Q2 2023 B&G Foods Inc Earnings Call

August 3, 2023

[music].

Good day, ladies and gentlemen, and welcome to the <unk>, Inc. Second quarter earnings financial results Conference call.

This call, which is being recorded it is scheduled to last about one hour, including remarks by <unk> management and the question and answer session.

I would now like to turn the call over to Michael Bauer director of corporate strategy and business development for <unk>. Please go ahead.

Good afternoon, and thank you for joining US with me today are Keith Taylor, our Chief Executive Officer, and Bruce <unk>, Our Chief Financial Officer.

You can access detailed financial information on the quarter in the earnings release, we issued today, which is available at the Investor Relations section of <unk> Dot com.

Before we begin our formal remarks I need to remind everyone that part of the discussion today includes forward looking statements. These.

These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

We refer you to <unk> annual report on Form 10-K, and subsequent SEC filings for a more detailed discussion of the risks that could impact our company's future operating results and financial condition.

P&G foods undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.

We will also be making references on today's call to the non-GAAP financial measures adjusted EBITDA.

Net income adjusted diluted earnings per share and base business net sales reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release.

Casey will begin the call with opening remarks, and discuss various factors that affected our results selected business highlights and his thoughts concerning the outlook for the remainder of fiscal 2023 first.

Bruce will then discuss our financial results for the second quarter 2023, and our guidance for fiscal 2023, I would now like to turn the call over to Casey.

Good afternoon. Thank you Michael and thank you all for joining us today for our second quarter 2023 earnings call.

Second quarter results continued strong profit and margin recovery.

Adjusted EBITDA increased plus 26, 4% versus last year to $68 $5 million.

Margins improved significantly with adjusted EBITDA as a percentage of net sales at 14, 6% increase.

Increasing 330 basis points from Q2 2022.

Base business net sales.

Excludes net sales from the recently divested back to nature brand were up slightly at plus one 1% versus Q2 2022.

On a two year stack base business trends remained strong up plus three 8% versus Q2 2021.

Some of the key drivers of the results.

Pricing recovery.

In total Q2 pricing realization, including product mix contributed $54 1 million versus Q2 last year.

Pricing flow through to offset higher costs and inflation with Q2 gross profit as a percentage of net sales excluding items affecting comparability at 21, 9% from 16, 5% last year.

Almost all pricing actions have been implemented to recover total inflation in fiscal year 'twenty three.

She is currently tracking at roughly 4% to 5% well below our fiscal year 'twenty two levels.

Volume sales.

Q2 volumes were down versus last year offset by higher pricing.

The major volume drivers, where Chris go Green giant price elasticities and to a lesser extent retail inventory reductions.

Excluding Chris go on Green giant, which have unique factors impacting net sales performance net sales of the remainder of our brands in the aggregate increased plus three 6% in Q2 versus last year.

Specifically on Chris go price Elasticities remain high greater than one about the key $5 $6 per bottle price point.

We are reducing our net prices to reflect lower commodity oil costs and expect to drop back below key price thresholds on shelf during baking season, This fall and project volumes to improve at lower price points.

As previously discussed the objective on Chris go is to maintain gross profit dollars and margin in a volatile commodity market.

Second Green giant.

Volume declines continue to reflect the discontinuation and rationalization of lower margin innovation in the frozen portfolio, which we will begin to lap at the end of Q3.

Our shelf stable products, we have also seen del Monte and others become very aggressive on pricing and promotion to work down higher prior season pack inventories.

Supply and service on a company wide basis customer service and fill rates improved during the quarter, reaching over 97% in June .

We are on track to deliver above 98% CFR are along our long term target before year end.

Inventory.

Total inventory decreased by $25 million to $675 million in Q2 from the ending position in Q1 and.

And down $52 million from fiscal year 'twenty to year end.

We are well on track to reduce inventories year over year at the end of Q4 2023.

The major drivers are unit efficiencies lower soybean oil costs and a smaller seasonal pack on green giant shelf stable versus last fall.

For the balance of the year outlook, we expect a more modest year over year margin and adjusted EBITDA recovery in Q3 and to be relatively flat in Q4 against the strong last year.

Last year pricing actions begin to partially offset inflation in Q3 and fully recover higher costs in Q4.

We remain on track to deliver within our communicated guidance of adjusted EBITDA in the range of $3 $10 million to $330 million we.

Second half base business net sales to be between zero and plus one 5% versus last year, an improvement from the first half trend of minus <unk>, 6%.

Cash flow generation was very strong in Q2 net cash from operations was $662 9 million in Q2, increasing from negative $4 1 million last year with year to date net cash from operations of $132 4 million.

Pro forma net leverage came down to $6 74 times from seven two times in Q1.

We are on track to continue to reduce leverage by the end of 2023, driven by adjusted EBITDA recovery, lower working capital and inventory needs and debt reduction from available cash flow.

Through June we have reduced the principal amount of our debt by $147 9 million as compared to year end.

Further the new business unit organization is becoming fully operational with multi functional teams accounted for accountable for and driving P&L performance for the portfolio responsibility.

Finally, we continue to evaluate exiting businesses that have lower margin and cash flow higher working capital complexity or do not fit with our core capabilities and b structure.

With back to nature is the first step last January .

There is a target list being worked to reshape the portfolio with no specified timeframe, but we expect that any proceeds from divestitures would primarily be used to reduce long term debt.

Thank you and I will now turn the call over to Bruce for more detail on our quarterly performance and outlook for the year.

Thank you Casey good afternoon, everyone. Thank you for joining us on our second quarter 2023 earnings call.

As you can see we had another strong quarter.

For the second quarter gross profit as a percentage of net sales increased by more than 500 basis points and adjusted EBITDA as a percentage of net sales increased by more than 300 basis points.

We also had strong net cash from operations.

<unk> balance sheet, including a continuing reduction in our net leverage as well as a slight uptick in our base business net sales when compared to the second quarter of last year.

In the second quarter of 2023, we generated $469 6 million and net sales.

$68 $5 million and adjusted EBITDA.

