B&G Foods, Inc. (NYSE:BGS) Q4 2023 Earnings Call Transcript
B&G Foods, Inc. (NYSE:BGS) Q4 2023 Earnings Call Transcript February 27, 2024
B&G Foods, Inc. beats earnings expectations. Reported EPS is $0.3, expectations were $0.28. B&G Foods, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to the B&G Foods Fourth Quarter and Fiscal 2023 Earnings Call. Today's call, which is being recorded, is scheduled to last about 1 hour included remarks by B&G Foods management and the question-and-answer session. I would now like to turn the call over to AJ Schwabe, Associate, Corporate Strategy and Business development for B&G Foods. AJ?
AJ Schwabe: 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 and full year in the earnings release we issued today, which is available at the Investor Relations section of bgfoods.com. Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to B&G Foods' most recent annual report on Form 10-K 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, 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 various factors that affected our results, selected business highlights and his thoughts concerning the outlook for fiscal 2024 and beyond.
Bruce will then discuss our financial results for the fourth and fiscal 2023 and our guidance for fiscal 2024. I would now like to turn the call over to Casey.
Casey Keller: Good afternoon. Thank you, AJ, and thank you all for joining us today for our fourth quarter and fiscal 2023 earnings call. B&G Foods fourth quarter results were solid, slightly exceeding expectations. Base business net sales, which exclude net sales of the divested Green Giant U.S. canned vegetable and Back to Nature businesses were essentially flat, but for the impact of lower Crisco oil commodity pricing year-over-year. In addition, base business volume in the aggregate across the portfolio was slightly up for the quarter, stabilizing for the first period since significant pricing actions in fiscal year '22. Profit margins also demonstrated steady progress. Adjusted gross profit percentage increased 130 basis points versus last year to 21.9%, reflecting pricing recovery of higher cost and productivity savings.
Adjusted EBITDA as a percentage of net sales was flat to last year at 15%, with adjusted gross profit improvement, offset by the reinstatement of the short-term management incentive accrual in G&A expenses versus zero in fiscal year '22. With fourth quarter results, B&G Foods delivered fiscal year '23 net sales of $2.062 billion and adjusted EBITDA of $318 million, well within our revised guidance reflecting the divestiture of Green Giant U.S. canned vegetables in November. Bruce will provide more details on quarter four and fiscal year '23 results. Stepping back, we achieved several critical milestones in fiscal year '23 on a journey to reshape and strengthen B&G Foods. First, margin recovery. After historic inflation pressure in fiscal year '22, margins recovered strongly in fiscal year '23 behind pricing actions and productivity efforts.
Adjusted gross profit percentage increased 280 basis points year-over-year from 19.4% to 22.2% in fiscal year '23. Adjusted EBITDA as a percentage of net sales increased 150 basis points to 15.4% in fiscal year '23. Going forward, input cost inflation has moderated to low single digits, and in some cases, such as soybean oil has come down from historic highs. Number two, portfolio shaping. We divested the low-margin working capital-intensive businesses of Back to Nature cookie crackers and Green Giant U.S. canned vegetables. Both did not fit with our future portfolio focus, and we're strained to deliver adequate cash flow against the leverage model. As previously disclosed, we expect to divest additional business and brands over the next year to focus the portfolio for future success and intend to use the proceeds to pay down debt.
Third, cash flow and working capital. Net cash from operations improved dramatically, increasing from $6 million last year to $248 million in fiscal year '23. These results were driven by better operating performance and margin recovery and critically by significant improvement in working capital. Inventories in fiscal year '23 declined by $157 million, down from $726 million last year to $569 million at year-end, reflecting the divestiture of the seasonal Green Giant U.S. canned business, lower Crisco soybean oil costs and efficiencies in base business inventory levels while delivering higher service. Fourth, debt and leverage. During fiscal year '23, B&G Foods reduced net debt by $335 million, primarily using improved cash flow and the proceeds from divestitures to pay down debt.
