Good day and welcome to the B&G Foods Second Quarter 2022 Earnings Call. Today’s call, which is being recorded, is scheduled to last about one hour, including remarks by B&G Foods’ management and the question-and-answer session. I would now like to turn the call over to Sarah Jarolem, Senior Director of Corporate Strategy and Business Development for B&G Foods. Sarah?

Good afternoon and thank you for joining us. With me today are Casey Keller, our Chief Executive Officer; and Bruce Wacha, our Chief Financial Officer. You can access detailed financial information on the quarter in the earnings release we issued today, which is available at the Investor Relations section of bgfoods.com. Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to B&G Foods’ Annual Report on Form 10-K and subsequent SEC filings for a more detailed discussion 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, 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 the remainder of fiscal 2022 and beyond. Bruce will then discuss our financial results for the second quarter of 2022 and our guidance for full year fiscal 2022. I would now like to turn the call over to Casey.

Good afternoon. Thank you, Sarah, and thank you all for joining us today for our second quarter earnings call. The second quarter was difficult. Similar to Q1, we experienced continued pressure from inflation ahead of recovering price actions. Total Q2 net sales increased 3.1% versus last year with adjusted EBITDA at $54.1 million, a 35.4% decline to prior year. Simply put our pricing actions have not yet caught up to the higher inflation flowing into our cost of goods sold. Within the quarter we saw improvement in June results after a tough April, May behind some early realizations from pricing implemented in June, and we expect to see further improvements starting in mid-July with additional pricing actions across the portfolio. Some key perspectives on the quarterly results. Pricing, the price increases effective in the last couple months, Crisco plus 25%, Green Giant plus 8% have been implemented and are yielding benefits, but are just taking effect in the market with the required customer lead times. We realized $56.7 million of pricing benefit in the first half of fiscal year 2022, slightly below initial inspection – expectations. In addition, elasticities on some brands have increased modestly in recent weeks, although still well below historical levels. Crisco elasticity for example is now at 0.5 to 0.6 with the last increase as a few consumers trade down to private label. Inflation, the total cost of goods sold inflation impact in the P&L is now projected at $270 million to $280 million year-over-year or over a 20% increase. The latest culprit is fuel and energy costs, which have driven up our freight transportation and utility costs rapidly. The July pricing action covered diesel costs at roughly $5.10 with a forthcoming price increase across the portfolio covering costs closer to projected levels. Downsized conversions, Q2…

Thank you, Casey. Good afternoon, everyone. As Casey just discussed, our second quarter was challenging. And much like the first quarter, it was heavily impacted by extreme input cost increases across large portions of our portfolio. Our supply chain has showed continued signs of improvement, but it still is not fully recovered to pre-pandemic levels of efficiency and thus limited some of the upside demand opportunities that we are still seeing in certain categories. We’ve executed large price increases that are yielding benefit particularly late in the second quarter, but due to the timing of those price increases relative to the cost increases we have based our margins have continued to be compressed. We are seeing some elasticity drag, but so far these elasticity effects have been modest and are largely in line with our forecasts. Based on our June monthly performance, the execution of our pricing initiatives and some moderation in the level of commodity costs, we believe that we have seen the trust in terms of the margin compression in overall financial performance. We are cautiously optimistic with regards to the rest of the year. During the second quarter of 2022, we generated net sales of $479 million and adjusted EBITDA of $54.1 million. Net sales for the second quarter of 2022 increased $14.6 million or 3.1%. Price increases coupled with product mix accounted for $20.5 million of the net sales increase. Volume declines negatively impacted net sales by $5 million and FX at a negligible impact. Volume declines were primarily driven by supply chain challenges lower than normal fill rates and modest elasticity. We will continue to monitor our brands to measure the negative impact of elasticity resulting from our pricing initiatives. But so far, we remain encouraged that elasticities remain modest, relative to our historical models…

Thank you, Bruce. In summary, the second quarter showed some pricing recovery, but not sufficient to offset the gross margin impact of rising inflationary input and operating costs. We have fielded and/or implemented pricing actions that are sufficient to recover projected cost positions, which are now flowing through in the back half of 2022. Finally, we are up and running with the business unit structure and organization, and making rapid progress towards driving stronger focus, greater speed, and improved performance on the business. This concludes our remarks. And now we would like to begin the Q&A portion of our call. Operator?

