Q2 2021 B&G Foods Inc Earnings Call
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You're currently on hold for this PNG Foods, Inc. Second quarter 2021 financial results Conference call. At this time is for gathering additional participants and plan to be underway. Shortly we appreciate your patience and please remain on the line.
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Good day and welcome to the BMG Foods second quarter 2021 earnings call today's call, which is being recorded is scheduled to last about 1 hour, including remarks by BG Foods management and the question and answer session.
I would now like to turn the call over to Sarah Geralyn Senior director of corporate strategy and business development for PNG foods Sir.
Good afternoon, and thank you for joining us.
With me today are Casey Keller, our Chief Executive Officer, and Bruce Walker, Our Chief Financial Officer.
You can access detailed financial information on the quarter and the earnings release, we issued today, which is available at the Investor Relations section of BG Foods Dotcom.
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 BMG for its most recent annual report on form 10-K.
The current SEC filings for a more detailed discussion of the risks that could impact our company's future operating results and financial condition.
AMG 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 EBITDA before COVID-19 expenses adjusted net income adjusted diluted earnings per share and base business net sales.
Reconciliations of these financial measures for 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 2021.
Bruce will then discuss our financial results for the second quarter as well as expectations for 2021.
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.
We are pleased with the company's performance in the second quarter and our prospects for the remainder of the year.
As we expected the second quarter was the most challenging to lap from a comparative perspective.
Given that Q2.2020 occurred at the height of pantry loading in stocking during the COVID-19 pandemic.
However performance remained elevated relative to 2019.
As many of you know this is my first earnings call at <unk> Foods.
Now been on the role as CEO for about 6 weeks.
So for the folks on the line that I haven't met yet it is a pleasure to meet you day over the phone.
Certainly looking forward to meeting many of you in person over the coming months as we get back into the cadence of in person investor conferences and industry events and Tradeshows.
While I am mostly in listen mode for now I will be happy to share some of my observations. So far and then come back over the coming quarters with a more detailed discussion around strategy the portfolio as well as our opportunities and challenges at <unk> foods.
Yes.
Obviously, 1 of the biggest drivers of industry performance for the past year on a half has been the COVID-19 pandemic.
In many cases this is a matter of portfolio DNA.
What are the brands what are the categories.
Coupled with management's effectiveness in keeping employees safe mitigating business risk maintaining supply and maximizing opportunity.
Here at <unk> Foods, we have done a pretty good job at the height of the pandemic in Q2 last year, we generated some of the largest growth numbers in the packaged food industry.
Today Covid continues to be a concern in everyday life across the country and around the world.
But with the passage of time and the increasing proportion of the population that has been vaccinated, we expect gradual if uneven recovery in normal economic activity.
We do have opportunities coming out of the pandemic, though when I look at the consumer trends that accelerated during the pandemic ecommerce comfort brands baking cooking Enhancers flavorings and seasonings there are lots of opportunities for the P&G portfolios at the center of these trends.
We clearly aren't going to match 2000, Twenty's net sales on our base business, but we are a larger business than we were in 2019, driven by continued growth in interest in cooking baking and eating at home.
<unk> base business is up 7% on a 2 year stack from 2019.
Within the portfolio, our spices and seasonings baking and meals brands are up 20% versus Q2.2019.
And specifically on spices, and seasonings, which is about 20% of our total company portfolio and aggregates to be the number 2 spices and seasonings business in the United States.
Net sales are up more than 20% from Q2, 2019 and remains well positioned coming out of the pandemic as more consumers continue to cook more often at home.
Also the spices and seasonings portfolio has about 15% to 20% foodservice. So we are also benefiting as restaurants and eating establishments reopen and more Americans are dining out again.
Our banking portfolio is also seeing positive trends in the post pandemic world.
Recent studies show that even in spring 2021, approximately 65% of consumers, we're baking at home at least once per week lifting the prospects of our growing list of baking brands that includes <unk> foods stalwarts, such as Brer rabbit and Grandma's molasses as well as more recent additions such as collateral girls and Chris.
<unk>.
We will spend more time talking about Chris go, but so far after 8 months of ownership. We are very encouraged by the category trends in the topline performance of this business.
Another significant impact coming out of the pandemic is inflation and at unprecedented levels. We.
We are seeing inflation on key cost for inputs across the portfolio, particularly on many tradable commodities packaging material and freight.
The impact on our base portfolio is approximately 3% to 4%, but much higher on the Chriscoe business, where soybean oil costs have doubled from last year.
At <unk> foods, we identified the risks of inflation early enacted to raise prices to recover higher input costs.
We will see more impact from both inflationary costs and pricing moving into the P&L through Q3 and Q4.
With some lag effect on the timing of pricing on the implementation with customers.
Finally, I wanted to give you my perspective on BG foods overall, and some thoughts on how we move forward.
Yeah.
This company has grown net sales on adjusted EBITDA at a greater than 10% compound annual growth rate over the last 17 years since its IPO in 2000 and for.
