Q2 2020 B&G Foods Inc Earnings Call
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Good day and welcome to the being cheap <unk> second quarter 2020 earnings call. Today's call is being recorded you can access detailed financial information on the quarter.
In the Companys earnings release issued today, which is available at the Investor Relations actually the BG foods Dotcom before the company begins its 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 the company's most recent annual report on form 10-K, and subsequent SEC filings.
For more detailed discussion of the risks that could impact the company's future operating results and financial condition.
The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result from new information future events or otherwise.
The company will also be making references on todays 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 todays earnings release, Kinro Manzi, the company's Vice President and Chief Executive Officer will begin the call with opening remarks and discuss some various factors that affect affected the companys results selected business highlights as thoughts concerning the outlook for the remainder of fiscal 2020.
Just walk out the Companys <unk> Chief Financial Officer will then discuss the Companys financial results for the second quarter as well its expectations for the remainder of 2020 I would like to turn the conference over the Ken Sir. Please go ahead.
Thank you operator.
Good afternoon, everyone.
Thank you for joining us today for a second quarter earnings call.
I hope that everyone staying safe and healthy during these very difficult times.
Well the last few months of the unprecedented and highly unpredictable are amazing team at BSG foods maintained steadfast commitment to our core values and strategic imperative to ensure in the short term and long term success of our company.
Before I highlight our second quarter results I want to acknowledge and thank the entire BMG foods team of almost 3000 people for their tireless efforts to produce the results we will share today.
All taking care of one another just stay safe and healthy yet remaining extremely productive to do our part to keep our nation's food supply flow.
Our frontline employees.
Truly shown there the troops euros throughout this pandemic.
And I cannot think them enough for their heroic efforts.
Some of you may have noticed the small just are we made to recognize our heroes back in June.
When two of our Terre Haute, Indiana manufacturing team members rang the closing Bell the New York stock exchange virtually.
What I am proud moment to have our team members represent the entire being GPS organization on the world's financial stage.
Throughout the pandemic, we remain steadfast an increasingly focused on our major priorities to delivered the results I will highlight for you today.
They are to one protect the health and safety of our employees.
To me unprecedented customer and consumer demand.
And three make investments necessary to ensure the long term financial health and success of BMG foods.
Thanks to the tremendous efforts of our employees, we had an outstanding second quarter with net sales increasing 38.1%.
And adjusted EBITDA growing 44.6% ahead of the second quarter of last year.
We reported adjusted diluted earnings per share of 71 cents for the core an increase of nearly 87% compared to last year.
Our sales performance was driven by very strong base business volume growth pricing and some M&A benefit.
Our adjusted EBITDA as a percentage of net sales was 20% 90 basis points above year ago, as we began to see some nice operating leverage from increased volumes.
As Bruce will share, we actually saw more operating leverage but some of the benefit was offset by increased koby cost.
These operating results coupled with excellent working capital management allowed us to generate very strong net cash flow from operating activities of $188.8 million for the quarter.
Bringing our cumulative year to date net cash from operations, so what astounding $246.4 million.
We've always maintained a PNG food is the cash flow generating machine and this corner certainly prove that.
We used a portion of the strong cash flow to repay the revolver borrowings and our net debt to pro forma adjusted EBITDA has been reduced by more than one turns into started the year to 4.99.
Furthermore, on Tuesday of this week, our board of directors declared our 64th consecutive quarterly dividend since going public in 2004.
[noise] BG foods team accomplished this while remaining committed to the health and safety of all of our employees and to do our park to keep our nation supplied the food during this difficult time.
We continue to take a wide range of precautionary measures at our manufacturing facilities and other work locations in response to cope with 90.
And although we're operating in a very challenging environment.
Our operations team has done a fantastic job ensuring that our supply chain has been able to me an unprecedented increasing demand for our products by keeping our manufacturing facilities operating well at the same time, ensuring the health and safety of our employees.
The other heroes in this pandemic are the brands of the BMG post foods portfolio that consumers turn to when they found themselves having to provide great tasting comforting and highly trusted brands products and Neil solutions for their families when required to cook and eat at home more than ever before.
We have a portfolio products perfect for these troubling times with brands and very attracted categories across frozen and shelf stable vegetables.
Tysons and seasonings.
Breakfast foods snacks meal solutions and Baker.
With at least one of our brands in approximately 80% of U.S. households.
And found in nearly every island grocery store, we have brands and products for each meals, a day and for all age groups.
During the second quarter, we experienced tremendous tremendous strength in almost all of our brands.
With 85% of our brands growing and net sales versus year ago, including Green Giant Ortega.
Copper girl cream of wheat, Mccann, Grandma's, molasses and Victoria to name a few.
And as Bruce will share a bit later the list goes on long.
Incredibly a number of our brands double than that sales versus year ago for the quarter, including Bear Creek, Joan Imbark and Mama Mary's.
For the most part our brands with more from service exposure did not grow at high rates, but those same brands did have very strong retail consumption.
The oppressive group net sales across our portfolio was driven by strong sustain consumption throughout the quarter.
For the 13 weeks ending June 27th as reported by Nielsen. The total BMG foods portfolio grew 34.5% versus year ago and consumption through retailer checkout lanes.
About two times, the total food and beverage growth rate and among the fastest growing publicly traded companies in the U.S. since the beginning of the pandemic.
Importantly, we gained or held share nearly three quarters of our brands and categories.
Our largest brand green giant grew 45% in net sales driven by strong consumption growth of nearly 58% and shelf stable vegetables, where we gained one of the half share points in the frozen vegetable category and more than 22%.
Assumption growth in frozen vegetables, where we maintained share versus last year for the quarter book grew share in May and June exiting the quarter with strong momentum.
Frozen vegetables, as a category, while growing nicely didn't quite keep up with center store shelf stable categories due to less space for consumers to stock up.
But the category did increased a healthy 22% in consumption versus last year.
Well, we don't expect these outsized growth numbers to continue forever. We do believe our sales trends will remain elevated as long as people are going to be sheltering or working a bit more from home.
Eating out a little less and eating at home a little more.