Adjusted EBITDA as a percentage of net sales a 14, 6% and adjusted diluted earnings per share of <unk> 15.

Base business net sales, which excludes net sales from the back to nature brand increased by approximately $4 million or 0.1% in the second quarter of 2023 compared to the year ago period.

Base business net sales remained robust despite our pricing activity and was up by $17 million or three 8% on a two year stack basis.

Pricing was obviously the big driver of our sales performance and contributed just over $54 $1 million to our base business net sales.

Volume declines largely different by pricing related elasticity and timing negatively impacted base business net sales by $52 1 million.

FX drove the remaining $1 $6 million of decline.

We continue to watch our volumes closely particularly for brands, where we have taken the most pricing.

We expect the pace of our volume declines to continue to moderate as we head into the back half of the year and lap the majority of our price increases.

Driven in part by our pricing initiatives, our second quarter 2023, adjusted EBITDA increased by $14 4 million or 26, 4% compared to the first quarter of 2022 to $68 5 million.

EBITDA as a percentage of net sales increased by approximately 330 basis points to 14, 6% in the second quarter of 2023 compared to adjusted EBITDA as a percentage of net sales was 11, 3% in the second quarter of 2022.

While the levels of adjusted EBITDA increases are staggering. This is exactly what we said would happen as pricing would finally catch up the costs across the portfolio.

Particularly with brands that had major cost increases.

Clabber girl and Chris go.

Also supply chain disruption and logistics costs are continuing to normalize this year.

And while we are seeing inflation across much of our portfolio. The pace of inflation has slowed which is what allowed pricing to catch up with costs and restore margins to our P&L.

Net sales were mixed across the portfolio among.

Amongst our largest brands Clabber girl was once again one of the top performers in the second quarter net.

Net sales of Clabber girl were up by $8 3 million or 43, 7% compared to the year ago period.

Clabber girl is continuing to see strength across all product lines, including baking powder baking soda and course, cornstarch and channels, including branded retail private label and industrial.

Yes.

Victoria recovered nicely from some of the pricing related elasticity and promotional timing headwinds that it faced in the first quarter.

Net sales of Victoria were up by approximately $1 6 million or 16, 1% compared to last year.

We feel very strongly about victorious position as one of the leading premium authentic pasta sauces in America.

Net sales of New York style were up by $1 3 million or 18, 5% in the second quarter of 2023 compared to last year.

With improved performance in our Yadkin Bill facility. We also think that this business will continue its recovery with a lot of upside.

Net sales of Maple Grove farms were up zero point $6 million or two 9%.

Net sales of cream of wheat were up by zero point $3 million or one 9%.

Or tiger, which had a challenging first quarter recovered in the second quarter net sales of Ortega were essentially flat for the quarter were down just zero point $2 million.

Four 0.5% compared to last year.

While net sales of Chris Gayle, and Green giant were both lower in the second quarter compared to the year ago period. The piece of declines is moderated significantly for both brands when compared to the first quarter performances.

Net sales of <unk> were down $4 $8 million or six 7% in the second quarter compared to the prior year, but were up $8 6 million or 14, 6% compared to the second quarter of 2021.

More importantly contribution and contribution margins for Chriscoe were up in the second quarter of this year compared to last year, just as they were in the first quarter of this year compared to the prior year.

Net sales of Green giant were down $4 9 million or.

Four 4% in the second quarter compared to the prior year period.

But were up $1 $9 million or one 8% compared to the second quarter of 2021.

Following a very strong first quarter net sales of our spices and seasonings business were down in the second quarter by approximately $6 4 million or six 7% compared to last year.

However, net sales of our spices and seasonings business have increased by $2 $1 million or one 1% on a year to date basis.

These business net sales of all other brands in the aggregate increased by $4 $6 million or five 8% for the second quarter of 2023 as compared to the second quarter of 2022.

Gross profit was $102 $3 million for the second quarter of 2023 or 21, 8% of net sales.

Excluding the negative impact of <unk> 4 million of acquisition divestiture related expenses and nonrecurring expenses included in cost of goods sold during the second quarter of 2023. The company's gross profit would have been $102 7 million or 21, 9% of net sales.

Gross profit was $76 $5 million for the second quarter of 2022 or 16% of net sales.

Excluding the negative impact of $2 $3 million of acquisition divestiture related expenses and nonrecurring expenses included in cost of goods sold during the second quarter of 2022. The company's gross profit would have been $78 8 million or 16, 5% of net sales.

Gross profit as a percentage of net sales excluding the impact of acquisition divestiture related and nonrecurring expenses was up by approximately 540 basis points in the second quarter of 2023 compared to last year's second quarter.

The improved margins were driven by increased pricing and a moderation in input costs and logistics inflation, representing a continued turnaround compared to the first three quarters of fiscal 2022, where.

Where we suffered from severe input cost inflation that we've seen industry wide and which led to large declines in our gross profit and margins.

Selling general and administrative expenses increased by $3 $7 million or eight 3% to $47 $9 million.

Second quarter of 2023 from $44 2 million in the second quarter of 2022.

The increase was composed of increases in general and administrative expenses of $3 million.

Consumer marketing expenses of 2 million selling expenses of $1 6 million and warehousing expenses of $1 1 million.

These were partially offset by decreases in acquisition divestiture related and nonrecurring expenses of $2 million.

Expressed as a percentage of net sales selling general and administrative expenses increased by 100 basis points to 10, 2% for the second quarter of 2023 as compared to nine 2% for the second quarter of 2022.

As I mentioned earlier, we generated $68 $5 million and adjusted EBITDA for the second quarter of 2023 compared to $54 1 million in the second quarter of 2022.

The increase in adjusted EBITDA is primarily attributable to our pricing initiatives, which finally caught up to industry wide input cost inflation and logistics inflation beginning in last year's fourth quarter.

Adjusted EBITDA as a percentage of net sales was 14, 6% in the second quarter of 2023 compared to 11, 3% in the second quarter of 2022, an increase of approximately 330 basis points.