The company was built up on our successful track record of acquisition related growth.
We have successfully acquired and integrated more than 50 brands into our company since it was established in 1996.
For sure some of the brands are a little old and stodgy, but many of these generate significant cash.
Many other brands and businesses that we've acquired including spacings vices baking and meals still have incredible opportunities in front of them.
Our goals are to continue to increase sales profitability and cash flows through organic growth and disciplined acquisitions of complementary branded businesses.
Going forward, what you should expect from me is stronger focus within the portfolio on where we will grow invest acquire and create value.
Much more to come on that in future meetings and calls.
Thank you for joining us today I will now turn the call over to Bruce for a more detailed discussion of the quarter Bruce.
Thank you Casey and good afternoon, everyone.
As Casey mentioned, we had a strong financial performance during our second quarter. Despite some very challenging comparables.
A year ago at this time, we were still for the most part sheltering at home had little hope of an effective vaccine in the near future and saw the majority of the away from home eating industry shutdown other than a budding recovery of takeout dining that began mid summer last year.
April May and June of 2020, where the peak months of COVID-19, and Americans, we're still eating the majority of their meals at home, creating unprecedented demand for shelf stable and frozen packaged food products.
It's a product that we sell.
In fact, when we reported our second quarter results last year. At this time, we were discussing net sales growth that was up nearly 40% and adjusted EBITDA growth that was up nearly 45% from the prior year.
Margins were also up significantly.
This year as we lap those pandemic enhanced results I think it is also important to view the second quarter in the context of its comparisons to Q2.2019, while sales were lower than March April and May months of last year. Net sales finished nicely ahead of pre pandemic levels for the quarter and we.
On you to track to the mid single digit increases over 2019 levels that we had been talking to for some time.
We are seeing many of the consumer behaviors that we witnessed last year persist driving a sustained increase in the numbers of Americans preparing their meals at home and eating at home on a daily basis.
As Casey said earlier, we are seeing consumers cooking baking and eating at home more frequently than they had pre pandemic.
Another factor worth mentioning before we get deeper into our results as inflation.
At the beginning of this year when we were delivering our Q4 results and outlook for the year, we raised our concerns about inflation as the broader economy restarted and began began to more fully adapt to the impact of COVID-19.
I hate to use the word unprecedented 2 new sleep, but we are certainly seeing inflation with little recent precedent.
While our conversations about inflation may have seemed early at the time. It is now hard to read watch or listen to the news without hearing about inflation.
Inflation this year and it appears that it will likely be here for some time in some cases that means costs were up marginally.
And in other cases, particularly for tradable commodities cost may be up as much as double digits from last year's pandemic depressed levels.
At <unk> foods, we acted quickly to take price across large parts of our portfolio to help offset inflation and preserve our margin structure.
We have now executed list price increases and approximately 80% of the brands on our portfolio.
While we were covered with many for purchases in many cases throughout portions of the year. This mitigates the damage that the cost increase is still hurt.
And while we are taking price and largely comes with a lag effect setting up a fairly common phenomenon, where the margins may be compressed a little bit more than we would like to see them in the short term, but are expected to remain fairly stable in the long term.
We expect these inflationary pressures to persist and net conversations about inflation and price increases will continue well into 2022.
And now for the 2021 Q2 highlights.
We reported net sales of $464.4 million adjusted EBITDA before COVID-19 expenses of $85 million.
Adjusted EBITDA of $83.8 million and adjusted diluted earnings per share of <unk> 41.
Adjusted EBITDA before COVID-19 expenses as a percentage of net sales was 18, 3%.
Adjusted EBITDA as a percentage of net sales was 18%.
Net sales of $464.4 million were down $48.1 million from 9.4% from the peak of Covid, Q2, 2020, but up $93.2 million for 25, 1% from pre Covid Q2.2019.
Frisco, which we acquired in December 2020 generated $58.4 million of net sales in Q2.2021.
Base business net sales, which primarily exclude chriscoe and approximately 1.5 months of Clabber girl net sales were up $26.4 million or 7.1% compared to 2019.
As a reminder, we acquired Clabber girl in May 2019.
We continue to believe that we will see a material lift to a mid single digits and net sales over the levels that we experienced in 2019.
Comparisons to 2020 are obviously driven by a decline in volumes, but we are also seeing a benefit from price, which includes list price increases trade spend optimization and a little bit of mix.
For the recent quarter price mix was a benefit of approximately $6.2 million, bringing us to approximately $12.8 million of benefit for the first 2 quarters combined.
We generated adjusted EBITDA before COVID-19 expenses of $85 million in the second quarter of 2021, a decrease of $21.9 million for 25%.
During the second quarter of 2021, we incurred approximately $1.2 million in incremental COVID-19 costs at our manufacturing facilities.
Which primarily included temporary enhanced compensation for our manufacturing employees.