And quite candidly, we believe these trends will remain elevated for quite some time, even after the pandemic eventually moves on.
Consumers are learning about and enjoying cooking at home.
And our brands our categories.
Our perfect fit for them.
We believe this because we're seeing a significant increase in volume from new buyers of our brands as measured by Nielsen 2.6 million new households purchased our branson's Covance struck.
3% increase across our portfolio.
With some brands like underwear, increasing new households by as much as 18%.
Encouragingly these new buyers appear to have a strong appetite to continue buying our brands as the repurchase intent.
For the percent of new buyers, who plan to buy again remains high with Catalina reporting a 26 repeat rate.
For new buyers of our brand led by Green giant at 34.4%.
Retaining these new households will be a key driver of elevated sales levels beyond the pandemic.
But our existing households are also driving significant growth is they have increased consumption of their favorite trusted brands.
We also saw a large increase in people shopping online and our business certainly benefited from that.
We estimate that E commerce sales represent approximately 3% to 5% of our total net sales and a growing rapidly inclusive of click and deliver and click and collect across our retail customer base.
Our Amazon business alone, we grew 340% versus year ago through the quarter and more than 330% year to date versus last year.
In summary, our brands products and most importantly, our people stepped up to deliver outstanding results during an unprecedented period of time.
I couldn't be more proud of our people we're more excited about our future based on our performance over the past quarter.
I'll share some thoughts on how we plan to capture future opportunity. After Bruce provide you with more details on our second quarter performance Bruce.
Thank you Ken.
Good afternoon, everyone I hope you and your families are staying safe and healthy.
As Ken mentioned.
We had a really incredible performance in the second quarter. Despite the many challenges that we faced as consumers flock to our products and those of other package food manufacturers. During this time of crisis.
This is driven a slowdown and away from home or restaurant oriented consumption.
Well contributing to a dramatic increase in food at home consumption that we expect will continue at elevated levels for sometime.
And we certainly would not be able to achieve this performance without the efforts of our team of dedicated employees across all of BG foods, who continue to work very hard in the face of this pandemic.
Separately, we are very thankful for the loyalty of our consumers who are gravitating towards our brands and this time of uncertainty.
We believe that our portfolio.
But products and our channel mix is well suited for the current situation that we find ourselves in today.
And we believe that this environment will benefit our net sales well after the pandemic receipts.
In the second quarter 2020, we generated net sales at $512.5 million adjusted EBITDA of $102.6 million and adjusted diluted earnings per share of 71 cents.
Results that were all far in excess of the prior year and in fact represented record second quarter performance for the company.
Our net sales increased by an astounding $141.3 million were 38.1%.
Increased volumes contributed to the majority of the growth in itself that we have seen in the quarter, including approximately $111.7 million an increase benefit from base business net sales.
$15.6 million of increased benefit from volumes due to M&A and $15.3 million from net pricing.
The impact of foreign exchange resulted in an approximately $1.3 million drag on net sales for the quarter.
The net pricing benefit of $15.3 million was primarily driven by the impact of our 2019 list price increases.
The trade spend optimization program that we initiated in 2019 and it temporarily lower trade spend environment.
The trade spend environment has already begun to normalize and we expect less pricing benefits in the third and fourth quarters of this year.
Increases in our net sales to supermarket mass merchants warehouse clubs.
Wholesalers and ecommerce customers have more than offset declines at foodservice customers.
Which for fiscal 2019 represented only approximately 13% of our overall net sales.
As we disclosed.
On the first quarter call. Our net sales in April increased by more than $70 million or more than 60% ahead of last year.
Net sales for may increased by more than $50 million, an increase of approximately 50%.
And for June net sales increased more than $15 million or 10% year over year.
While our second quarter was very strong we saw what appears to be in emerging theme and its pandemic.
Well typically we see a strong build ahead of the holidays that encourage large gatherings like fourth of July we did not see that build this year and actually saw a decrease in sales in the final week, leading up to the holiday when compared to the prior year period, which did benefit from that traditional holiday Bill.
Interestingly this would be one of the few times since the beginning of the pandemic that we did not see weekly year over year increase in net sales versus the prior year.
July however started off with the bank and looks to have had growth rates and net sales versus July of last year of some 30% to 35% based on preliminary results when looking at June and July combined our net sales growth was approximately 20% which is more similar to what we're currently seeing in it.
Consumption scanner data.
Green giant continues to be leader in our portfolio with net sales, including net sales of the little store brand of approximately $164.1 million.
An increase of approximately $51.2 million or 45.4% in the quarter.
Over the last 12 month green giant including lists or has generated just over $600 million in itself.
We saw outsized growth in net sales for both our shelf stable and frozen green giant products in the second quarter.
With shelf stable, adding $33.6 million in net sales or an increase of over 130%.
And frozen, adding $17.6 million and net sales for an increase of 20.1%.
Frozen growth was driven by core legacy frozen bag and frozen bag in a box line as well as innovation products, such as Green giant Rice, Veggies Green giant veggie spirals and Green giant Veggie Todd.
Shelf stable Green giant continues to benefit from a renaissance demand for can vegetables.
Well ever girl, which we acquired on May 15th 2019, and off with non our April and first half of May 2019 results was also a major contributor in the second quarter growth.
Net sales of clever her over approximately $26.5 million for the second quarter of this year and what is ordinarily a slow period for the category.
Compared to approximately $8.4 million during the portion of the second quarter last year that we own clavier girl plus an additional $8 million are so under prior ownership.
Among our other large brands, we had exponential growth from cream of wheat, which increased net sales by approximately $6.3 million or 54%.
Victoria, which was up approximately $3.8 million or 13.37, 0.7%.
And Ortega, which was up approximately $12.8 million for 37.4%.
Our spices and seasonings any aggregate increased net sales by $17.4 million or 21.4% with an acceleration in the second half of the quarter. Despite continued softness in foodservice.
We have seen a strong bill developing and traditional grocery throughout the course of the quarter as well as more recently increased demand in foodservice.