Net interest expense was $35 8 million in the second quarter of 2023 compared to $29 9 million in the second quarter of 2022.

The increase was primarily attributable to higher interest rates on our variable rate borrowings, partially offset by a reduction in our average long term debt outstanding.

At $1.8 million gain on extinguishment of debt as a result of the repurchase of our bonds.

Depreciation and amortization was.

<unk> was $17 3 million in the second quarter of 2023 compared to $25 million in the second quarter of last year.

We generated 15.

And adjusted diluted earnings per share in the second quarter of 2023.

Compared to seven last year.

We remain very encouraged by the progress that we've made over the past year in terms of restoring our P&L.

And in addition to our P&L improvements. We're also continuing to make progress in the improvement of our cash flows and our balance sheet.

We generated $62 $9 million.

And net cash from operations in the second quarter and $132 4 million in net cash from operations. During the first half of 2023 compared to net cash used in operations of $4 1 million in the second quarter of 2022.

Net cash from operations of $21 1 million in the first half of 2022.

Increased operating profit improved margins and more favorable working capital were the primary drivers of the improved cash from operations performance, which was offset in part by increased interest expense.

We reduced our inventory by another $25 million or so in the second quarter.

Our inventory stood at approximately $675 million at the end of the second quarter, which is more than $50 million lower than it was at the start of the year.

We have also reduced principal amount of our long term debt by $36 9 million in the second quarter and by $147 9 million in the first six months of the year.

During the quarter, we repurchased $24 $4 million of our senior unsecured bonds due 2025, and an average price of 90, 574% of face value.

Additionally, we reduced our revolver balance by $12 5 million during the second quarter compared to the end of the first quarter.

Our net leverage ratio as defined by our credit facility has also improved dropping below seven times to 674 times at the end of the second quarter.

We are focused on continuing to lower this ratio and over time, we do expect to return to our long term goal of a ratio of four five to five five times pro forma net debt to adjusted EBITDA before share based compensation expense.

Our fiscal 2023 guidance remains dependent in part on many industry wide or macro factors that have proven to be beyond our control over the last few years.

However through six months, we are largely on track to achieve the targets we laid out at the beginning of the year.

We are adjusting our net sales target to $2 1 billion to $2 $3 billion through six months, our net sales were essentially flat.

Covering the worst of our expected elasticity drag.

Our updated guidance reflects base business net sales performance of approximately zero to one 5% growth during the back half of the year.

And as a reminder, we the recently divested back in each brand contributed approximately $10 2 million of net sales in the third quarter of 2022, and $11 9 million of net sales in the fourth quarter of 2022.

The primary driver in the adjustment and net sales guidance is related to Chris go given that input costs have come down over the course of the year.

Our initial net sales target of assumed higher selling prices for Chris go.

However, we now expect to be able to reduce selling prices for chriscoe.

Relative to their selling prices at the end of 2022, while still preserving our profits.

Okay.

Softer than expected volumes in our green giant canned and bag in the box business have also impacted the outlook for the year.

Meanwhile, we are reaffirming our adjusted EBITDA guidance of $310 million to $330 million.

Adjusted earnings per share is somewhat dependent on movements in interest rates, but we are also reaffirming our fiscal year guidance for adjusted diluted earnings per share of <unk> 95 to $1 15.

The majority of the heavy lifting in our adjusted EBITDA margin and dollar recovery has largely happened.

And as we mentioned in our previous girls.

We expect improvements in the back half of the year to be somewhat more modest.

We still do believe that our third quarter can show a modest improvement in 2023 versus 2022.

While we also expect the fourth quarter of 2023 to look similar in many regards to the fourth quarter of 2022.

For full year fiscal 2023, we also expect.

Interest expense of $145 million to $150 million, including cash interest of $140 million to $145 million.

Depreciation expense of 47, five to $52 5 million.

Amortization expense of $20 million to $22 million.

Effective tax rate of 26, 5% to 27, 5% in.

And capex of $35 million to $40 million.

Now I will turn the call back over to Casey for further remarks.

Thank you Bruce.

In closing Q2 results demonstrated strong year over year improvement with pricing covering inflationary costs improve margins and a reduction in leverage.

We remain on track to achieve fiscal year 'twenty three guidance of adjusted EBITDA and adjusted diluted earnings per share as well as deliver improved base business sales trends in the back half of the year.

This concludes our prepared remarks, and we would now like to begin the Q&A portion of the call operator.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star one.

If you want to withdraw your question. Please press star two.

Your question was will be bulk indoors or they are received.

Are you seeing a speaker phone please see the handset before pressing any keys.

One moment. Please for your first question.

Your first question comes from Andrew <unk> from Barclays. Please go ahead.

Alright, Thanks, a lot good afternoon, Casey and Bruce.

Hey, Andrew Andrew.

I guess first off I'd love to maybe explore a little bit further the relationship between sort of volume and price that you expect on the base business in the back half I think you said base business sales flat to up one 5% in the second half it sounded like you still may be expected volumes to be down year over year.

But at a more modest pace than what you saw obviously in the first half.

So correct me, if I'm wrong, there, but if that's the case.

It means you still expect I guess, some some year over year benefit from pricing.

Even though I know that chriscoe pricing on a pass through basis is going to be coming down. So I was trying to get a sense.

The magnitude of some of these things.

I guess are you still expecting a positive price.

Benefit even with the Chriscoe adjustment and volumes to still be negative. So I'm trying to get a sense of how those work out because obviously it looks like some of these things should invert.

On each of these metrics versus what you saw in the first half just because of the comps and such.

Yeah, right, so I guess.

If I take let's take Chriscoe side.

I look at the.

But the balance of the business, excluding chriscoe in green giant because of different factors.

We're kind of seeing elasticities with the pricing and the.

And that 0.78 range that we've talked about before and we still expect to get.

Yes.

We will get some pricing benefit for the remainder of the year, because we'll be lapping that for some portion, but we'll probably have some.

Some elasticity impact, but we expect that year over year kind of differential to be lower.