Compensation, we continue to pay manufacturing employees, while in quarantine and expenses related to other precautionary health and safety measures.
We expect to see continued reduction in these costs, which averaged about $1.5 million per month during the height of the pandemic and have average a little less than $5 million per month in the second quarter of 2021.
Inclusive of these costs, we reported adjusted EBITDA of $83.8 million.
Which is a decrease of $18.8 million for 18, 3% compared to last year's second quarter.
Adjusted EBITDA as a percentage of net sales was 18% in the second quarter of 2021 compared to 20% in the second quarter of 2020.
Adjusted EBITDA as a percentage of net sales was 19, 1% in the second quarter of 2019.
Adjusted diluted earnings per share was <unk> 41, compared to <unk> 71 in Q2, 2020 and 38 in Q2.2019.
Spices and seasonings continues to be 1 of the key drivers in the portfolio net sales of our spices and seasonings, including our legacy brands, such as accident and dash and the brands. We acquired in 2016, such as tones and Weber were approximately $99.3 million, a little bit more than 21% of our total company.
Net sales for the quarter.
Net sales of spices, and seasonings were up by approximately zero point $7 million for <unk>, 7% compared to Q2.2020.
Net sales of spices, and seasonings were up approximately $18.1 million or 22, 2% compared to Q2.2019.
Spices and seasoning sales remain elevated across all of our brands and channels and we are seeing a real benefit as consumers repeatedly demonstrate their interest in trying new recipes, while cooking and eating at home.
Among our other large brands Maple Grove farms, which generated $22 million in net sales for the quarter was up $2.2 million or 11, 7% compared to Q2, 2020 and up to $4 million for 13, 4% compared to Q$2.2019.
Maple Grove farms benefited from both strong retail demand as long as a recovery and its foodservice business.
We're taking a generated net sales of $40.9 million and was down $5.9 million or 12, 7% compared to Q2.2020.
So it was up $6.9 million for 20% from Q2.2019.
Ortega to callout brand that is still benefiting from COVID-19 like demand.
But we are selling products as fast as we can make them, particularly taco shells, Taco sauces, chili peppers, and unfortunately due to internal and external supply chain constraints, we are still not able to capitalize fully on the demand opportunity.
Ortega is a brand that we're very much leaning into and our operations team is working hard to expand capacity and maximize this opportunity.
We have a similar story with Las Palmas, Las Palmas generated net sales of $8.8 million was.
<unk> was down $3.4 million for 27, 7% compared to Q2, 2020, but was up $1.2 million or 15, 2% compared to Q2.2019.
Similar to Ortega Las Palmas was not able to fully capture the continued demand opportunity with supply constraints and chili's due to crop issues.
Cream of wheat, which has been 1 of our largest beneficiaries of the consumer patterns emerging from the pandemic generated $14.2 million and net sales for the quarter on.
And while down $3.8 million for 28%.
From Q2, 2020 cream of wheat was up $2.5 million or 21, 9% from its pre pandemic Q2.2019 levels.
Green giant had a tough quarter that combine the most challenging COVID-19 comparison, our portfolio with the most challenging supply chain constraints as we wait for the new vegetable pack green.
Green giant generated $105.7 million and net sales down $58.4 million or down 35, 6% compared to Q2.2020.
And down $7.2 million or 6.4% compared to Q2.2019.
Green giant will continue to face tough comparisons and supply chain constraints until the year largely get through the pack season in the third quarter of this year. However.
However, we do expect a strong fourth quarter. Once we are fully loaded on inventory.
We generated $111.6 million on gross profit for the second quarter of 2021 or 24% of net sales gross profit was down when compared to Q2.2020 gross profit of $134.1 million for 26, 2% of net sales.
But margins were up almost 100 basis points sequentially when compared to Q1.2021 gross profit, which was 23, 3% of net sales.
As we discussed earlier, we are seeing low to mid single digit input cost increases in our base business, coupled with double digit increases for chriscoe.
These increases also include low to mid single digit increases in factory wages low single digit increases in packaging and double digit increases in freight these.
These costs were largely offset in part by our pricing initiatives as well as in aggressive forward purchasing strategy and debt.
By various cost savings initiatives in our manufacturing facilities.
Gross margin was also negatively impacted by the inclusion of Chris go on our results.
<unk> comes with a higher depreciation rate than the base business, thus margining us down nearly 100 basis points for the quarter. Although this impact is netted out for adjusted EBITDA and adjusted EBITDA margin purposes.
These pressures were offset in part from our lapping of COVID-19 expenses, which were just $1.2 million for the quarter compared to $4.3 million.
During Q2.2020.
Selling general and administrative expenses were $47.1 million for the quarter or 10, 1% of net sales.
This compares to $44.3 million or 8.7% for the prior year and 10, 7% in the second quarter of 2019.
The dollar increase in SG&A compared to last year ago levels is almost entirely driven by a $4.6 million increase in warehousing costs.