Net sales of Maple Grove farms for up to zero point $2 million for 1.5% in the second quarter with strong retail performance offset by softness at some key food service customers.
Similarly, New York style was down zero point $7 million or 6.9% due to a combination of foodservice exposure as well as more muted performance that we are seeing an a daily aisle relative to the center of store and frozen us.
And we also saw strong performance across the rest of our portfolio in fact outside of our seven large brands in our sliced spices and seasonings net sales of the rest of our portfolio increased by $35.3 million or 38.2%.
And as Ken mentioned earlier, approximately 85% of our brands increased net sales during the quarter with approximately 80%, including being M. PNG Grandma's, Los-palmas Mama Mary's Mccann, Poland or Underwood.
Increasing net sales by double digits in the quarter.
Gross profit was $134.1 million for the second quarter 2020.
Or 26.2% of net sales.
Excluding the negative impact of approximately zero point $5 million of acquisition divestiture related and nonrecurring expenses. During the second quarter of 2020 gross profit would've been approximately $134.6 million or 26.3% of sales.
Gross profit was $91.9 million for the second quarter of 2019 or 24.7% of net sales.
Excluding the negative impact of $4.9 million.
Of acquisition Divesture related and other nonrecurring expenses during the second quarter of 2019 gross profit would have been $96.8 million or 26 point.
Of net sales.
Selling general and administrative expenses were $44.3 million in the second quarter, 2020, or 8.7% of the quarters net sales up slightly in dollar terms, but a decrease of approximately 200 basis points as a percentage of net sales.
Selling general and administrative expenses were $39.9 million in the prior year quarter, which was 10.7% of net sales.
The dollar increase was composed of increases in selling expenses of $2.7 million and general and administrative expenses of $4.7 million, partially offset by a decrease in M&A.
Nonrecurring expenses of $2.7 million.
Warehousing expenses of zero point, $2 million, and consumer marketing or zero point $1 million.
We generated $102.6 million in adjusted EBITDA in the second quarter of 2020 compared to $71 million in the prior year period.
The increase of $31.6 million, an adjusted EBITDA represents our third consecutive quarterly increase in adjusted EBITDA.
As compared to the comparable prior year quarter, following our lapping of the one year anniversary of the Divesture of pirate brands in the fourth quarter of last year.
Strong base business performance that has been enhance by the increase sales, resulting from the onset of covert 19 pandemic and the resulting shelter at home and work from home policies.
Adjusted EBITDA as a percentage of net sales was 20% for the second quarter of 2020, an increase of approximately 90 basis points over the 19.1% generated during last year's second quarter.
Adjusted EBITDA as a percentage of net sales was negatively impacted by approximately 90 basis points or approximately $4.7 million in cobot 19 expenses related to health and safety precautions, including enhance annotations and employee screenings and increased compensation paid to our manufacturer.
The employees in the form of temporary wage increases special bonuses and continued paid during quarantines.
Adjusted EBITDA was also negatively impacted by an additional $3 million.
Or 60 basis points due to the impact of foreign exchange.
Net interest expense was $24.8 million in the second quarter 2020, an increase of about $1.6 million compared to the prior year period.
We generated 71 cents in adjusted diluted earnings per share in the second quarter of 2020 compared to 38 cents in adjusted diluted earnings per share in the prior year period, driven by our strong operating performance and a reduction in our share count.
The Angie foods has historically been a strong cash flow generator, but our second quarter results were unprecedented for us.
We generated 188.
Point $8 million and net cash provided by operating activities in the second quarter of 2020, and we have now generated $246.4 million and net cash provided by operating activities through the first six months of the year.
As you May recall, we highlighted our intention to reduce working capital this year and generate generate outsized net cash provided by operating activities.
Our planned reduction in working capital has been accelerated by the impact of covert 19.
This combined with a substantial increase in our net sales for the first six months of the year have dramatically improves our net cash from operating activities.
The other aspect to think about with regards to our strong cash flows is our balance sheet and how our performance. This year has impacted our net leverage and accelerated our deleveraging goals.
During the first six months of the year, we've reduced our net debt by approximately $170 million to 1.7 billion at the end of the second quarter.
We have reduced our net debt to pro forma adjusted EBITDA from 6.1 at the start of the year to just under five times today.
We're now well within our stated target range of four and a half the five and a half times net debt to pro forma adjusted EBITDA and we expect continued strong financial performance throughout the back half of the year to further reduce our net leverage in 2020.
While we have suspended giving guidance for fiscal 2020 due to the unpredictable macro environment every day, we're learning a lot more about the world that we're currently living it.
Based on the current environment with still elevated incidences of confirm Corona virus cases, we expect continued shelter at home and work from home activity.
Unfortunately, we also expect a soft economy and higher than normal levels of unemployment.
As a result, we believe that we will remain in an environment, where people are eating more meals at home than in the prior year.
Boosting our traditional grocery sales, while putting pressure on our foodservice sales.
Based on what we know today, we expect to see continued elevated levels of net sales adjusted EBITDA and growth in net sales and adjusted EBITDA throughout the remainder of the year.
Ultimately, we expect our retail shipments to eventually type fairly closely overtime to our retail consumption trends and this is effectively where we found ourselves when we look back at our June and July periods.
Our factories are running full steam to keep up with this demand, which is helping to generate positive operating leverages.
But we also expect that these benefits will continue to be offset in part by the incremental costs of the precautions that we feel are necessary to operate safely in this environment.
As a result, we believe that our margins will generally remain in line with perhaps with a small upside to the prior year and quarterly levels.
However, it is very hard to predict timing or the full impact of covert 19 pandemic will have on our business.
Or to provide financial guidance in this environment and as a result, we're continuing to suspend giving guidance.
The ultimate impact of the Cobot 19 pandemic on our business will depend on many factors, including among others the duration of social distancing and stay at home mandates and whether a second or third wave of covert 19 will affect the United States and the rest of North America, our ability to continue to operate our manufacturing facilities.
And maintain our supply chain without material disruption and the extent to which macroeconomic conditions, resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating habits.
I would now like to turn the call back over to Ken to highlight our plans for the rest of the year Ken.