On Chris <unk>, I think what's going to happen is pricing will come down because commodity cost oil costs are lower in the back half of the year, particularly I think starting in August September going into baking season.

Probably see volume trends improve but pricing will be down. So these things are kind of organized net around each other to deliver some better improvement in the sales trends, but it'll be different we'll have different trends going on between Chris go on the rest of the business and on the Green giant business as we lap some of the rationalization we did.

At the end of Q3.

So a lot of moving parts, Andrew I know to say that but.

Overall, we're we're seeing elasticity as are most of the business, where we expected Chris go a little bit higher with the very higher pricing, but we expect as the price comes down going to Buck baking season that volume and pricing what kind of volume volume trends will get better pricing will obviously be another factor.

Okay.

And then.

A number of.

Peer food companies have reported over the last two weeks.

It just seems like kind of a very recent past some have seen.

Some changes in consumer behavior, alright at or a little less positive.

Promotional activity starts to ramp up.

As would be expected as capacity sort of loosens up and constraints ease and whatnot.

But.

Elasticity sort of ramp up a bit I'm, just trying to get a sense. If you guys have seen any sort of discernible changes in some of those things for you consumer behavior. Some I've talked about consumers sort of hunkering down a little bit more are protecting their.

I think as Kelly said today zealously protecting against waste things like that.

And also we've seen some destocking at retail, which I think you mentioned briefly so maybe you can just cover off on some any any changes you've seen in those behaviors more recently as it relates to your business.

Yes, I would say on an chriscoe, we've seen higher last CECI, because we hit kind of big thresholds that we've never seen in the category before so five $5 $6 for a bottle of oil I mean, we've never seen that before so we saw Alaska is higher there.

And the rest of the business I'm not so sure it's that different maybe slightly higher in terms of elasticities.

Overall, what we are hearing from consumers in some categories is that they are kind of stretching out their purchases. So they might have been kind of maintaining more inventory in the household on spices or an oil bottles there.

Now doing that less and kind of.

Basically stretching that purchase cycle out.

We hear that a little bit in terms of how people to change behavior, we hear that there.

Have made on the margin, particularly when prices are really high relative to history. They are making some trade down to private label, we see that in the oil category at these high prices hopefully as we bring the price back down we will see some of that recover but we are hearing those kinds of themes from consumers as we as we talked to them about and it varies by category.

But we are hearing that consumers are kind of stretching out their purchases running down their own inventories and responding when prices have gone really high and maybe making some marginal trade down.

Kind of behavior, and I think thats kind of a continuation of what we are seeing in the first quarter and throughout the year as opposed to some radical shifts that just happened over the last couple of weeks.

And we've seen we've seen some customers kind of taking inventory levels down.

Which by the way is what we're doing.

We're not shocked by that but I would say that's a smaller extent to the other things that we're talking about.

Okay. Thanks, so much.

Thank you. Your next question comes from Michael Lavery from Piper Sandler. Please go ahead.

Thank you good evening.

Hey, Michael.

Just was wondering if you could touch on.

Unmeasured channels or maybe any you mentioned a little bit of inventory destocking, but.

Your reported number was a few points ahead of what we're seeing from the <unk>.

<unk> the scanner data sell through.

How should we think about that.

That looks in <unk> or in the second half does that reverse or any kind of thoughts on what the drivers were and what's ahead.

Yes, I think.

I think there wasn't a massive difference at least as we see it between the consumption data and shipments.

Both pretty tight where we see differences is we've got 89% of our sales outside of the U S mostly in Canada.

For some of our businesses, particularly spices in foodservice.

There is a.

I'm going into a non tracked channel and then much lesser degree, but certainly within spices.

With our partnership brand and Clabber girl, we do have some through private label we.

We think we're generally pretty close to the consumption data.

And in this quarter, we Didnt think we are radically different.

Okay. That's helpful.

Just on the balance sheet, you mentioned some of the debt paid down in the quarter.

Is there any sort of.

Cadence.

Should a similar amount be likely.

Any given quarter or how should we think about just the progression there.

Typically our third quarter as an inventory build which will lead to maybe a little bit of an upturn and leverage I think our pack is going to be smaller this year. So it won't be as pronounced that has as it has been in other years and outside of that we typically like to.

Burn inventory and reduce leverage our goal is to keep bringing leverage down.

Okay, great. Thanks, so much.

Yes.

Thank you.

Your next question comes from Nik Modi from RBC capital markets. Please go ahead.

Yes. Thank you good evening everyone.

Just a few questions on my end.

I mean, just going back to those threshold pricing.

On the on the Cristal business.

Do you think that that kind of thought process is.

Also relevant in other segments of.

The packaged food categories and across our portfolio.

Quantum critical price that's helpful for a lot of different.

Sub segments and categories and so I just would love to get your thoughts on that and then the second question is really.

Out of numbers in home would love your point of view on what Youre seeing in the market right now in that regard.

Yes on the first one I mean honestly.

I've been in this business for a long time, it's always been true that that price thresholds drive higher last 50, so consumers respond to the big the big dollar.

And it's true in almost every category and that so you might have like under $5 between $4 50, and $4 80, so youre not going to get.

Huge kind of change in Alaska, but even across $5 consumers would say that's a threshold.

React differently and we've seen that predominantly in the Chriscoe business as we've gone over some big thresholds that consumers have never seen before but even on some other categories, where we've taken pricing.

One of the things we will do is look at that when we cross the threshold and trying to understand how consumers are behaving in some cases, if we have some commodity relief, we will take it back down below the threshold because we see higher last issue we've done that in a couple of things.

Not universally but we've done a couple of things so that dynamic is definitely true in the in the food and the food segment right. Now there is no doubt if you cross our threshold that consumers behave a little bit differently. The elasticities tend to get a little higher on that margin will move.

<unk>.

What was your second question I'm sorry, yes.

Yes.

At home dynamic.

Yes.

I mean honestly this is sort of.

This is a moving dynamic as we've come out of Covid.

Because I think people forget that last year in the beginning of 2022, we had.