As a result, B&G Foods pro forma adjusted net leverage ratio, as calculated per our credit agreement, decreased from 7.62 times at fiscal year '22 end to 6.32 times by the end of fiscal year '23. We are making excellent progress towards returning to our long-term range of 4.5 to 5.5 times. The expectation is to further close that gap in fiscal year '23 or through additional divestitures and paying down debt with excess cash flow. Five, Crisco pricing model. During the first quarter fiscal year '23, we implemented a new commodity-based pricing model on Crisco with our customers. Prices for Crisco products moved quarterly to reflect the volatility in soybean and vegetable oil inputs and match market pricing with actual oil costs. The result has been stable gross profit dollars and cash flow for Crisco in a volatile market, particularly over the past 2 years.
As discussed, we do expect to see some up and down movement on Crisco net sales results based on changes in oil pricing without any impact on the bottom line. And last, spices and seasonings, representing approximately 18% of our portfolio, the core high-margin spices and seasonings business increased net sales by 2.2%. Trends were particularly strong on the foodservice and Members Mark Sam's label business, which largely serve out-of-home and small business customers. The core retail branded trends, DASH, Webber, Spice Islands, et cetera, are improving and have recovered from temporary service and production issues in our Ankeny factory. We have also strengthened our innovation and new product pipeline, launching new license seasoning and grilling blends under the Buffalo Trace, Fireball and Southern Comfort brands, which are preparing very well in initial distribution.
Overall, we are pleased with the performance in the fourth quarter and the recovery of the B&G Foods business in fiscal year '23. There is clearly more work to do, but our team has made significant progress towards creating a stronger, more valuable B&G Foods. Bruce will discuss specific guidance, but our focus in fiscal year '24 is to generate slight top line and low single-digit bottom line growth on the base business, which excludes the divested Green Giant U.S. canned vegetable business. Further reshape the business through strategic divestitures to focus the long-term portfolio for higher margins and valuation growth, we continue to evaluate existing businesses that have lower margin and cash flow, higher working capital complexity or do not fit with our core capabilities and business unit structure, reduce net debt and leverage through divestiture proceeds and strong excess cash flows.
Thank you, and I will now turn the call over to Bruce for more detail on the quarterly performance and results for the year.
Bruce Wacha: Thank you, Casey. Good afternoon, everyone. Thank you for joining us on our fourth quarter and fiscal year 2023 earnings call. As you can see, we had another strong quarter, and we finished the year largely in line with our guidance. As we explained at the outset of the year, we expected to see large year-over-year increase in adjusted EBITDA and adjusted EBITDA as a percentage of net sales in the first two quarters of the year, followed by a more modest increase in adjusted EBITDA and adjusted EBITDA as a percentage of net sales in the third quarter. And for the fourth quarter, we expected similar performance to the prior year before accounting for the divestiture of Green Giant U.S. shelf-stable product line. This is essentially how the year played out for us.
In fiscal 2023, we generated $2.062 billion in net sales, $318 million in adjusted EBITDA, adjusted EBITDA as a percentage of net sales of 15.4% and adjusted diluted earnings per share of $0.99. Base business net sales, which excludes net sales from the Back to Nature brand and the Green Giant U.S. shelf-stable product line decreased by approximately $30 million or 1.5% in fiscal 2023 compared to the year ago period. Base business net sales include a benefit of $93.3 million from pricing and the impact of product mix. This was offset by negative impacts of $5.1 million from FX and $118.2 million from volumes. And the pricing helped particularly in our results in the early part of the year. For fiscal 2023, adjusted EBITDA increased by $17 million or 5.7% compared to $301 million for fiscal 2022.