Thank you Bruce.
As Bruce mentioned these unprecedented times make it extremely difficult to predict the future.
So we will remain focused on the things, we can control and nimbly react to the things we can't control.
During the second half of the year, we will continue to work closely with our supply chain partners customers to ensure we continue to provide uninterrupted service to meet the increase demand, resulting from the pandemic while of course, keeping our employees seasonality.
At the same time, we will continue around new product innovation and other brand building efforts as we look to turn some of this pandemic related increase in demand into long term growth opportunities for our brands.
We are taking this opportunity to make incremental investments behind brand innovation.
Marketing.
And building out our ecommerce capabilities.
Well the introduction of new products have been somewhat delayed due to cope with driven detailer shelf resets delays, we remain very excited about our innovation pipeline and have received terrific response from our customers.
This fall, we'll continue to launch several new products, including Green giant frozen vegetable carved replacement products, including Green giant pizza causal Onquest Green giant veggie hash Browns green giant cauliflower, yaki and cost loan breadsticks.
We will also leverage our acquisition of song wisely, introducing green giant veggie fries.
And in China that hearings are cauliflower based take on onion rings.
Regarding the formalized brand will also relaunched background in the natural channel plus a few of the current mainstream retail customers layman's here as well.
On the dry grocery side the business we plan to continue the launch on the shelf stable version of Green giant raced veggies, a nutritious alternative to traditional dry rice made from a 100% plant based lagoons like lentils suite piece and you piece.
We also going to do one of our first cross promotion, where we planned launch green giant frozen vegetables seasons already dash insult threed seasonings introduce green giant consumers to the dash brand.
Well many customers delayed their new product resets, we certainly have not needed to volume this year, given the large increases in our base business.
And introducing these items later this year than planned and even some pulling in the next year should provide greater growth 2021 than we originally planned.
We plan to support these new product launches with increased marketing investment to ensure their success.
In addition, we will shift more investment in commerce to make sure. We continue to engage with consumers. During this rapid increase in the adoption of this new shopping behavior.
Our ecommerce business is growing rapidly and we see strong trends building throughout the pandemic, which we expect to continue.
Our goal this year was to be fully ecommerce capable by year end, but we're ahead of our internal timeline and we expect to be fully capable, but it is the beginning of the fourth quarter.
We've experienced tremendous growth in E commerce sales year to date without even being fully ecommerce capable. So we expect even stronger trends going forward.
Well actually will take the tremendous opportunity that those unfortunate pandemic has given us to generate significant cash flow and for the deleverage our balance sheet. So we continue to execute the tried and true BG strategy of maintaining a stable base business, while growing through accretive acquisitions.
This concludes our remarks and now we'd like to begin the Q and a portion of our call operator.
Thank you at this time will be conducting a question answer session. If you like to ask a question. Please press star one on your telephone keypad a confirmation total indicate that your line is in the question Q you made Chris Star to if you'd like to remove your question from the Q.
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One moment, please why would pull for questions.
The first question is from Brian Holland D.A. Davidson. Please go ahead Sir.
Yes, that's a good evening gentlemen, congrats on the storm corridor I wanted to ask about a.
Pre kovac one of the concerns on the business was kind of the the relative performance took your kind of composite categories. As I think you noted today, there's been an inflection.
There within the past couple, but so curious what specifically would point to because obviously you know you're in categories that are attractively positioned but so are your competitors. So what do you <unk> 0.2, specifically as driving the inflection in share for baby in moderately or worse negative to positive today that'd be the first part of the question and the second part is.
What plans do you have in place or what kind of urgency do you feel you need to preserve that that improvement your relative performance.
So did you ask because what we thought why we thought we were gaining share in these categories.
Yeah sure. So I think Theres, if you look at the data in the past couple of months, there's been an inflection where I think you know on whole you've been a little bit negative sometimes they do a little bit worse now that's going positive. So curious within those categories that there's one or two do you would highlight where you feel like.
You benefited more than your competitors in those categories.
Well I I'm not sure I'm not following you in terms of the fact that were a negative and positive. We are strong consumption started in the third week of margin that we haven't looked back and we've been.
Our consumption growth has been tops in terms of food companies across the board [noise].
You know ever since the start of the pandemic. There were some there were some areas like in green giant frozen vegetables, we were still cleaning up promotions, you know, which was a negative impact versus year ago work as we plan were fully passed all that so now we're kinda on even keel from a promotional standpoint, and then of course are.
Innovations, adding a lot so.
The only other delay was spices and seasonings as a category was fascinating well, while the categories like pasta sauce and rice and.
And can be a beans, and baking products and things of that nature started taking off spices and seasonings was almost like.
A delay by about a month.
Because I think people were using up spices and seasonings hadn't they're covered and do their increased activity in cooking, a baking you saw them come back and that category as well as our brands really start to take off in April where most of the other categories that have benefited from called it took off in March.
That's perfect. That's helpful color I appreciate it and then.
Just one more I guess, you're thinking about your capital allocation priorities, obviously with the big bump in EBITDA. This year, you've got a lot more cushion here and you know you can look at a debt pay down as as Youve done.
So, notably so far through the first half of this year. There is also baby reinvestment you've talked about the traction that these brands have had as consumers are migrating towards that hope is there any shift in the capital priorities our capital allocation priorities here in the near term given given the bump in EBITDA and maybe the opportunity to seize on Brazil.
You know, maybe big bump in household penetration or two or no real change there and still kind of following the same beats I think from a capital allocation standpoint, we've always strive to do we thought was best for shareholders, which is one returning excess cash in that in a in a form of the dividend I'm still high priority.
Keeping healthy balance sheet, and keeping and making sure that balance sheet is primed for for M&A and other investments and so those first two things you know always felt confident about but but clearly demonstrating with a much lower leverage.
Our balance sheet is very healthy today.
As far as reinvestment absolutely I think.
I think candidates highlighted over and over again, the importance of making investments in marketing and E commerce and positioning our brands.
To be a strong coming out of the pandemic as they are today and then obviously.