Omicron, and we had a lot of stay at home behavior in the first quarter. So we saw a big increase in foodservice year over year in the first quarter as people were kind of going back to eating at home on a more regular basis we.

We still saw a little bit of that trend going on in Q2 on the foodservice out of home business, but what we're starting to see in the last couple of months is maybe a slowdown in traffic in some of the out of home.

<unk> been foodservice outlets I mean, it's going to vary by by by customer by outlet.

But we but I think it's going to it's kind of stabilizing year over year in the back half of this year and depending on what happens with the economy. If the economy turns down a little bit as we go into sort of stagnation or a mild recession I think youll see consumers are shipped back to in home versus out of home.

But right now I think it's more normal with some signs that we need to watch about maybe foodservice traffic slowing down.

Does that help.

Yes. Thank you so much I'll pass it on.

Alright, thank you.

Your next question comes from William Reuter from Bank of America. Please go ahead.

Good afternoon.

Just thinking about a couple of potential tailwind next year. When you look at your basket of food prices and where they are at this point and let's kind of.

Riding crisco issue and the resets and price will happen more.

Do you have a sense for whether at.

As a whole your your cost could be lower from an input cost perspective next year on a magnitude for that.

Hard to say that it would be lower at this stage, but certainly the pace of inflation has significantly decreased.

And there are youre throwing went out with with Chris go with our costs are lower than they were last year. At this time, which is great, which is allowing us to adjust price, which should be good for volumes.

Logistics costs are lower than they were last year diesel fuel lower than it was last year, but we are still seeing some modest inflation across the portfolio with a hole.

Got it and then.

We're kind of expecting right now we're modeling.

Kind of this year inflation year over year is more like 45% versus the 2021% last year.

Next year, we're looking more at length of 3% to 4% range early on that's kind of the early outlook. We can see from a few commodities, but obviously that's going to change in the next six months.

Yes, Okay understood and then I guess secondarily I know some retailers reset their shelves in twice a year and some do it kind of in the August timeframe, where there any resets either benefited you or.

Where you lost shelf space.

Kind of just the end of the summer football.

I mean, the resets happen at different times during the year in different categories. So.

We have.

We have some of the frozen SaaS kit.

Getting reset now and kind of in August and we fared reasonably well most of our our new innovation has been accepted and shipping and in our total distribution points look pretty stable year over year. So thats. The one that I know about us is actually moving we haven't seen.

Some of the other category big categories, we haven't seen a lot of changes.

But some of those happen earlier happened earlier this year. So we're already through those in.

We just I think the big one the big one we're going through right now is the frozen portfolio.

Got it okay. Thank you.

Thank you your.

Your next question comes from Hale Holden from Barclays. Please go ahead.

Yeah.

Hey, good afternoon guys.

So I had two questions. One is maybe a little bit more color just on the on the volume weakness in prices in the corner.

If theres anything specific in there or anything we should be thinking about.

Im sorry, I don't think so I think it's really a tale of how the first two quarters lapped what they lapped last year. So I don't know if you remember in the first quarter of last year.

We had really low service levels and our spices business. Our factory was having trouble running we had omicron call outs.

We were.

We were really not shipping very well so you saw.

You said, producing we really have production and service problems in the first quarter. So you saw our first quarter numbers were a huge growth year over year in the second quarter, because we went down there got everything back up and running kind of in AP.

April may time frame in the second quarter, we were refilling pipeline with customers inventories with customers. So we actually shipped ahead of consumption in that.

Second quarter last year. This year, we're lapping that so I think as Bruce said, So you saw big growth in the first quarter a decline in the second quarter. The net of that was over 1% growth over the first half of this year. So I think we're fine. It's just a matter of how the business is flowing versus the problems last year.

<unk> production in service.

I expect that youre going to see growth in the second half of the year, we do have actually some recess happening on spices coming up very shortly which we're very positive. We've had we've had good acceptance of some of our new items.

And so I feel good about the second half and how it's going to flow.

Got it and then on the second half.

I fully understand the chriscoe.

So if we just take that off the table.

For the base business ex crisco.

I just wanted to talk through the.

Puts and takes on volume pricing.

Okay.

Our normalization of volume that we're looking at.

How how much risk you think are tail risk you think there is.

In that part of the equation.

Finally on the rest of the business ex Chriscoe I think it's yes.

We said that the last 5678, what's going to happen is we're lapping the pricing. So we are lapping the price increases.

Last year, so the differential in pricing on the rest of the business will be smaller because we had fewer and fewer pricing increases in the back half of last year, we kind of most of them happened through July and August I guess the last one was in October one.

So as we lap we're going to have less pricing benefit, but I expect it will have less volume decline because those two are working with each other on elasticity. So basically on the forget Chris go for a second and I guess is what I'm trying to say with Andrew.

Started the call.

We expect lower pricing benefit, but lower volume declines in the back half of the year as we're lapping as we've lapped most of the big pricing actions and we're no longer kind of have this huge pricing differential versus the year ago period does.

Does that help.

Okay. That's helpful and I apologize for asking almost the same question I answered it.

Okay.

I don't think I don't think I was clear enough with Andrew.

Alright, Thank you guys I appreciate it.

Yes.

Okay. Thank you. Your next question comes from Carlos Rodriguez from consumer Edge Research. Please go ahead.

Good afternoon, guys. Thanks for the question.

Got it.

So we've heard from other quarters about a more challenging environment emerging with select brands the dial up promotions.

You called out some margin in that Department marks and just I guess I guess in the.

The data that we're seeing.

Currently it looks to be continuing to gain share across your portfolio and I guess, how should we sort of think about the trade off of price realization in.

Promo activity in the second half as it relates to frequency in our company.

Yes, so a couple of things certainly as we started this year are laid out the plans for this year, we kind of expected a lot to happen as it did which is massive massive prices.

Increases to protect margin rate last year was tough and we knew that that was going to cost those volumes and it did and I think youre seeing that across the packaged food universe, but thats something that we very much expected.

As part of our game plan, we had to we had to restore our EBITDA and EBITDA margins.