Adjusted EBITDA as a percentage of net sales was 15.4% for fiscal 2023 compared to 13.9% for fiscal 2022. For the fourth quarter of 2023, we generated $578.1 million in net sales, $86.8 million in adjusted EBITDA, adjusted EBITDA as a percentage of net sales of 15% and adjusted diluted earnings per share of $0.30. Base business net sales decreased by $13.3 million or 2.3% in the fourth quarter of 2023 compared to the prior year. The decrease in base business net sales in the fourth quarter was largely driven by a decrease in net pricing and the impact of product mix of $15.9 million or 2.8% of base business net sales. The decrease in pricing was in part a product of our Crisco commodity pricing model that we have instituted, coupled with modest increases in promotional trade spending in other areas of the portfolio where it made sense.
The impact of foreign currency was also a slight drag on net sales, contributing to another $0.3 million of the decline. These were partially offset by an increase in unit volume of $2.9 million for the quarter. We are obviously encouraged by the improving volume story that we are now seeing, although we are closely monitoring the trade-offs between pricing, promotional strategy and volumes as well as the current consumption trends. I will now highlight the performance of some of our larger brands. Clabber Girl had incredibly strong momentum coming into the holiday bake season and similar to its performance all year long, Clabber didn't disappoint. Net sales of Clabber increased by $8.2 million or 26.3% in the fourth quarter of 2023 as compared to the fourth quarter of 2022.
Net sales of Clabber Girl benefited from both pricing and increased volumes during the quarter. Net sales of Maple Grove Farms increased by about $0.7 million or 3.4%. Our spices and seasonings continue to benefit from improved supply chain performance and new product launches, finishing the year with a solid quarter. Net sales of the company's spices and seasonings increased by $0.7 million or 0.8% in the fourth quarter of 2023 as compared to the fourth quarter of 2022. As Casey mentioned earlier on the call, we are very excited about the prospects for these new partnership brand launches coming out of our spices and seasonings business, which include the license seasoning products, Einstein's Everything Bagel, Einstein's Avocado Toast and Sazerac Weber Flavors, Buffalo Trace, Fireball and Southern Comfort.
We have -- also have a robust pipeline and expect to be able to announce additional new and exciting products. While net sales of Crisco decreased by $10.6 million or 8.7% in the fourth quarter of 2023 when compared to the prior year period. This was largely expected due to favorable input cost relief and the execution of our commodity pricing model, which allowed us to reduce pricing to our customers and still maintain profit dollars. As a result of the lower pricing, we are starting to see a nice recovery in Crisco volumes. Increased volumes for Crisco contributed to $1.8 million to net sales or 1.5% in the fourth quarter of 2023 compared to the fourth quarter of 2022. We expect this trend to continue throughout 2024 with lower pricing leading to an improved volume recovery for Crisco throughout the year.
Our Green Giant business was not immune to the category-wide industry challenges seen throughout 2023 in the shelf-stable and frozen vegetable sets. Net sales of Green Giant, including Le Sueur, but excluding the divested Green Giant U.S. shelf-stable product line decreased by $5.2 million or 4.4%. We expect more favorable industry trends in the category during 2024. And quite frankly, we expect much more favorable trends for our business. The goal is to get this brand back to being the industry leader from an innovation perspective and to generate category-leading growth rates like we did before the pandemic. The hot breakfast ale is another category that is still seeing some normalization in its post-pandemic trends. Net sales of Cream of Wheat were approximately $78.5 million in 2023, which was well ahead of the pre-pandemic levels that have been consistently in the $60 million to $70 million range annually.
Although 2023 net sales were somewhat lower than fiscal 2022 annual net sales of $81.4 million. In the fourth quarter of 2023, net sales of Cream of Wheat decreased by $2.2 million or 9% compared to the prior year. Net sales of Ortega decreased by $0.3 million or 1% in the fourth quarter of 2023 as compared to the fourth quarter of 2022. Ortega finished the quarter with some momentum despite a challenging year. While Q4 net sales were down 1%, they were up approximately 0.9% in the month of November and another 0.6% in December compared to the prior year periods. Taco sauces, green chiles and seasoning mixes led the way for the brand, driving positive performance in the back half of the fourth quarter. Taco Shells and Taco kits continue to be somewhat challenged.