We're always on the proud for M&A, it's a matter finding the right ones being selective and disciplined but but also very much a priority for us.
Thanks, Bruce I appreciate it that's worked out.
Yeah, and just to be clear so from capital gains will make investments in marketing E commerce, but we still plan to have a above plan and significantly above year ago.
EBITDA growth and cash to give to Bruce so that we can continue our dividends as well as reduced our leverage we've heard loud and clear from the investment community that leverage got a little too high for folks.
Are there for their stomach and and we want the flexibility to get back to our strategy of accretive acquisitions. So having a nice strong base business. The best thing, we can do for that and we're excited about being able to get back on the acquisition drop.
The next question is from Andrew Lazard Barclays. Please go ahead Sir.
Hey, Ken Bruce how are you.
Andrew.
Well thanks.
I guess you know in thinking about realizing obviously is a a lot of dynamics at play here in terms of forward looking guidance and things like that.
You know your comment about EBITDA margins in the back half maybe being.
In line with or a little better than than year ago. I mean, obviously the through the first half of the volume leverage that you've gotten off of this increased volume has been phenomenal and we've seen that come through for probably a lot of food companies is there.
Are there certain aspects are discrete things I'm, well aware of that might you know restrain some of that volume leverage in the back half because obviously, you're still going to see it would fit what would team elevated you know consumption levels for a while I think you mentioned that very recent trends, we're settling in that kind of 20% level and even if they sequentially decelerate from.
Here It is still a lot of operating leverage there. So I don't know if it's just incremental investment as you mentioned.
Andy or cobot costs, maybe there's some quantification of those to give us a sense of it but anyway just hit the gist of my question, Yeah. So a couple of things that that.
No to hit on their support one obviously elevated sales and with that elevated EBITDA and then the question is what happens with margins and as you saw.
Considerable leverage from an operating standpoint and from an S. DNA.
From a cost standpoint, a couple of things to to remember, which one is we produce in house about 50% of our products and about 50% through co Packers and so we're not necessarily getting the same incremental leverage on co packed items from an internal manufacturing we are dead.
Finally, seeing you know operating leverage however, some of that benefit is also offset by by incremental cobot 19 costs and for US. We're looking at this from a long term perspective, its the right thing to do but it's also smart policy, we're making sure. We can take every precaution in our factories.
To keep people safe into keep and running.
For for an extended period of time, rather than sacrificing any of that and there's a cost to the operating in that environment. So we think theres benefit you know we showed there there is benefit.
This quarter, but there there's probably a ceiling on how much that benefit can be just given the the world that we're living it.
Alright, Thanks for that and then can you know it's interesting there, there's obviously a pretty big debate raging a in the food space right now over you know how sticky right some of its incremental consumption and new from new consumers and lapsed consumers will be you seem pretty confident that even sort of post pandemic there there could be some positive.
You know positive Halo right from all this on some of your key brands.
Hi to think it maybe unrealistic that 100% of these new buyers will all of the sudden sort of lead these brands once they've sort of try them, but but again I know, there's a big debate about that but your level of confidence in that Im just trying to get a better idea of what drives that for you and yeah not not in this sort of the current environment, but the the post pandemic world.
What gives you that level of confidence that your brands can see some of this continued benefit. Thank you.
Good question. So the reason why we're still confident is actually when you look at our growth.
While while we love the new households, I think I mentioned that last I believe I mentioned that last.
Earnings call I've been doing this for almost 40 years and.
New households are like the fountain abuse for brand market or you know we fight for years to try to get up <unk> percent increase in household penetration.
And Underwood saw an 18% increase alone.
However, when you look a lot of the increased volumes a lot of its the same households, just buying anymore.
So the reason why I'm. So confident have doesn't have as much to do with our brands. Our brands are perfectly position I'm I'm confident because I haven't talked to a you know where part of the BG as part of the consumer brands Association to see VA deal GM may the old grocery manufacturers, such as and there isn't a.
There isn't a food company out there and in fact, there isn't a banking company or any of the company I haven't heard that said post pandemic, we're going to be in a new world of work from home versus work from work.
So I'm I'm enthusiastic because it just a small percentage of people stay at home.
You got that means you have to have breakfast and how that means you have time to run downstairs and throw banana bread and up and that means you have time to with up a quick quick serve lots. That's what we're finding can people's behavior I find that my own behavior being more at home. So.
So it's really about everybody feeling that the post pandemic world is not going to be the same as the pre packed and mcworld, even if there's a virus vaccine tomorrow.
That's what makes us so so as long as people are going to be at home just a little bit more that's positive trends more categories, like we have and vegetables, and baking and spices and seasonings and breakfast I mean, we again the breakfast portfolio is a perfect example, as people are home.
In hot cereal still growing 30, or 40% consumption in warm summer month [laughter] versus year ago.
So in a word it's really about the world's gonna be different even even when a vaccine arise.
Thank you.
Okay.
We have a question from William Reuter Bank of America. Please go ahead.
Hi, Thanks for taking the question you talked about the terrific response, you proceed from new products, although it sounds like very few of your supermarket customers.
Shelf resets in a in July are you expecting it these are being delayed until the fall or do you think those resets are being just skipped and they'll do one in January of 21.
It's a mixed bag. So we have italias on every one of our customers some or planning to do the for fourth quarter in time for the fourth quarter and some are delaying till next year.
And you know we've got that all appropriately in our forecast but.
I know what we're so excited to get the new products to market, but we certainly don't want to do anything that our customers don't want and again, we were happy with the base business growth. So we'll take our customers lead on when they want to put it on shelf the right way you know there, they're having their own labor challenges and so.
You know shelf resets in many cases are being delayed till next year, but it's not the majority I mean, I I don't know the exact number but it's a fairly balanced between just delays versus delays in this year versus pushing off till next year.
Is there anyway to quantify what that shelf space you, maybe gaining from these new product introductions would be in you know you there between fall in January of next year.
I don't have that number's offhand, but we look at it is net net skew increase so if we introduce phygen skews, we don't necessarily get a whole that five as long as we come up that positive because this whenever there's new products you know everybody's going to have to.