Specifically with regards to private label and promotion area environment.

Both increase.

Increasing both probably lower than they were 2019, certainly on the promotional side.

It's going up.

It's kind of gone up over the last year or two but we're still at lower levels than we were in 2019 and it has been somewhat steady and not haphazard.

With regards to private label private labels recovering share.

There's areas, where it's increased.

As price points, where cross sell KC referenced the chriscoe.

Vegetable oil versus private label, certainly that's an area, where private label picked up some share as price points come down.

We would expect that to moderate or possibly reverse.

But we're also still seeing private label at levels.

Generally lower than where they were.

At the beginning of the pandemic.

Something both things that we need to continue to watch and monitor but I don't I don't think theres been any sudden changes at least that we see.

Okay, great. Thanks for the color on that and then also just one more for me just wanted to check in on the <unk>.

Portfolio Strategic review just I just wanted to just wanted to see are you guys continuing to evaluate brands or categories. Just in the context of divestitures or is that largely concluded with back to nature.

We're continuing to evaluate.

<unk>. So we tend to do a fair amount of M&A.

We're always looking at things right now, we're probably more focused on.

What makes sense to pruning the portfolio and as it becomes appropriate to talk about it that's what we'll do.

Back to nature with just the first step.

Okay, Alright sounds great. Thanks, guys.

Yes.

Thank you.

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

Thank you Casey I remember you wanted to get more to a single real time pricing pass through with the Chriscoe business.

Maybe limiting profit dollar volatility even if we were to continue to see sales and margins ebb and flow.

Could you talk about maybe what you expect from that brand and in terms of profit dollar contribution per quarter on a normalized basis. If there is such a thing.

I mean honestly, we have our new pricing model that we implemented kind of at the end of last year is working beautifully we are we're maintaining the gross profit dollars pretty consistent with where we want to see them.

And margins have been pretty pretty close too.

Obviously, you have an effect when you have much higher sales and higher pricing, but those gross profit dollars and have been very strong so.

The new pricing model commodity based pricing model is working so we give we get pricing reflected within 60 days, we agree on the market price with the customers and Thats, what we price too.

We buy consistently within the window, so that our purchases at our pricing.

Matched up, but we expect to deliver at or better than the the EBITDA and gross profit that we bought the chriscoe business at with this pricing model and so far that's really working well.

Yes, maybe it's a suggestion because one of the comments you made.

In the opening remarks, how your business was doing ex green.

Green giant and ex Chriscoe, because those businesses are different in their price pass through mechanisms and if you were to describe those businesses differently in terms of.

Sort of the.

Profit capture and say that that's you're targeting but also give morbidity descriptions of that that would be.

That would be helpful and probably aligned with how youre looking at your business, but.

Just a suggestion.

We can do that we haven't we've never really we havent really disclosed individual profitability by brand, but I can tell you that despite the fact that critical sales were down in the second quarter, our gross profit and our EBITDA was way up on that business.

Yes.

In the near term just just thinking about your the ebbs and flows here.

Youre talking about take taking down prices for Chris go, but if we look at the charts for edible oils, they spiked up lately. So it seems like.

Obviously 60 days of lag can make all the difference in the world. So it's it's.

It's wild that you might be contemplating in 60 days another price increase for the Spike that happened could you just give us a sense of.

How this works, yes and.

By the way, we have to be out buying oil.

60 days in advance at least 60 days in advance when we're selling it so let's say we agree on a window with the trade that we look at the price of oil at a cost of oil and we agree that thats the cost of oil that we'll base, our pricing off of and we agree to that level with that with the customer.

We are already we have already bought a lot of that oil at that price point in that range or buying it at the same time that we're talking to them because we can't.

We have to have oil kind of being delivered to be able to produce it on a 60 to 90 day window.

The 60 day window, yes, the price can change, but then.

After we implement that new pricing then we will start after every quarter, we will go back and reset that market mechanism with the trade. So it works pretty well I mean, yes, there's obviously a little squiggles here and there but for the most part it really aligns our cost at our market price.

To maintain our kind of our gross profit.

Does that does that help you understand.

Yes, yes, no I think.

I think it makes sense.

It will be good if you can if you're stabilizing those dollars like you say I think there'll be there'll be a big data from the past.

This is our third pricing. This is our third pricing kind of window with trade and so far it's worked well.

Thank you very much.

Okay.

Thank you.

Your next question comes from Carlos Garcia from Jpmorgan.

Please go ahead.

Hi, Thanks for taking the question.

I'm wondering have you done any more buybacks bond buyback since quarter end.

So if we did we wouldn't be able to disclose it on the call.

Okay, and then you mentioned Youre always active in the M&A market can you just talk about where you think that market is I know there had been some talk before that.

Buyers and sellers had different ideas and pricing is the market getting more rationale today.

There is there's been a lot of chatter and people talking about deals that might come to market. There hasnt been a lot of stuff that's been completed.

Certainly the level of dialogue seems to be picking up so we'll see.

Okay, Great and then.

How much of your business overall is typically for the survey.

It's certainly less than 15%.

Okay.

And then one last one you were talking about private label.

And there sure.

What is the pricing gap between our branded and private label changed dramatically today or do we say.

Kind of a healthy balance.

I mean, we kind of target differentials of private label in different categories.

Kind of on a percentage basis on an absolute dollar basis, but.

I think what's happened in a couple of categories, where you've had really big inflation in the prices have gone up a lot like dollar $2.

Even though that percentage differential to private label and maybe the same as it was before as the absolute higher price point people are saying well on the margin a few people are trading down to private label that is what we hear and see in the data.

No.

It's just a matter of when.

People might make a different decision at $5 a bottle then they would add.

At $3 50, a bottle and the percentage difference private label might be.

Same at $5 versus the $3 50, but that absolute dollar outlay, they might salmon trade down.

But that's on the margin you see a few consumers doing that on the margin.

Okay, great. Thank you very much.

Thanks Carlin.

Thank you.

Your next question comes from Robert Moskow from Cowen. Please go ahead.