Coupled with $1.9 million and incremental acquisition related and non recurring expenses, which primarily relate to the acquisition and integration of the Chriscoe brand as well as $3 million and increased advertising and marketing expense.
The increase in warehousing costs was primarily driven by the Chriscoe acquisition and customer fines related to COVID-19 shortages and delays.
These costs were partially offset by decreases in selling a $2.5 million and decreases of general and administrative expenses of $1.5 million.
As I mentioned earlier, we generated $85 million and adjusted EBITDA before COVID-19 costs and $83.8 million and adjusted EBITDA in the second quarter of 2021.
This compares to adjusted EBITDA of $102.6 million in Q2.2020.
And $71 million in Q2.2019.
Interest expense was $26.7 million compared to $24.8 million in the second quarter last year. The primary driver of the increase in interest expense was the acquisition of Chriscoe.
As a reminder, we finance the entire $550 million acquisition price with debt.
Combination of revolver draw in new term loans.
The revolver currently costs us a little less than 2% and interest and the term loan a little bit less than 2% and 3 quarters per cent and interest.
Depreciation and amortization are also up year over year, driven primarily by Chriscoe depreciation expense was $14.8 million in the second quarter of 2021 compared to $10.6 million in last year's second quarter.
Amortization expense was $5.4 million in the second quarter of 2021 compared to $4.7 million in last year's second quarter.
We are still expecting and expect this tax rate of approximately 26% for the year, but taxes were a little higher than that in this years second quarter due to some discrete tax events at an effective rate of 26, 8% for the quarter compared to 26, 2% in last year's second quarter.
We generated 41 and adjusted diluted earnings per share in the second quarter of 2021 compared to <unk> 71 per share in Q2, 2020, and 38 per share in Q1.2019.
We remain encouraged by these trends.
Despite the tough comparison against 2020, and the continuing challenges of Covid, we still expect to achieve company record net sales for the year, reflecting a mid to high single digit increase in the base business net sales compared to 2019 and coupled with the addition of Chris go in.
<unk> with the 205 to $2.1 billion net sales guidance that we provided in March.
And despite the continued inflationary pressures that we face we are continuing to target the 18% plus adjusted EBITDA margins that we've generated in recent years.
However, because we are not fully able to estimate the impact of COVID-19 cost inflation in our cost inflation mitigation efforts.
We will have on our results for the remainder of fiscal 2021, we are unable at this time to provide more detailed earnings guidance for the full year of fiscal 2021.
Couple of quick call outs from a modeling perspective.
As I mentioned earlier interest expense depreciation and amortization or continuing to trend higher than last year as a result of the Chriscoe acquisition.
We expect full year interest expense of $105 million to $110 million, including cash interest expense of $100 million to $105 million dip.
Depreciation expense of $60 million to $62 million amortization expense of $21 million to $22 million and an effective tax rate of approximately 26% for the full year.
Finally, as a reminder, last year's third quarter included an extra week as a result of our 50 <unk> week during the fiscal calendar of 2020 at the time, we estimated that the extra week was worth approximately $35 million in.
An extra net sales.
Now I'll turn the call back over to Casey for further remarks.
Thank you Bruce.
As I said at the beginning of the call we had a fairly strong quarter. Despite lapping Q2, 2020, which benefited from peak COVID-19 demand.
The quarter played out pretty much as management expected and the company remains on track to deliver the mid to high single digit growth ahead of 2019 that had set as a target for this year.
I am digging in and enjoying my early days at <unk> foods, and I look forward to sharing more of my perspective on the company's performance strategy and portfolio in the time ahead.
This concludes our remarks and now we would like to begin the Q&A portion of our call operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star 1 on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off price you signaled to reach our equipment again press star 1 to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we will take the first question from the line of <unk> Martinson with Jefferies. Please go ahead.
Hi, This is Oliver gross from an on for crew.
What products would you say you have been better able to take price and which are you having more trouble with them on why would you think thats. The case I think you mentioned that 80% on the portfolio has seen price increases so any color there would be helpful.
Yes, I can start on that Bruce can talk a little bit.
I think we disclosed that we've taken pricing on 80% of the portfolio at this stage because we've seen that the inflation in input costs.
Pressure has been pretty broad across the portfolio.
We I.
I would say.
Yes.
The increases on our core portfolio before Chris go or.
Are probably smaller but depending on the item. So we've been pretty successful at being able to implement those with customers and we have very strong justification with the inputs going up I mean, Chris go is significant when Youre primary component as soybean oil and that goes up by 2 X, which is what is what it has happened.
We acquired the business.
Those are obviously, some tougher discussions, but we are getting through those because.
All of our customers on the industry see that those soybeans requests are up that much. So I would say look overall I think.
And pricing environment.
Customers feel it.
We have very tough by productive discussions about it but we've been able to largely.
We have successful.
Discussions around pricing and get it implemented and some of it is still yet to come we just announce it but it hasnt there hasnt been.
Implemented fully until probably a couple of months.