Ortega began the year with a tough comp relative to prior year and some softness in shelves and kits as well as pricing elasticity-driven volume declines in some SKUs where we took pricing. These factors, combined with the general post-COVID category normalization helped cause much of the declines. Total net sales for Ortega were $147.9 million in fiscal 2023, down from $154.3 million in fiscal 2022, but also up substantially from pre-pandemic 2019 net sales of $140.4 million. Base business net sales of all other brands in the aggregate decreased by $4.6 million or 3.5% for the fourth quarter of 2023 as compared to the fourth quarter of 2022. Gross profit was $125.2 million for the fourth quarter of 2023 or 21.7% of net sales. Adjusted gross profit was $126.8 million or 21.9% of net sales.
Gross profit was $126.1 million in the fourth quarter of 2022 or 20.2% of net sales. Adjusted gross profit was $128.6 million or 20.6% of net sales. Adjusted gross profit increased by approximately 130 basis points in the fourth quarter of 2023 compared to last year's fourth quarter. The improvement in gross profit percentage was largely driven by a moderation in input costs and logistics inflation. This represents a continued turnaround compared to the first half of fiscal 2022, where we suffered from the severe industry-wide input cost inflation, which led to large declines in our gross profit and margins. Selling, general and administrative expenses increased by $1.3 million or 2.7% to $53.2 million for the fourth quarter of 2023 from $51.9 million for the fourth quarter of 2022.
The increase was composed of increases in general and administrative expenses of $5.8 million and consumer marketing expenses of $0.9 million, partially offset by decreases in warehousing expenses of $2.6 million, selling expenses of $2.3 million and acquisition divestiture-related and nonrecurring expenses of $0.5 million. Expressed as a percentage of net sales, selling, general and administrative expenses increased by 90 basis points to 9.2% for the fourth quarter of 2023 as compared to 8.3% for the fourth quarter of 2022. The increase in general and administrative costs was largely driven by modest inflation in wages, insurance and other professional services as well as an increase in short-term management incentive accruals as no annual bonuses were rewarded for fiscal 2022 due to the shortfall in performance in fiscal 2022.
As I mentioned earlier, we generated $86.8 million in adjusted EBITDA for the fourth quarter of 2023 compared to $93.6 million in the fourth quarter of 2022. Fourth quarter 2023 adjusted EBITDA benefited from the moderation in industry-wide input cost inflation, and logistics inflation that have plagued the industry since the fourth quarter of 2021, which were offset in part by the modestly higher G&A costs as well as the impact of divestitures. Fourth quarter of 2022 included a full quarter of profits from Back to Nature brand and the Green Giant U.S. shelf-stable product line, while the fourth quarter of 2023 had no benefit from Back to Nature and approximately 5.5 weeks of benefit from Green Giant U.S. shelf-stable business. Adjusted EBITDA as a percentage of net sales was 15% in the fourth quarter of 2023, in line with the 15% in the fourth quarter of 2022.
Net interest expense was $40.2 million in the fourth quarter of 2023 compared to $36.3 million in the fourth quarter of 2022. The increase was primarily attributable to higher interest rates on our borrowings and a $0.5 million loss on extinguishment of debt, partially offset by a reduction in our average debt outstanding. Depreciation and amortization was $17 million in the fourth quarter of 2023 compared to $19.5 million in the fourth quarter of last year. We generated $0.30 in adjusted diluted earnings per share in the fourth quarter of 2023 compared to $0.40 last year. We remain very encouraged by the progress we have made over the past year in terms of restoring our P&L and perhaps even more impressive than our P&L improvements was the progress that we made in the improvement of our cash flows and our balance sheet.