Give give it the ultra so to speak in terms of giving up skews because theres not unlimited space. So we always look to make sure that were highly net positive in the skew count that we we have so.
And that's all planned in our in our forecast because there's we have to say two steps cannibalization, there systematic cannibalization, meaning I'm going to launch new five new excuse, but I'm going to lose too. So I I've lost the volume from those two skews that systematic ambulation and then of course is always consumer cannibalization that you know sometimes some of the new new concern.
Assumption comes from from your base case consumption.
The reason why we're so excited about green giant is that we're not launching just a bunch of new vegetable products, we've been on a.
Long term trend of launching new products.
Really focused on other categories made from that stumbles and and going after a real estate knows area. So that's what I'm most excited about so.
Peter Pan Pizza, and Tots and hash Browns in and potatoes section then.
And Yaki and the frozen pasta I'll end now dry raced veggies over in the retried lifestyle. This is all that real estate for Green giant, which we believe will be drive more incrementality.
Great I'll pass on to others. Thank you.
Thanks, Phil.
We have a question from Nik Modi RBC capital markets. Please go ahead Sir.
Yeah, good evening everyone.
Oh, Hey, how are you I have just two quick question first one's online and obviously well be company and seeing a certain amount I'm just curious from your vantage point, what kind of consumer was buying your thoughts on line. I mean is it's just all the placement of what some of the buying a brick and mortar environment, where incrementality here. So that's the first class.
And then the second question as to the degree you know we've seen all surgeon cases, we're hearing from retailers around the country that they're starting to stock up with the pair for a second wave. So I'm. Just curious you know that's something that you've seen it may be reference tenure July commentary that things are off to a very good start I'm wondering if that has anything.
The do it.
Thank you for itself.
So.
Your first your first question was about E Commerce, I mean E. Commerce. We believe is a cost of venture you got to be there because people are changing.
They're they're buying pattern so.
We see a mixture theres younger millennial shopping but also there is older people. So online is now you know as older people don't want to be exposes watching going shopping in store older people were shopping online have it delivered at home as well [laughter] or click or the click and collect version. So to me. It's it's you know, it's we're doing a better job on line now.
And we were before and we'll continue to do better job. So, perhaps it's a little bit more incremental than what we've seen before but at the ended the day online is not necessarily I don't know of any data. That's as online is driving increased consumption. It's just a mix of shopping youve got to be there.
Got it you've got to be present, and I'll retailers demanded so our large retailers want us to want to want to make sure that their electronic storefront is is we are well represented just like they want us well reserved in their physical store front and they don't want any difference and you know they wanted to all be the same so that it's.
Absolutely simple for the customer that no matter, how the customer wants it shop in store.
Quickening deliver click and collect they want it to be seamless for the customer and they want us as manufacturers to make sure that our products are ready to be able to be seamless in front of their customers and that's what we're working that's we've been working hard when I talk about getting E commerce ready.
Capable.
In terms of your your second question was remind me it was.
Yeah, we close preparing for a second wave and Oh sure on your second wave Yeah, I mean, I guess I guess it yet you look at the news reports so.
As soon as.
We you saw news reports that states, where now you know, perhaps got a little bit too aggressive them people got lackadaisical and California shut down in South Florida is having an issue we absolutely saw an increase in average daily orders in our open order book looking out.
Immediately it's it's fascinating so as soon as you saw big States, we started to see a little bit of the jump not necessarily in.
Well I bet, you could say I guess in building inventory My guess I don't know about retailer inventories in total, but I guess you can say once they hear that states are shutting down and not you know in EM and restaurants and going backwards again, you know, they're going to be ready for the increased activity as oil and <unk>.
And we'll see that and you know if that happens, we'll see that in there and the in the consumption numbers as reported by Nielsen buyer I services.
Excellent. Thank you for your help.
Thanks, Nick.
Welcome.
We have a question from Carla Casella JP Morgan. Please go ahead.
Hi, I guess just goes along with the questions about new products and the trends there, but also on any trends you're seeing in terms of trade spend or how the retailers are viewing and trade spending is that opening back up or any enrichment restrains trade spend out of coming out of Cowen.
We saw a little bit of relief on trade spend in the first half of the year and were but you know we're planning on making sure that we're going to be promoting.
Equal levels from year ago for the rest of the year unless of course, there's a huge jump and you know in pandemic fears again then.
You know as they did in the first part of their customers may not want to be as aggressive on promotion as they might be in pre overtime. So we'll take the lead from our customers were ready to match our promotional activity from year ago.
We'll take it will take it from our customers as to whether or not they want to continue to do that.
Okay, great. Thank you.
We have a question from Bryan Hunt Wells Fargo. Please go ahead Sir.
Thank you I just have two questions one.
If I look at inventories and Grand you have seasonal fluctuations because of pack, but you're at the lowest level and three and a half years and I was wondering did where are you all missing sales throughout this period or recently because you're out of stock can you talk about the quality. It inventories you have I imagine there probably the best.
You've ever you've ever had you been able to clean out any.
Old inventory again, just talk about that your inventories and whether you missed any sales.
We it is we are in a really good inventory position, we actually went into the quarter with.
We are high inventories and that helped us in the first part of the pandemic because when March and April boosted we were able to run off high inventories as we got our manufacturing.
System geared up.
For when those inventories going to be depletion, which is which is a big reason I think why you know that plus our keeping our people safe and our plants running I think and having the right brands and categories why we're probably well we're you know.
Well I think we're number two in terms of consumption growth of any major food company in terms of growth versus year ago as reported by Nielsen and IRI.
We had a few product lines, where our customer service levels were well below 90%, which as you know we don't like to be there you want to be we want to be 95% or more you know ones can vegetables, because the pack is only one time here [laughter] and yeah that you you pack that as the crop comes into the summer and fall and you got to you got to make that last year.
So we saw some issues there while underwood has grown dramatically and you saw some constraints there it's not material. It wouldn't have had a huge impact on our EBITDA and cash so, but yes else could have been a little bit higher because three or four of our product lines, we struggled to keep up.