Good afternoon and welcome Casey.
Thank you Andrew.
Maybe all I wanted to start off Casey I know, you're not ready to sort of lay out sort of go forward strategy and a whole lot of detail yet, but maybe just want to get a sense historically right. The company has had a very successful strategy of sort of keeping the core relatively stable to growing very modestly and then kind of supplementing growth with capital allocation around dividend Paul.
Seeing an accretive deals and maybe it seems that the PNG may have strayed, a little bit from that strategy, maybe the past few years looking for a little more growth out of the corps I'm just trying to get a sense of if it's your intention just sort of take <unk> back to its roots so to speak or are moving in an entirely different direction and I've just got a follow up.
Yeah, I would say and Andrew I didn't want to say that this 6 weeks and I think I'd be crazy to say I've I understand everything about this company and know everything about where we need to go but look I am digging in I'm starting to form some ideas about what we need to do and working those with the team.
I would say.
My approach is to say, we need to keep we need to do what has been working at <unk> well.
Which is.
Fair enough I mean look I think in this quarter you certainly saw the compression on on margins, we were a little bit less than we were.
2019, certainly no expectation on our side that we would have hit 20% for this quarter.
We're still targeting an 18% EBITDA margin because we think that's the right thing for the business and what we should be able to produce.
Probably at the lower end of that 18, 18, and a half that we talked about earlier in the year, but that's still our goal.
Great and I guess just on that then what is because there are a bunch of from companies, obviously that arent able to reach there let's call. It normal EBITDA run rate from a margin perspective. This year, just because of again the timing lags and the things that are that are typical with how this works in a rising input cost environment I guess whats.
Is it that you were faster to get pricing implemented.
Additional productivity I'm trying to get a sense of what sort of making up that are making up for that that GAAP or that timing lag. There is still a value to get to that type of margin for the year.
Sure I mean look not saying, it's going to be easy, there's certainly going to be challenge and there is always risks, but as we highlighted when we gave our fourth quarter results and our outlook for the year and the beginning part 1 we werent, giving formal guidance. This year, because we thought that there would be many challenges coming out of COVID-19.
From a sales standpoint, but also thinking through the cost side.
And we have debt.
In theory, we should have a margin benefit from Chriscoe. This year, because it is a higher margin business.
As we said that's an area, where we've seen input cost is an area, where we've taken pricing.
And kind of the same to a lesser degree on the portfolio reacted quick.
In terms of taking pricing, but we're still seeing cost increases and so.
I wouldn't go too crazy with with.
Building, an EBITDA margin upside opportunity for this year, because I think like everybody else in the space, we're going to see challenges.
But we still think thats the right margin for the business.
I would say Andrew just very quickly.
I believe.
Looking from the outside coming in here that <unk> did callout inflation earlier enacted on pricing earlier than a lot of the rest of the industry, which is now followed pretty aggressively.
The second thing I would say.
Is that we did a good job on certain commodities.
<unk> ourselves so having coverage fairly long, we did that with soybean oil. So in the first half we haven't seen a huge impact we will see more impact coming through Q3, Q4, because we were hedged or protected longer on some of the things that have gone up dramatically and then the last thing is just.
Sort of the focus on costs and cost savings and making sure that.
From spending to supply chain costs that we were doing everything possible to get productivity.
It's the combination of all those that's going to enable us to stay around that 18% number.
Great. Thank you.
We will take our next question is from the line of Michael Lavery with Piper Sandler. Please go ahead.
Thank you and good evening.
And I wanted to get a little bit more specific you said you've got some good coverage on commodities, but.
I know when you were calling out inflation pressures or concerns earlier in the year. The fourth quarter was the big wildcard. There. How covered is that now is there still a good amount of exposure and can you give us any sense of how you may be positioned for 2022.
Not in a position right now to give our 2022 guidance, we typically don't yes.
No sorry, I don't mean guidance just do you have <unk> 20 per cent covered on commodities 30, 10, something like that not something that we would disclose at this point.
I think it's fair to say that we were pretty.
Pretty well covered through.
And I am talking about against the increases so we're actually fairly covered through this year, but we recovered against that the larger increases through the first half of the year.
The second half of the year, we will have pricing rolling through to help us offset the increasing.
Costs that are going to be flowing through our inventory on P&L.
That's kind of what's happening so we will have pricing coming into more into larger effect as we see more of the costs flow into the P&L in Q3 and Q4.
Also think thats something thats going to remain fluid I mean, we're seeing what seems like inflation across the board.
For months ago, No 1 was talking inflation when we had our call now everybody is talking about it and you are hearing out.
Even the retailers talking about taking price.
If we continue to be an inflationary environment in 2022, Theres, probably more price increases if we ended up not being an inflationary environment and some of these cost increases go away, we will have to watch that as well.
Okay. That's helpful.
Just to maybe follow up on the pricing side.
You correctly note that you were kind of a leader here talking about this earlier as an issue than your peers, but.