We generated $92.1 million in net cash from operations in the fourth quarter of 2023 and $247.8 million in the full 12 months of fiscal 2023. This compares to $54.4 million in net cash from operations generated in the fourth quarter of 2022 and just $6 million during the full 12 months of 2022. Increased operating profits, improved margins and a more favorable working capital were the primary drivers of improved cash flows from operations, which was offset in part by increased interest expense. We finished the year with approximately $569 million in inventory in fiscal 2023 compared to $726.5 million in inventory at the end of last year. Approximately $90 million of the reduction was due to our focus on supply chain efficiencies and a moderation in input costs.
The remainder came from the sale of the Green Giant U.S. shelf-stable product line, which, as we mentioned previously, was highly capital-intensive and came with large seasonal swings in working capital. We reduced net debt by more than $335 million during the course of fiscal 2023 to $2.02 billion at the end of the year, down from $2.36 billion at the end of fiscal 2022. We also reduced pro forma adjusted net leverage ratio as defined in our credit agreement to approximately 6.3 times at the end of fiscal 2023 compared to 7.6 times at the end of fiscal 2022. We expect to continue to reduce our net debt and pro forma adjusted net leverage ratio throughout fiscal 2024 and beyond as we diligently work toward achieving our long-term target of 4.5 to 5.5 times.
Now as a reminder, before we get to our fiscal 2024 guidance, we are still living in a highly unpredictable times. We have two major military conflicts going on in the world that are far-reaching global implications. We also have separate but ongoing disruptions in both important canal zones that impacted the global supply chain. Although we are not immune from the challenges that these issues present, we are happy to have a much simpler operational footprint than many of our larger packaged food peers. For B&G Foods though, M&A will have an impact on our numbers. We have now fully lapped the sale of Back to Nature, but we still have to lap the sale of the Green Giant U.S. shelf-stable product line. As we mentioned on our prior call, the Green Giant U.S. shelf-stable product line had approximately $75 million to $85 million in annual net sales and low double-digit contribution margins.
The business had approximately $65 million in net sales under our watch in fiscal 2023 that we need to lap this year. It is also worth noting that while the majority of the heavy lifting in our adjusted EBITDA margin and dollar recovery has already happened, we still do expect to see some modest improvements going forward in 2024. So based on what we know today, we expect 2024 net sales of $1.975 billion to $2.020 billion. Our net sales guidance is generally in line with our long-term guidance of 0% to 2% base business top line growth after adjusting for the removal of the Green Giant U.S. shelf stable product line, which we sold in November, other nonrecurring sales and an estimated $15 million reduction in net sales of Crisco due to anticipated lower oil input costs and a corresponding reduction in our Crisco net selling prices.
We expect adjusted EBITDA to be in a range of $305 million to $325 million. This range largely reflects the elimination of approximately $8 million to $10 million of adjusted EBITDA due to the recent sale of our Green Giant U.S. shelf-stable product line. Based on this adjusted EBITDA guidance range, we expect adjusted EBITDA as a percentage of net sales to remain at approximately 15%. And based on this guidance, we expect adjusted diluted earnings per share to be in a range of $0.80 to $1. Additionally, we expect for full year 2024, interest expense of $145 million to $150 million, including cash interest of $138 million to $143 million, depreciation expense of $47.5 million to $52.5 million, amortization expense of $20 million to $22 million, an effective tax rate of 26% to 27% and CapEx of $35 million to $40 million.
We expect to use a little bit less than 50% of our excess cash to pay our dividend and the remaining 50% to 60% to pay down debt. And now I will turn the call back over to Casey for further remarks.
Casey Keller: Thank you, Bruce. In closing, our quarter four and fiscal 2023 results demonstrated strong progress with improved margins, stabilizing volumes, stronger cash flows and a reduction in leverage. We remain on track to further improve the business in fiscal 2024 and beyond. We have also made significant progress against reshaping the portfolio through our focused M&A strategy, including the divestiture of two businesses, the Back to Nature brand and the Green Giant U.S. shelf-stable business that are not core to the B&G Foods of the future. This concludes our remarks, and now we would like to begin the Q&A portion of our call. Operator?
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