[Operator Instructions] Thank you. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Great. Thanks so much. I guess, to start off, maybe Bruce, are you able to break out in the second quarter what the benefit from price versus mix was? Because if we just look at overall price mix, I think it was up like 4.5%, and obviously that decelerated quite a bit from where price mix was in the first quarter, which is surprising or confusing just given, obviously you’ve been putting more pricing into place. So, I know whether that’s because of mix or maybe some of the trade promotions you talked about that you had to protect, but trying to get a better handle on that just to see that pricing is actually accelerating.

Yes. We don’t have a perfect split between the price and the mix part, but if that is some of it, as well as some of the promotional trade to protect price points and the price increases.

So then…

It’s a pricing mix number. So, one of the things that happens is, when spices & seasonings goes down, then we have a mix effect going on too.

Okay. So, if we look in the back half of the year, if we look at that price mix line, I’m assuming that accelerates fairly dramatically. And I think maybe as of last quarter, you’re expecting it maybe to get even into the double digits, is that still the right way to think about the back half in terms of the price mix equation?

From a price standpoint? Yes. There’s going to be a lot more pricing benefit in the back half of the year. And even as we talked about on the last call, a lot of our price increases this year that were sizable were June, July and back half of the year implementation.

And I think, Andrew we disclosed that we’re expecting, kind of close to $200 million in total pricing for the year. And so year-to-date we’ve gotten $56 million, $57 million. So that’s we expect acceleration in the back behind all of the actions that have been taken.

Got it. And then last one would be and this, I think you said it, but I just want to make sure I heard it, right. Did you suggest that 2023 EBITDA could be similar to 2021? Or was it the back half of 2023? I just want to make sure I heard – I want to make sure I heard.

Yes, that is correct. We expect based on what we’re seeing today, continued normalization in EBITDA, and that would imply a stronger first half of 2023, and 2023 EBITDA levels that would be closer to what we saw in 2021.

Got it. Okay. Thanks very much.

Thank you [Operator Instructions] Our next question comes from the line of Karru Martinson with Jefferies. Please proceed with your question.

Good afternoon. When you look at the price gap between your product and private label, where does that stand now, and post the price increases where do you think that will go and that kind of dovetails into questions on the sustainability of the positive trends you’ve seen so far on elasticity?

Yes, this is Casey. I’ll answer that. I mean, this is going to vary dramatically between brands and product lines, but let’s just take the big one Crisco, which obviously has had the most pricing going on. So, we measure elasticity pretty carefully, and we look at our gap to private label. So, we know that prior to probably the last increase, which was in June, we were seeing elasticity is probably in the 0.2 to 0.3 range. And now I think since this last increase, we’re seeing it more in the 0.5, 0.55, 0.6 range. And in that period with our last price increase the gap to private label increased a little bit, but now I’ve noticed that in the last couple weeks, private labels began to come up again. So our assumption is that, prices go higher that there will be a little bit more elasticity effect we’ve modeled that in the back half. And that we do expect that some consumers may make the decision to trade down to private label, but we just haven’t seen it in large impact yet. I mean, we think that the 0.5 to 0.6 is where Crisco will stay relative to elasticity in the back half of the year.

And then when you look at the recovery of EBITDA that you guys are looking for in 2023, I was trying to kind of square that with the credit amendment that will maintain the eight times leverage ratio through September of 2023. Is that just being overly cautious on that front or what’s the thinking there?

Yeah. Being overly cautious. And we want to give ourselves time to delever just through the combination of the natural EBITDA growth part of the equation, the cash flows that we generate for that. And as well as potentially select assets investors.

Thank you very much, guys. Appreciate it.

Thank you. Our next question comes from the line of William Reuter with Bank of America. Please proceed with your question.