I guess then you are also now saying that you've got the lag between the pricing.
On coming into effect on the inflation pressure.
Is it just that the inflation has moved so quickly is it just that you were trying to be careful to take pricing to not take pricing too soon and then you're you've got a GAAP that can you help us understand some of the mechanics around the timing.
Yes, I mean, there is certainly a conversation you can have with customers around price. When you have input cost increases and you have to see that materialize that you can verify and validate those cost increases and then put them in place until it still takes time.
I think our point was we are aware of it we suspect a lot of people were aware of it and seeing it and like I said, we prepared ourselves and we are ready to act quickly, but theres still has a lag effect.
And Thats basically debt.
Basically when do we see that costs really going up which by the way they have been increasing over the last 6 months.
And when we take pricing as well as the timeline for getting it implemented with customers. I mean, most customers are going to insist that we have a 90 day lead time on price increases.
So it's just it's just those timing factors, but we try and get it in line as much as possible, but usually there is some lag effect.
By chain disruption and Green giant you were on allocation.
With certain products, I guess, where do we stand on that now and are you continuing to have.
A shortage of certain inputs such that some of your customers you're not able to fully.
Provide them all the products that they like.
Certainly on the can side for Green giant.
We're still just now getting into the pack season.
<unk> basically now weeks ago and continues through.
Just past the end of the third quarter and so that's that's a position that's steadily improving and trying to get back to normal.
Okay.
Great. That's all for me thank you.
Thanks, Bob.
Your next question comes from the line of Jenna Giannelli with Goldman Sachs. Please go ahead.
Hi, Thanks for taking my question you.
You talked about obviously your desire or interest to.
To continue opportunistic M&A, but I guess given there are simple.
In fact, it near term cash maybe be.
On pause in terms on the pipeline.
And then just remind us again potentially how high you're willing to take leverage and just commentary on evaluation. Thank you.
Yeah. So great question I think we're always looking for me at P&G, It's hard to go up more than a year or 2 here and there without seeing a couple of acquisitions don't know what the next 1 is.
We're less than a year removed from christo.
But we are always looking I think certainly as Casey developed this strategy for the company.
There's going to be areas that we're going to focus on where we see more or less opportunity.
There is an opportunistic aspect of willing willing seller in order to find a willing buyer and so.
That will continue to evolve as.
As far as leverage we've got a target ratio of 4.5 to 5.5 times and so we're a little bit above that but not too for above.
But that's certainly a consideration that has to make the math work both from a valuation and how we are paying for things and so.
We're always willing to look always willing to do the math on how to fund something.
We'll see where the next 1 comes.
That makes sense and then I guess I have to ask you have on callable debt. How are you thinking about addressing that sequentially coming to market taking advantage of that.
Favorable high yield market etcetera. Thank you.
Great Great question similar answers on the M&A, which as you know.
I wish there was the opportunity to get out in the high yield market is very very attractive rates.
We're happy with our capital structure today, but we are getting a little bit closer to the.
For the maturity on the 2025, although it's still a ways off I think we got to look and evaluate and if there is something to do structurally that's great, but but right now we're very happy with our capital structure.
Bolt on the on the floating side on the in the bonds.
Thank you so much.
We will now take the next question is from the line of Rob Dickerson with Jefferies. Please go ahead.
Great. Thanks, so much.
Hey, How's it going Casey how are you on goodness tech for good.
Bruce just a just a direct question.
I know there is no.
Guidance outside of revenue provided for the year given all the moving parts.
But just kind of given that commentary here right.
On a around if youre trying to hold this 18% EBITDA margin for the year.
And then giving revenue guidance I'm not going to ask you about your EBITDA guidance for this but haven't.
Current you kind of implied what that EBITDA.
EBITDA guidance is make sure there's not something else in there that would prevent the rest of us on this call myself included to kind of go go that way I'll start with that.
I think just for US there is a recognition that there has been.
All of this year and really beginning last year that we're in unprecedented times and it's just harder to to put a fine number out there.
Knowing all of the risks and in some cases opportunities.
What.
Of what Covid is broad for us.
And what happens in the coming months ahead in terms of what our restrictions.
Ability to eat in restaurants, or not and so theres a lot of unknowns out there.
Our guidance or lack of guidance. This year is a reflection on that alright.
Alright fair enough.
Secondly, a lot of volatility I would say on top of that not only volatility on the COVID-19 environment and expectations. What's happening I mean, you can look at the Delta right now I'd say, it's hard to figure out what's going to really go there but.
There's also a lot of volatility in the inflationary environment.
Right.
I think makes giving earnings guidance earnings guidance hard when you can't see.
<unk>, what's going to happen and whats going forward. So I think look we are targeting.
The 18% earnings margin, we're just think there's too much volatility.
In the EMEA on the costs and the external environment to really be able to pinpoint it.
And certainly part of the thought process behind.