Hi, Thanks for the question.

Greg I wanted to know.

Whether youre seeing different behavior by different cohorts of consumers.

You have a lot of brands that I do think target lower income consumers and I wanted to know if.

Youre seeing more sensitivity in that group than you are in other brands another way of saying like.

Where do you where do you most exposed to that low income cohort and is it is it more sensitive these days or.

Are you or are you doing okay. In those brands I think yes, I think theres, probably pluses and minuses maybe on the.

Bias.

Tailwind as we think about downturns in the portfolio that we've had over time.

Certainly don't expect if the economy slows that we get any kind of benefit like we had during COVID-19, but historically the portfolio is kind of done just just fine during a downturn I would expect that to continue here.

With as many pluses and minuses.

I mean I.

I guess, Rob I would say that I'm not sure that our product line is really skewed towards lower income consumers, it's more kind of middle income broadly distributed broad broad penetration.

So we don't really see like.

Big differential in the cohorts I mean, lower income consumers as part of our total portfolio purchases might change slightly but we don't have business brands and businesses that really earn skew heavily down there I mean, what Bruce just said is I think true.

We do see.

Patterns, where when the economy kind of.

Turns down a little bit we see people move their eating habits from out of home or food service to in home and that's been true historically in every downturn and that's what I kind of referenced that a little bit we're hearing a little bit of that from some of our foodservice operators that they are seeing traffic slowing down a little.

Maybe consumers are kind of belt tightening and making decisions on the margin to maybe move from where they were in the last six months on foodservice or out of home consumption to maybe moving a little bit more in home and I think that trend will get even more pronounced if the economy slows down here.

We get benefit from a slower economy.

As a portfolio.

Okay, alright, well thank you.

Thanks, Rob.

Thank you.

There are no further questions at this time you May proceed.

Thank you everyone. I appreciate you getting on the call and all of the questions and we look forward to talking with you next quarter.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating.

Could you. Please disconnect your lines. Thank you.

[music].

Good day, ladies and gentlemen, welcome to the <unk> Foods, Inc. Second quarter, three financial results Conference call.

Today's call, which is being recorded this is scheduled to last about one hour and great remarks by via G fluids management and a question and answer Fisher.

I'd now like to turn the call over to Michael Bauer director of corporate strategy and business development.

Please go ahead.

Good afternoon, and thank you for joining US with me today are Casey Keller, our Chief Executive Officer, and Bruce <unk>, Our Chief Financial Officer.

You can access detailed financial information on the quarter in the earnings release, we issued today, which is available at the Investor Relations section of <unk> Dot com.

Before we begin our formal remarks I need to remind everyone that part of the discussion today includes forward looking statements.

These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

P&G foods undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.

We will also be making references on today's call to the non-GAAP financial measures adjusted EBITDA adjusted net income adjusted diluted earnings per share and base business net sales reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release Casey.

Bruce will then discuss our financial results for the second quarter of 2023, and our guidance for fiscal 2023, I would now like to turn the call over to Casey.

Good afternoon. Thank you Michael and thank you all for joining us today for our second quarter of 2023 earnings call.

Second quarter results continued strong profit and margin recovery.

Adjusted EBITDA increased 26, 4% versus last year to $68 $5 million.

Margins improved significantly with adjusted EBITDA as a percentage of net sales at 14, 6% increase.

Increasing 330 basis points from Q2 2022.

Base business net sales, which excludes net sales from the recently divested back to nature brand were up slightly at plus one 1% versus Q2 2022.

On a two year stack base business trends remained strong up plus three 8% versus Q2 2021.

Some of the key drivers of the results.

Pricing recovery.

In total Q2 pricing realization, including product mix contributed $54 $1 million versus Q2 last year.

Pricing flow through to offset higher costs and inflation with Q2 gross profit as a percentage of net sales excluding items affecting comparability at 21, 9% up from 16, 5% last year.

Almost all pricing actions have been implemented to recover total inflation in fiscal year 'twenty, three which is currently tracking at roughly 4% to 5% well below fiscal year 'twenty two levels.

Volume sales Q.

Q2 volumes were down versus last year offset by higher pricing.

The major volume drivers, where Chris go Green giant price elasticities and to a lesser extent retail inventory reductions.

Excluding Chris go on Green giant, which have unique factors impacting net sales performance net sales of the remainder of our brands in the aggregate increased plus three 6% in Q2 versus last year.

Specifically on Chris go price Elasticities remain high greater than one above the key $5 $6 per bottle price point.

As previously discussed the objective on Chris go is to maintain gross profit dollars and margin in a volatile commodity market.

Second Green giant.

Volume declines continue to reflect the discontinuation and rationalization of lower margin innovation in the frozen portfolio, which we will begin to lap at the end of Q3.

For shelf stable products, we have also seen del Monte and others become very aggressive on pricing and promotion to work down higher prior season pack inventories.

Supply and service on a companywide basis customer service and fill rates improved during the quarter, reaching over 97% in June we are on track to deliver above 98% CFR are aligned with our long term target before year end.

Inventory.

Total inventory decreased by $25 million to.

$675 million in Q2 from the ending position in Q1.

And down $52 million from fiscal year 'twenty to year end.

We are well on track to reduce inventories year over year at the end of Q4 2023.

The major drivers are unit efficiencies lower soybean oil costs and a smaller seasonal pack on green giant shelf stable versus last fall.

For the balance of the year outlook, we expect a more modest year over year margin and adjusted EBITDA recovery in Q3 and to be relatively flat in Q4 against the strong last year.

Last year pricing actions began to partially offset inflation in Q3 and fully recover higher costs in Q4.

We remain on track to deliver within our communicated guidance of adjusted EBITDA in the range of $3 $10 million to $330 million we.

We expect second half base business net sales to be between zero and plus one 5% versus last year, an improvement from the first half trend of minus <unk>, 6%.

Cash flow generation was very strong in Q2 net cash from operations was $662 $9 million in Q2, increasing from negative $4 1 million last year with year to date net cash from operations of $132 4 million.