Hi my first question on the dividend, I guess, is given that your leverage is elevated. Is this something that you would consider reducing for a period of time in order to bring down leverage or are you pretty committed to staying at this level?

At the current time, there’s no change in dividend policy.

Okay. And then given that you have seen some declines in some of these input costs from their peaks, when you think about your cost outlook for next year, do you anticipate that those are going to be lower on a year-over-year basis if they were to remain at current levels or will they be higher year-over-year, next year?

If we look at the – this is Casey. So if we look at total inflation expectations next year, right now we’re currently modeling some something in the 3% to 5% range, versus we talked about over 20% this year. And our expectation is that the big commodity inputs that have been so volatile and rapidly rising in the first six months of this year kind of stabilize, that’s what we’re seeing in the markets. Maybe even go down a little bit, which would allow us maybe to have in some periods of next year, some lower costs year-over-year in those big inputs. But overall, we are seeing that we will have inflation in certain components, think about glass, paperboard, tomatoes, et cetera. So 3% to 5%, which we would intend to price and drive cost savings against to make that neutral.

Got it. That makes sense. Thank you.

Thank you. Our next question comes from the line of Carla Casella with JPMorgan. Please proceed with your question.

Hi one of us on the supply chain, can you just talk about kind of where you’re seeing the biggest supply chain issues and when you expect them to resolve?

Yeah, I think the big picture is that we’ve improved dramatically in the last three to six months on our service levels and our supply positions. And I feel pretty confident that we’ll continue to make progress. We said, I think we were at the end of the first quarter, we were below 90% service levels were now approaching 93% service levels on the business. And we think that by the end of the year, we’ll be even closer to 95% service level, so we had a lot. At the beginning of the year, we had some significant disruptions. We had a few material problems. We had some labor shortages in some of our key facilities, like the spice and seasoning facility in Ankeny. Some of those driven by the Omicron variant and other things, but so far we’ve been operating pretty smoothly. We’ve been able to now recover in terms of our labor shortages, and we’re running all the factories that the we want to. We’ll probably have material shortages here and there, but so far it’s become more manageable. And as I said, we’re kind of getting back to full production staffing versus where we were, I’d say six to 12 months ago.

Okay, great. And then did you say, were you – I mean, you raised the covenant level on your debt. When do you expect leverage to peak? It sounds like you feel like you’re near trough EBITDA or should we be near the leverage peak or what quarter?

Yes, you probably see leverage peak in the third quarter, is our normal seasonal pattern. And that’s due to the pack coming in for Green Giant. So no difference this year.

Okay, great. And then, I don’t know if you could give us an update on if you look at your costs, can you give us any ballpark figures? How much of it is the raw material versus labor versus packaging and transport?

Not a number we disclosed, but obviously when you’re talking about soybean, soybean oil as part of Crisco and corn and wheat is part of a lot of our products. I would say its commodity input is the biggest driver of our inflation. But clearly packaging material and paper board, no things are up. But I would say the lion share of it is the input cost, the commodity input cost with also a significant challenge on the freight and fuel side, right. Exactly, yes.

Okay. And then just one more. Retailers are starting to talk about the consumer in elasticities. Are you getting any more pressure to promote or are you seeing any pickup in any particular category where you’re seeing more of a promotional environment?

I think what we see right now is less around kind of the inflation impact on promotion or maybe potentially deflation. What we see is a resumption of kind of more normal promotional patterns from the – in the post pandemic period. So think about 2021 and 2020 promotions, we’re kind of scaled back by a lot of retailers. We’re focusing on some of the core SKUs, not doing as much feature and display activity. We’re seeing a resumption of that normal pattern. So, I mean, promotion activity has increased this year, but frankly that’s because I think we’re just coming back to normal.

Okay, great. Thanks so much.

Thank you.

Thank you. Our next question comes from the line of Eric Larson with Seaport Research Partners. Please proceed with your question. Eric, your line is live. Our next question is from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Hi. Thank you.

Hi, Rob.