How and where we gave guidance. This year was there isn't a lot of unknowns and we didn't want to be in the situation. We were in an earnings call whether it's the second quarter of the third quarter debating your 10th above or below.
And EBITDA margin number.
There as.
We're going to do our best but there is risks and like you guys said a lot of other companies are seeing a lot more margin compression than we have.
We will continue to do that.
Yeah, all make sense.
And then I guess right.
So you're calling out as much for maybe it isn't there I'm not reading it the right way, it's just kind of supply chain I know you still call out some of the capacity constraint on green giant and what's happening there.
On a part of your network is current band.
But.
Was there anything in Q2, when you kind of force in the back half.
That gives me some kind of pause on just overall supply chain complexity inclusive waiver at all.
Capacity, what habits outside of growth, yes, it's all it's all very much there for us like it is for for a lot of people, who are doing manufacturing or relying on co Packers I think last year. At this time. There was concerns could you could you get your factory staffed and we were pretty lucky in terms of not having the massive shutdowns like some other folks.
From the conversations with retailers.
To be somewhat ongoing but as you get for the year, obviously, there's some complexity and kind of where those costs go as we move forward, but if we sit here today.
You know when you go and talk to that retailer you know I'm, assuming like you were saying on Chris though I you know on on this.
Some hedges roll off on I'm trying to go forward rolling basis.
The assumption here is you're trying to kind of price to those rolled off hedges of later, you think through and 22 verses getting what you can now than trying to go back at the end of the year just trying to figure out that you.
You know, how you think about that price and dynamic relative to you.
What's your visibility is just off a spot today.
Yeah, I mean, I think ultimately we have to price the business.
Also with the with the longterm input costs are going to be.
And so.
You know look at the end of the day.
We need to price. So we're not margin compressed over the long term is we've kinda said repeatedly on this call for me.
Maybe some margin compression in the short term our goal is to meet day in our margins over the long term.
Got it alright. Thank you so much I appreciate it.
[laughter].
Your next question comes from the line of Carla for someone with J P. Morgan. Please go ahead.
Hi, and thanks to my questions have been answered by on my new capacity from becoming about selling pasty is that something that could come on in third court, that's something that's more fourth quarter next year.
And Ortega and the other for you on that.
Constraint, Yeah I mean.
It's probably more fourth quarter and the first quarter of next year to to be honest, just there might be some slight impact in Q3, but it's really a queue for on the.
Taco sauce in the shell, Idaho will come on for another 6 months.
But it's I think you could count on and then on the supply constraints on Green giant that's really about the pack the seasonal pack as as Bruce talked about.
Okay, Great and then can you sound like you're starting to see if we can further out away from Covid and lock on.
Other you're seeing any changes in promotional environment or cadence in <unk> I'm on different product lines like for.
Rather than versus shelves anything you could call out.
Yeah, I think you know what what we seen during the Covid pandemic and our last fall and even this spring is you know promotions there's less.
Foot traffic in the store during kind of promotional time for traditional for promotional timeframes call at Easter or whatever and so the the lift off promotion is a little bit less but we expect as you know things begin to normalize that that will improve so we were kind of like you know, we're not pulling back on promotion necessarily in the fall.
Period, you know, we're we're expecting that there will be some promotion events and their promotion will be a little bit better than it was last fall in the middle of the pandemic, but it's kind of it's gradually returning and we're just trying to follow that and make sure that we're moving in line with with what we see from promotion activity at retailers.
Okay, great. Thank you.
You too [noise].
We'll take the next question from the line of Kim Zaslow with Bank of Montreal. Please go ahead.
Hi, good evening everyone.
And it could.
T Z as you kind of look at the business you know a.
A lot of <unk> come out and say, Hey, look I have a 100 day plan a year plan a 3 year plan.
No not in a position to tell us about what the plan is that you have a.
Lane in which you were gonna set up your plan I guess and like How're you going on about it and what is your philosophy and gone through that and.
And how when will be no more what's the schedule 2 which is a.
You know what.
<unk>, what your plans are on a longer term basis.
Yeah, I have a I have a plan and a timeline that I am working against it.
Typically it's at least 100 days before I'm at a point, where I'm really willing to talk about it and and that's because I'll spend my first.
Weeks months in the company, just trying to understand where do I see value, where do I see value creation happening, where do I see the capabilities, where do I see what businesses are working and not working how.
Were rebuilt our model and we built the M&A case input costs are up.
Yeah.
This is an area, where there are higher than some of the other categories, but pricing is also up.
And also higher than where it is and some of the other categories. We feel very good about where the top line trends are going.
Really like the category.
Feel really good about just the overall consumer trends for things involved in baking it.
<unk> strategic for us.
On complements things like the molasses businesses and the and the Clabber girl that we bought back in 2018, so happy with the acquisition.
Would've preferred input cost to become favorable to us rather than go up but it's also a category.
We're also on our competitors.
Kind of like most of the things across the board are taking price to reflect the change in input costs.
My last question.