But at a 50 plus brands to having an issue on three or four of them was we thought was a pretty good pretty good performance and weve resolve some of those issues and we just in the last month alone have gotten back or you know increased our service levels.
No copper Grade example, we purchased we purchase that building, we purchase that brand in that company and the building that we produce baking powder is still for doing the same thing that that building was intended was built to do over 100 years ago [laughter], they've been pushing they've been they've been making they've been packing more baking better than they ever dreamed during.
This timeframe.
And we're actually now going to be expanding some of that production and some of our other facilities to help to help to meet these amazing demand because of research shows that while people have gone through a lot of baking powder. There. It's not like they have too much you know that's a that's something that many of US just by account a year [laughter], but people are going through that can.
And our customers are saying they want to be big gearing up for a strong fourth quarter. Because you know people have to still be ready to do their traditional baking in the fourth quarter. So.
Whatever production problems not production problems, but whatever shortages, we had in the past we're rapidly solved and get ready for the rest of year to be too to get those to get those customer service those back above 90%.
So are you having any are what are they issues within your supply chain. If you are having any whether its internal or external with your co packing partners.
Arco pegging partners that I've been very good it's been very spotty in terms of a one or two product lines, where they haven't been able to scale up quite as much. So in fact, we're going to believe that and and do some supplemental.
Supplemental package.
On our own above a brand of product line or two that we haven't back before.
For the most part our.
Our our co pack partners have helped us out in terms of helping us in places where we've been at maxed out we've actually brought on a couple of co Packers a couple of product lines that we didn't traditionally co pack to have them help us gear backup for sustained high consumption rates.
Alright, then my last question Ken is Hey, you know you talked about pack a just a minute ago can you talk about how the crops look and maybe what your plan is for pack this year relative to a year ago. That's it for me at best of luck. Thank you.
Thank you or the pack from what we understand has is good we.
We.
Did the spring was good so there wasn't delayed plantings.
So we hear that the crop is going to be decent pieces are basically in we didn't get older piece. We wanted we but we got a lot <unk> very close to what we want it's the p. crop has been short for a few years running so.
It continues to be short from what we what we would ultimately like like to have and we haven't heard any issues on the horizon, but there's still a long way to go we still have a lot of summer and the Carver's goes in the fall and mother nature is physical but so far we've heard it will be a if you know a better better crop than it's been the last couple of years.
Thanks for your time of basic.
Thank you [noise].
The next question is some Michael Lavery Piper Jaffray. Please go ahead Sir.
Thanks, Good evening.
Michael I do.
Two questions related to inventories one on the trade inventories your organic sales growth and your.
I arrived the numbers, we see sales growth aren't very far apart, but.
With such a surgeon general.
What the retailer inventories look like and how much of a restocking lift we should be looking for in the second half or third quarter, maybe specifically and then on your own inventories with the working capital benefit that you've gotten.
Can you give us any sense you or your your day than quarter. Kessler of course are very strong just any sense of how much of that make it may reverse as you restock from your own inventories as well.
Yeah, I think all through alternative it a bruce on on our inventories the the big headline there's going to be obviously, our inventories will now below given we're going to bring the green giant vegetable pack end, but on retailer inventories were not sensing that there's any big huge stockwell, meaning retailers built inventories then depleted and now they're going to.
Rebuild the most of our inventories are most of our customers around really you know efficient.
Supply chain replenishment program. So you know, it's really all about if they're seeing more shoppers in the store there and the takeaway gets you know increases there and they're going to order more so.
It's not as much of a lag effect with our retailers.
Like I said, we saw.
We saw the thinking with the.
The first or second week August already.
Open orders looking out into future pop up because you know.
Places like California, Florida are running into difficulties, so it's pretty immediate versus some long term stock up and drawdown of fat.
And Michael is with regards to our inventory I mean, we did talk to after our fourth quarter call or during our fourth quarter call about desiring to to bring working capital down a little bit. This year. So some of this is plan some of it's accelerated but still within plan I'm I think you're right.
It back half of the year, particularly around pack season, you know, we usually ramp up inventory during the third quarter fourth quarters. It usually a drawdown there is a fair amount that's influx because it really is.
What happens with over 90, and what happens with back to school.
We're seeing strong demand and assuming that continues I'm, we're producing everything that we can so we've got enough product to sell the people in that kind of how it's been chugging along for the last few months.
Yeah, we got to be correct, okay going forward.
Great. Thank you very much yep.
We have a question from Rob the consent Jefferies. Please go ahead Sir.
Great. Thank you.
So I guess just one general question on reinvestment rate potential I guess button it up the back half a year, but then maybe it out for the foreseeable future.
You know look obviously you have a very nice topline Bob.
Category for the Consols good.
I'm very well in certain categories on a share side, but you know kind of like every other company say now for the most part of that and try to get this nice you know increasing household penetration kind of once the lifetime. So to speak but then as you kind of come out of that.
There will be some decelerating sales, maybe you know not that quickly, but it would decelerate to some extent and then it would the feel as it did like everybody that's been able to increase that household penetration, which sake by let's say, it's kinda everybody.
The then everybody rushes into that reinvest to try to hold it right to the competitive environment gets more competitive right trade spend.
Yeah, kinda dip a little bit tougher in the back half this year.
Marketing budgets right what have you.
Got you know kind of are going to office or hearing you know kind of general food in general excuse me.
So yeah, the topline remains elevated.
I guess it goes back to maybe average question around like you know kind of what gives you the confidence not only that you'd have food at home cleaning up a bit which I tend to agree with two but that that competitive dynamic doesn't really you know skyrocket to an extent that you kind of you know a leader.
Yourself enough room at this point to really be able to spend up.
Because we're all talking about Q3 June July.
I'm thinking about 2021 and thinking about how do you budget for next year, what did the topline be how much do you need to reinvest it's kind of any color on that reinvestment side, how you kind of hold or you keep that household penetration sticky or next 12 18 months.
[noise] well, we are we haven't done our 2021 plan yet we're still still may So you know dealing with the current state of affairs, but you know this business is always very competitive so I.