I think you said that some of your pricing initiatives didn’t occur like you thought they would in 2Q. Did I catch that right? And if so, was it a delay or did what caused that? And also the cost that you’re talking about like the increase versus your prior estimate. It’s a lot more than what other food companies are reporting in 2Q, like most companies reporting so far seemed to have talked about stabilizing costs. 2Q came out pretty well. What do you think happened here that was materially different regarding your cost profile, which is up, I guess, a lot more than you thought it would be?

So on the pricing and implementation, the real driver there that we were referring to was for Crisco. We had a downside and it just took longer for some of that inventory to flow through the system, which was kind of the delay there. And we also had a price increase attached to that glowing through. But largely we got within – we got pretty close to the pricing that we expected for the first half.

Right.

And then on the cost side, we’ve also seen a stabilization. I mean, that’s where we think, we’re near the trough certainly, comparing us to other companies, I guess it depends on what company and what their portfolio is. Certainly for us, some of the real challenges that we saw on the quarter was just the disconnect or the rapid increase in the cost side from Crisco relative to when we were able to implement the price. We knew a lot of that was coming, but that was the challenge in the quarter at that inflection point. Yes. I mean, the way I would answer it is we have a portfolio with the addition of Crisco and look, let’s be honest. Crisco is driving probably 40% of this. We have a portfolio now that is very sensitive to the dramatic increases in certain commodities over the last six months, soybean oil, corn, wheat so unfortunately these were some of the largest – the largest increases and we just – we have a portfolio now that’s extremely sensitive to those. So we’re going to – Crisco to me is something we got to think about longer term in terms of the commodity sensitivity that that product, but we’re at historic level. So with a little bit of luck we’ll start to see that come off in the future months, with a decent crop this year.

And the positive on that is, is really Crisco was, that was an issue for us, April, May and June was actually, I wouldn’t say normal but much closer to normal, but April, May were challenging, and so we were encouraged to see the June performance.

Yes. Bruce, you mentioned $0.80 soybean oil, but soybean oil is much lower now. So does that mean that you get an immediate benefit from that in the third quarter and fourth? Or do you kind of live with $0.80 for a little while?

Well, we’re not quite at $0.80 through the whole period, but we’re covered through the whole year now and we can’t just the way oil works is once we agree to buy it, we probably have between 10 to 15 weeks before we can actually sell it as a bottle. So because you got to refine the oil, you got to deodorize it, you got to process it, so we’re largely covered for the rest of the year. So any benefit that happens in the soybean oil market we’ll get in JFM, kind of the first quarter of next year, but right now we had to cover the cost because of the lead times in the product. And also we were able to go in when it dipped down in kind of the low- to mid-60s and cover a little bit of our fourth quarter needs, but largely we’re set for the rest of the year at more in the $0.70 to $0.80 range.

Okay. I got you now. Thanks for the clarity.

Thank you. Our next question comes from the line of David Palmer with Evercore. Please proceed with your question.

Okay, thanks. Just a question for those of us tracking you with scanner data, it looks like now in IRI, for example, you’ve gotten up to a double-digit pricing increases per unit portfolio wide. Is that the type of price realization you expect that that’s the kind of run rate of pricing that you would actually see in your organic results going forward?

Yes. I mean, it varies by obviously by brand and product category, but yes. And you would see that – you’d see that showing up. Yes, you’d see that showing up probably with some of the latest increases that really hit kind of in June and July.

Right, right. Yes. One other things that I’ve been wrestling with is just, just the fact that it seemed to take, we tracking it in the data. It finally did accelerate as you said, but it took a while to get through and I wonder to what degree it’s a mistake for us to commingle the pace of your price realization with pricing power. And in other words, some of your competitors out there were getting pricing in faster, and is there a reason for that? Is there something of a category dynamic that that plays out in some of your major categories? Any thoughts on that?