Do you assume that the hedges roll off.
Yep.
Yes.
William margins, we'd be restored to the 18% to 18.18 to 18, 5% margin with other pricing actions that you're doing in the capacity coming online like thinking about obviously the capacity constraints.
Vegetable crop coming in so if you kind of fast forward and say hey, everything is still from here, but time disclose by would you say that that 18% 18, 5% margin.
Is doable.
You'd have to yeah, you'd have to tell me what input costs are going to be a year from now and their debt.
Nevertheless, as price stabilizes anything to stop yes.
Yep.
Price inflation stopped their hedges rolled off and you got the capacity.
Restored.
From the vegetable crop and you just kind of went forward from here would you have restored all the actions and everything would have been net again if prices stay permanently up at the levels, where they are I think youll see people take price.
List price up.
Sure.
But I looked at it philosophically are you know our philosophy is that we will price to recover higher costs.
With the help of some productivity efforts to help us maintain margins and.
And profitability that is our philosophy.
That's what will drive and it's a matter of what time period do you want to talk about the lag effect of being able to implement those things, but yes, we are going to price and cost save to make sure that we that we maintain margins if thats what youre asking.
I appreciate it thank you guys very much.
Yes.
Your next question will come from the line of Eric Larson with Seaport Research Group. Please go ahead.
Yeah. Thank you everyone.
I also pass on my my welcome to you Casey and good luck.
Thank you.
So.
I know that we have.
Hoping for and beaten already to depth, but.
Given.
On the last call I think 1 other.
Very few last comments that debt.
That day.
<unk> made was that the cost inflation.
Was rampant.
It was getting worse kind of on.
He loved it and are.
Have you seen your costs have you seen the cost side kind of starting to flatten out or is it still rising and does that mean that you have to go back to your customers and take another bite at the Apple at pricing.
I'm curious as to what the second and third derivative is on on your input costs.
Price increases on our cost increases.
Yeah, I'd say look we've taken pricing actions this year, including some recent pricing actions to make sure that we're pricing against the environment that we see for the next 6 months.
I would tell you that we're now in.
It really analyzing what do we think costs will look like on certain key commodities next year.
Do we need to be prepared for additional pricing and watching that.
So it's a moving game in some categories <unk> seen it gone it's gone up a lot, but it's starting to stabilize and other categories I'm still seeing we're still seeing some increases that are being projected into the early part of next year, but we watch this pretty carefully and we will plan and I think we'll have to make some decisions.
About.
There are costs or input cost inflation on a relative to the pricing we have out there and do we need additional pricing actions given.
What we see is justifiable input cost increases.
And as Bruce said debt.
Kind of a moving target we can't really say what that looks like in 2022 next year. Although I will tell you that I don't think inflation is transitory right now I think we're going to be looking at inflation in some areas.
For more than just the next 6 to 6 months, we'll be looking at some inflation impact next year, but that's part of what we do to manage the pricing and look at that and we already have kind of plans in place to say how would we execute if we needed to based on input costs.
Okay. Thanks, Brian.
That helps a little bit yes, yes, no adjust last follow up here given all the.
The weird.
Volume movements COVID-19 related from last year.
We're obviously the industry down a lot because of tough comps et cetera.
Can you attribute any of that to price elasticity, yet too early on some other products.
Its probably pretty hard to actually analyze if theres any negative elasticity at this point, but I'd be curious on your thoughts on that.
I think the easy answer.
And it's probably not a full answer but the easy answer is we have taken price.
Relatively happy with where our sales are coming out so far this year and so jury is still out because we're only 6.7 months into the year.
But so far our sales trends are moving up to kind of where we talked about when we started to think about 2021, even if you went back to the end of 2020.
We are trending at that mid.
Maybe a little bit better than mid single digits higher than 2019.
Got it fair enough. Thank you.
The other places we're going to look at elasticity them. The most is chriscoe, because that's where the magnitude of the input cost and the magnitude of the pricing is the highest and that really hasnt rolled into the market yet. So in Q3, and Q4 will have a better read on that but Thats. If you ask me personally which 1 of my watch.
Pretty close to that 1 I mean, I'm tracking that almost weekly to see what's happening and as Bruce said, so far we have not seen we have not seen.
Any real elasticity from the pricing that we've already taken it's been implemented in kind of late May June is when we saw the first waves are things coming in.
Got it. Thank you Casey I appreciate I appreciate the color. Thanks.
Thank you Eric.
And there are no further questions at this time I would like to turn the conference back over to management for any additional or closing remarks.
So I think we'll just go ahead and close but this is Casey I want to say thank you for joining today.
For all the great questions and I look forward to talking to you more about what I'm seeing and where do we want to go in the future and as I said, I think there'll be plenty of opportunities.
Around the November call and maybe even other times thoughts around that that we can have those conversations. So thank you very much.
Ladies and gentlemen, this does conclude today's call. Thank you for your participation and you may now disconnect your lines.
Okay.
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