Pro forma net leverage came down to $6 74 times from seven two times in Q1.

We are on track to continue to reduce leverage by the end of 2023, driven by adjusted EBITDA recovery, lower working capital and inventory needs and debt reduction from available cash flow.

Through June we have reduced the principal amount of our debt by $147 $9 million as compared to year end.

Further the new business unit organization is becoming fully operational with multi functional teams accounted for accountable for and driving P&L performance for the portfolio responsibility.

Finally, we continue to evaluate exiting businesses that have lower margin and cash flow higher working capital complexity or do not fit with our core capabilities in Bu structure.

With back to nature is the first step last January .

There is a target list being worked to reshape the portfolio with no specified timeframe, but we expect that any proceeds from divestitures would primarily be used to reduce long term debt.

Thank you and I will now turn the call over to Bruce for more detail on our quarterly performance and outlook for the year.

Thank you Casey good afternoon, everyone. Thank you for joining us on our second quarter 2023 earnings call.

As you can see we had another strong quarter.

For the second quarter gross profit as a percentage of net sales increased by more than 500 basis points and adjusted EBITDA as a percentage of net sales increased by more than 300 basis points.

We also had strong net cash from operations and improved balance sheet, including a continuing reduction in our net leverage as well as a slight uptick in our base business net sales when compared to the second quarter of last year.

In the second quarter of 2023, we generated $469 6 million and net sales $68 5 million and adjusted EBITDA adjusted EBITDA as a percentage of net sales a 14, 6% and adjusted diluted earnings per share of <unk> 15.

Base business net sales, which excludes net sales from the back to nature brand increased by approximately $4 million or 0.1% in the second quarter of 2023 compared to the year ago period.

Base business net sales remained robust despite our pricing activity and was up by $17 million or three 8% on a two year stack basis.

Pricing was obviously the big driver of our sales performance and contributed just over $54 1 million to our base business net sales.

Volume declines largely different by pricing related elasticity and timing negatively impacted base business net sales by $52 1 million.

FX drove the remaining $1 $6 million of decline.

We continue to watch our volumes closely particularly for brands, where we have taken the most pricing.

We expect the pace of our volume declines to continue to moderate as we head into the back half of the year and lap the majority of our price increases.

Driven in part by our pricing initiatives, our second quarter 2023, adjusted EBITDA increased by $14 4 million or 26, 4% compared to the first quarter of 2022 to $68 $5 million.

Adjusted EBITDA as a percentage of net sales increased by approximately 330 basis points to 14, 6% in the second quarter of 2023 compared to adjusted EBITDA as a percentage of net sales of 11, 3% in the second quarter of 2022.

While the levels of adjusted EBITDA increases are staggering. This is exactly what we said would happen as pricing would finally catch up the costs across the portfolio.

Particularly with brands that had major cost increases like Clabber girl and Chris go.

Also supply chain disruption and logistics costs are continuing to normalize this year.

And while we are seeing inflation across much of our portfolio. The pace of inflation has slowed which is what allowed pricing to catch up with costs and restore margins to our P&L.

Net sales were mixed across the portfolio.

Amongst our largest brands Clabber girl was once again one of the top performers in the second quarter.

Net sales of Clabber girl were up by $8 $3 million were 43, 7% compared to the year ago period.

Clabber girl is continuing to see strength across all product lines, including baking better baking soda and course, cornstarch and channels, including branded retail private label and industrial.

Okay.

Victoria recovered nicely from some of the pricing related elasticity and promotional timing headwinds that it faced in the first quarter.

Net sales of Victoria were up by approximately $1 6 million or 16, 1% compared to last year.

We feel very strongly about Victoria's position as one of the leading premium authentic pasta sauces in America.

Net sales of New York style were up by $1 3 million or 18, 5% in the second quarter of 2023 compared to last year.

With improved performance in our Yadkin Bill facility. We also think that this business will continue its recovery with a lot of upside.

Net sales of Maple Grove farms were up zero point $6 million or two 9%.

Net sales of premium we were up by zero point $3 million or one 9%.

Ortega, which had a challenging first quarter recovered in the second quarter net sales of Ortega were essentially flat for the quarter were down just zero point $2 million.

Four 0.5% compared to last year.

While net sales of Chris go in Green giant were both lower in the second quarter compared to the year ago period. The pace of decline has moderated significantly for both brands when compared to their first quarter performances.

Net sales of <unk> were down $4 $8 million or six 7% in the second quarter compared to the prior year, but were up $8 6 million or 14, 6% compared to the second quarter of 2021.

More importantly contribution and contribution margins for Frisco were up in the second quarter of this year compared to last year, just as they were in the first quarter of this year compared to the prior year.

Net sales of Green giant were down $4 9 million or four 4% in the second quarter compared to the prior year period.

But were up $1 $9 million or one 8% compared to the second quarter of 2021.

Following a very strong first quarter net sales of our spices and seasonings business were down in the second quarter by approximately $6 4 million or six 7% compared to last year.

However, net sales of our spices and seasonings business have increased by $2 $1 million or one 1% on a year to date basis.

Base business net sales of all other brands in the aggregate increased by $4 6 million or five 8% for the second quarter of 2023 as compared to the second quarter of 2022.

Gross profit was $102 3 million for the second quarter of 2023 or 21, 8% of net sales.

Gross profit was $76 $5 million for the second quarter of 2022 or 16% of net sales.

Gross profit as a percentage of net sales, excluding the impact of acquisition divestiture related and nonrecurring expenses.

Was up by approximately 540 basis points in the second quarter of 2023 compared to last year's second quarter.

The improved margins were driven by increased pricing and a moderation in input costs and logistics inflation representing.

Representing a continued turnaround compared to the first three quarters of fiscal 2022.

Where we suffered from severe input cost inflation that we've seen industry wide and which led to large declines in our gross profit and margins.

Selling general and administrative expenses increased by $3 7 million or eight 3% to $47 $9 million.

The second quarter of 2023 from $44 2 million in the second quarter of 2022.