No. I think what we face is as we’re in kind of categories with promotion. We have kind of contracts with retailers, so we have to protect promoted price points. So sometimes that mutes a little bit of how fast the total pricing effect comes in. I would say – I would say we do have to get better on pricing. This is Casey talking, I having been here, we have to get better and faster on projecting future cost increases as well as pricing against them. That is something that we’re going to get better at in the business unit structure, and we’re designing that capability to do that. I would say overall on Crisco, which again is driving a lot of this, what we’re talking about. We have to probably treat that more like a commodity and try and negotiate with our retailers to move pricing more quickly. Because the normal lead times in a commodity that Bruce said went from $0.56 cents to $0.88. We just, we can’t operate with these kind of lead times. It’s not a normal with when that, so much of the cost, the product is in that commodity we’re going to have to think about it more like coffee.

Yes. And then one last question I have is just on spices, you noted that you have a tough comparison there. That seems to be an inventoriable, perhaps like the ultimate COVID type category, where people were perhaps grilling at home more and they stocked up on the stuff. Do you feel like, you have decent visibility into that getting better, the year getting back to its historic growth rates sometime in this year.

What we are seeing is contraction in the first half of the year in the category. Frankly, some of their spices, seasonings problems was our own issues where we had supply problems and production problems in the first quarter, which kind of caused some temporary distribution losses, which were now getting back. But we think that, the trends will kind of improve in the back half we’re already seeing that, trend improving in July. So we’re don’t – we don’t expect to see big growth in spices, seasonings either our business or the category this year, but we expect to see it kind of like steadily, kind of recover and stabilize. And then, we know that from a lot of consumer research that people are now planning, given the possibility of recession are now planning to maybe continue to make more meals at home, use more spices, and that’s kind of the research we’re seeing. So, I’m encouraged that we’ll still, that we’ll be able to deliver some growth on the spices and seasonings portfolio, as we go forward and in the long-term, and that, what I said was the low single digits. I think there’s good growth there. And it’s, obviously good margin and I think we have good capabilities in that category.

And Dave, the other thing you got to keep in mind, I think on spices and seasonings as a category, is it was almost a different pattern from the COVID response than something like a canned vegetables or canned meat, for us we look back at the financials and you actually see the spike in sales and some of those products, even before we thought we had, a COVID issue back in 2020. And then spices was more of a delayed reaction and so we’re, laughing in the first and second quarter of this year, some of the strongest performance in the spice category that contributes a little bit to it.

Thank you very much.

Thank you. Our next question is from the line of Connor Rattigan with Consumer Edge. Please proceed with your question.

Good afternoon. Thanks for the question. So I know it’s a bit premature given the current environment, but just I guess as far as the pricing strategy goes going forward, if we begin to see a commodity pullback, like we’ve seen some of the commodities, I mean, I guess, especially in soybean oil like we’ve seen, in the last couple weeks. Later in the year when you’re closer to full coverage, would that really impacts your strategy around pricing or maybe make those conversations with retailers tougher?

Well, I mean, we don’t, we’ve largely kind of fielded all the pricing against the big commodity increases, so that’s already kind of been fielded and sold through. So, I think the discussions with retailers will be around, if the commodity comes down much below where it is now. We will start to have the conversations about, when would we take, when we take possibly on Crisco prices down. But honestly even, it’s that the spot market prices today. They’re not far off with where our real costs are, so you got to add basis and other things to it. But I think, if the commodity comes down, we’re going to get benefit in the probably the first quarter of next year. And we’ll have those discussions with retailers, on predominantly on Crisco and oil about what does that mean in terms of when we can reflect pricing. But those will be conversations that we’ll have, over the next several months, depending on where the market, the soybean market actually goes. It’s not down to the point where it’s really that, that way far off from where we are from a cost basis.

All right. Thank you so much. That was very helpful. That’s on.

There are no further questions at this time. I’d like to turn the floor over to Casey Keller for closing comments.

Thank you all for joining us. As I said, this was a difficult quarter, but we feel pretty confident that we have the pricing actions in place to recover against, the kind of unusual inflation environment that we’re dealing with. I appreciate all the questions and we’ll talk to you next quarter. Thank you.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.