available?

Speaker 3

Yes. So I would suggest just go into the debt offering docs and I think we've footnoted appropriately what was drawn and available based on closing dates.

Speaker 8

Perfect. Okay. And then on the ramen, what I missed the timing you said of that offering and I'm just wondering if you I mean, what's the shelf kind of placement you've got on it? Any kind of either numbers or percentage gains you can point to?

Speaker 2

It's going in this fall. So we'll start shipping shortly. We've had good acceptance and reception from customers, but I don't think you'll see it on shelf until the fall based on when customers set their frozen cases. Okay. Great.

Speaker 2

Thank you. It's a ramen vegetable kind of dish, But it will start shipping within the next couple of months.

Speaker 8

Okay, great. Look forward to trying it. Thanks a lot.

Speaker 2

Thank you.

Operator

Our next question comes from David Palmer with Evercore ISI. Please go ahead.

Speaker 10

Thanks. I wanted to talk about what your vision would be for the business long term in terms of what sorts of businesses fit within B&G? And I know there's going to be reticence to talk about categories or brands, but I'm really talking about the types of things that would work inside B and G. There was a wave of acquisitions long ago where the company was trying to growth up with Snacks and Frozen. And then now those businesses are gone or soon to be gone.

Speaker 10

So they were kind of rejected from the shell that is B&G. So I'm wondering, what do you think does work from what you've seen and where you might want to get bigger?

Speaker 2

Yes. I think it's pretty we've talked about this before, but I think it's relatively clear looking at our business where we've been successful over time and where we have good margin structure and cash flows. And so I like 1st and foremost the spices and seasonings and business. If you look at our margin, it's high margin. We actually improved our segment EBITDA margin year over year in the quarter 2.

Speaker 2

We had good growth on that business. I think that's a business that we want to focus on organically, but more importantly, we would want to look over time to add additional acquisitions. We have a great asset in our Iowa facility. We've got good capabilities. We've kind of built up our culinary and R and D capability there.

Speaker 2

So that's one business that I see as a strong future for B and G. Also the specialty business, which is, as I think I said in my comments, is 70% baking staples with kind of number one brands that and pretty stable trends in those categories. We've done a good job of managing, Claver Girl, Crisco, even with some of the kind of volatility in this in the commodity pricing, we've done a great job of managing the profitability and the cash flow in those businesses. I think we would be interested in picking up additional baking staples or some shelf stable baking products where we could easily fit into that portfolio, get synergies and maintain good margin, stable cash flow. And then I think lastly, meals, we've about that.

Speaker 2

I do think longer term meals is a good place for us to be. We kind of are centered in 2 places, Mexican meals. I believe Mexican meals will grow in terms of at home consumption. We're seeing those trends going, people making different types of Mexican meals. I think our portfolio, Las Palmas Ortega is well founded there, but I think there's lots of opportunities to look at other Mexican at home sauces and other meal preparation items that we would consider buying over time.

Speaker 2

So I think those three business units remaining after the frozen business, which we said we have a question around or under review whether that really fits with us long term. I think those are 3 places that we should be able to drive organic growth, but more importantly be good platforms for acquisitions. If we decided to buy something outside of those 3, we have certainly looked at it, but I would want to make sure that it fits our capabilities. It fits our ability to distribute it. Less like and we said frozen is not a place that we want to scale up to drive costs down.

Speaker 2

Refrigerated would probably a place that would be hard for us to get into. So I would want to stay in the categories that we know how to manage that may be adjacent to some of the categories where we have selling synergies, distribution synergies, other places. But we might create another business unit to manage that if we acquire things

Speaker 3

in over time. So that's

Speaker 2

kind of a more longer term view of where we're going. But that's the vision of what I see us shaping up with the divestiture activity.

Speaker 10

Yes. And would you say those 3 by the way, that's a very helpful answer. I really appreciate that. Would you those 3 I know that's probably not an unabridged answer. That's probably not everything that you would think is core.

Speaker 10

But like just those 3 mega platforms that you mentioned, how much of your business do you think is encapsulated with those currently, over half?

Speaker 2

75%.

Speaker 10

75%.

Speaker 2

From a sales basis higher on an EBITDA basis and higher on a cash flow basis.

Speaker 10

And thanks. I mean what you said, I think it was in the release that foodservice was a little bit better than it was in the Q1. For a lot of companies, foodservice is actually getting worse. So I'm just wondering maybe what are you seeing with your particular foodservice accounts and what are you seeing out there from foodservice looking into the second half?

Speaker 3

I mean the one thing to remember which we highlighted last quarter was we had some challenges, but some of that was timing, right? And some of that was unique to 1 or 2 customers.

Speaker 2

I think we see that our business, which should largely track what we expect restaurant and foodservice traffic trends to be overall. And what we see is kind of I've seen different numbers, but call it minus 2% to minus 4% and people are sort of projecting that for the rest of the year. I mean who knows in a recessionary environment if that would get worse, but that's kind of what we expect. And right now, our trends are kind of mirroring that in terms of restaurant traffic. Our minus 3% we call it minus 3% in Q2.

Speaker 2

That's what I think we're going to see for the near future until something changes. But that's kind of what we stand and what we read in the industry data.

Speaker 10

Yes. No, I think a lot of people were thinking that the second half would be better because of comparisons. And I think those expectations might be fading a bit. So I don't think there's many people thinking it will necessarily get worse, but I'll leave it there. Thank you.

Operator

And our final question will come from Robert Moskow with TD Cowen. Please go ahead.

Speaker 9

Hey, Rob. Hi. I have a glass half empty and a glass half full question. So I think I'm going to just do the glass half full question.

Speaker 3

Question. What's in the glass, Rob?

Speaker 9

It's pretty late. So I don't want to and I'm covering bourbon socks, so maybe

Speaker 3

9 o'clock somewhere.

Speaker 9

But honestly, like if you look at Nielsen tracking data and just look at overall grocery sales, like forgetting about all the who's selling it, it is starting to show some signs of acceleration. I think it's up about 3% in the last 4 weeks. And it's a clear sign, I would argue, of consumers going back to the grocery store, trying to save money, and you can see foodservice being down a lot. So are you I haven't heard much about that in your outlook for the back half of the year. I know you have easy comps, but do you could you be so bold as to say, hey, there could be a better environment, a better backdrop overall in grocery retail in the back half because of that, as well as the easier comparisons.

Speaker 3

Yes. So I think our guidance is somewhat based on that, which is more favorable back half of this year than the first half. We obviously took it down a little bit to suggest some caution. We do have at the high end a little bit of growth, right? So don't disagree with what you're saying.

Speaker 3

I think if you went back to earlier this year when most of us were talking and giving guidance, I think there was an expectation that that recovery was going to happen sooner. I think we're seeing signs of it, would have just loved it to be a little bit sooner, but that's what we're seeing. That's the glass half full.

Speaker 9

Okay. All right. You and me both. All right. Thanks a lot.

Speaker 3

Thank you.

Operator

And this will conclude the question and answer session for today. Ladies and gentlemen, the conference has now ended. Thank you for all joining and you may now disconnect.

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Earnings Conference Call
B&G Foods Q2 2024
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