I don't know if it's going to give the more competitive post Kim dynamic just because we're trying to capture new houses were always trying to get new households, and retain or households, and fighting for share.
What I would say is that we're very encouraged because.
This 10 Demick has allowed US you know because the shelf set set dilute delays.
Our pipeline is even more robust so what I'm, saying is it if our pipeline was delayed by six to nine months that just.
We were already planning beyond that so our our innovation pipeline is really now chock full [laughter], because we've had a six month or so delay and so we're very encouraged because our innovation pipeline is going to be able to drive growth.
Farther into the future them, we were planning because it's not driving much of our growth this year. So.
Where were you know we're excited about the innovation, we the investment we make this year, we're hoping to keep that for next year, rather than having to reduce it but like I said, we haven't built our plan yet.
We also next year will benefit you know we had a soft first quarter. This year. So we're planning we're hoping for a good a good start to next year and then we really have to see how consumption shakes out as we as we build the rest to build the rest of the plan for the rest of year.
Okay. So just to kind of summarize it seems like you know because that's the way because of that innovation lined out that you to possibly kind of hopefully I is maybe the return on that investment could it will be higher just given you're investing right kind of had pulled back a little bit her quarter, but.
Can you give to reinvest later with better innovation that hopefully the probability of share gain sticks.
Absolutely.
Absolutely right.
Great. Thanks to pass it on.
Thank you.
We have a question for Robert Moskow Credit Suisse. Please go ahead Sir.
Oh. Thank you quick question, all right I out doing good.
Question on that the path or for the Bestival crop and I. Once you know it do you or do you did when you decide how much to buy are you, making a forecast for for what the demand growth is going to be for the next 12 months and vegetables.
How are you are you aggressively buying this year more than you bought the prior year as a result.
Or do you buy conservatively and then just assume well if demand is really strong well, we'll get raw materials from from other sources along the way just wondering how it works.
No we have to we ask the we have to forecast the business and.
You know to be able to make sure that if you have one package here you have to make sure that you get a secure enough for what you believe commands going to be.
And that hurt being G., a few years ago, when we lost a major customers. So the inventories popped up because the customer you know the pack was determined and that's troubles. We're in the can before they knew about the lost customer but.
We did increase our sales forecast so we get a chance you know from from the start of the year through May we get a chance to adjust our adjust our forecast.
We did take it up.
And even.
Even found alternative supplemental suppliers when our major when our major suppliers couldn't give us all we wanted based on the increased demand for can vegetables in particular.
And we got a lot of what we asked for we didn't get everything who will be asked for but then again the crops not in yet so the commitments, though are up versus year ago because of the.
You know, we drew down so much inventory so we have to.
When we when we do a new pack, we not only have to project demand we have to get back to the inventory levels that will ensure profit good customer service not only today, but you know a year from now.
Oh, okay, but the net of this is you bought aggressively more so than you did a year ago, because you expected demand to continue to be strong.
Yes, the fabric, okay, all right, yet, yes, and end to end to make sure we have enough of a public stock inventory.
Okay.
Very good.
We have a closer from David Palmer Evercore ISI. Please go ahead Sir.
Thanks, and congrats on the results.
Yeah, the free cash.
That free cash flow number two the first half the year was.
About 120% of EBITDA, how should we think about the free cash flow conversion for the full year or do you.
They get might stay at that sort of ratio or any reasons, we should think higher or lower.
Good to be big obviously, the one thing that to keep in mind third quarter, we do by a lot within the vegetable pack. So that's always usually our softest quarter.
From a free cash flow standpoint, but but as we've been saying for sometime large large demand causes large sales large sales calls as large EBITDA large EBITDA is going to create a lot of cash flow.
Yep.
So.
I would like north of.
Like free cash flow being higher than EBITDA. This year wouldn't surprise you.
I don't know that I'd expect it to be higher than than EBITDA. This year, because ultimately we were going to be reinvesting in buying some more inventory in the third quarter, but we'll have a real good definitely here.
Got it.
The <unk>, we're getting for far enough along right now where you've seen the you and you might have data on this consumer insight data where are you see who's trying your product and how many where your household.
Expansion has been and then you might even I understand what the repeat of those consumers has been in other words, giving you a clue as to what their actual satisfaction is do you. How do you have any data points, there to share about which brands and categories. You feel like you've had the most triers and the most satisfied triers.
It's across the board I said as I mentioned, we saw.
We saw 3% household penetration overall increase and we saw upwards of 80% of brand like underwear downturn I have all the numbers of thought my head.
But encouraging on our largest brand we saw increased household penetration green giant and a 34% indicated repeat rate so that's pretty pretty.
Okay. That's those are pretty nice numbers.
No. The last thing is when we see some of these scanner data it doesn't it's not a perfect audit in terms of the promotional activity because of course, the fact that it's not always people to check out what's going on the stores.
So in some times, there's a more promotional activity then it looks like are you really see what looks like you know 567 points of dropping promotional activity yeah in terms of sold on promotion.
Is your spending going down that much and then heading into the second half the year, there's there seems to be a little bit more money out there to spend or do you anticipate it being a more promotional.
Hey environment in your key categories.
We so when Bruce talks as Bruce mentioned pricing. So most of our pricing is due to trade promotion division season, and some of that's less promotion. So when you go folks so and you see that in the you know when you look at the Nielsen or IRI, you know incremental versus base volume baseball.
Games are up across the board in many cases promotional volumes are down.
We don't necessarily think that the rest of the year is gonna be more aggressive promotions than prior year, but we do we are planning to make sure to be promoting more in the back half of the year than we did in the first half of the year.
Got it.
Thank you, but that but that could change [laughter] you have another locked down in more than just a couple of states and you know it could change and that could be less promotion again I'm like in the like in the March April timeframe.
Makes sense. Thank you.
There isn't that ladies and gentlemen, this concludes todays question and answer session.
And we concluded the conference you May now disconnect your lines and thank you for your participation.
Thank you thanks for joining us thank you operator.
[noise].