BGS (2020 - Q2)

Good day, and welcome to the B&G Foods Second Quarter 2020 Earnings Call. Today's call is being recorded. You can access detailed financial information on the quarter in the company's earnings release issued today, which is available at the Investor Relations section of bgfoods.com. Before the company begins its formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to the Company's most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact the Company's future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The company 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. Ken Romanzi, the company’s Vice President and Chief Executive Officer, will begin the call with the opening remarks and discuss various factors that affected the company’s results, selected business highlights and his thoughts concerning the outlook for the remainder of fiscal 2020. Bruce Wacha, the company’s Chief Financial Officer, will then discuss the company’s financial results for the second quarter, as well as expectations for the remainder of 2020. I would now like to turn our conference over to Ken. Sir, please go ahead. Ken Roma

Thank you, operator. Good afternoon, everyone. Thank you for joining us today for our second quarter earnings call. I hope that everyone's staying safe and healthy during these very difficult times. While the last few months have been unprecedented and highly unpredictable, our amazing team at B&G Foods maintained a steadfast commitment to our core values and strategic imperatives to ensure the short-term and long-term success of our company. Before, I highlight our second quarter results, I want to acknowledge and thank the entire B&G Foods team of almost 3,000 people for their tireless efforts to produce the results we will share today, all while taking care of one another to stay safe and healthy, yet remaining extremely productive to do our part to keep our nation's food supply float. Our frontline employees have truly shown they're the true heroes throughout this pandemic, and I cannot thank them enough for their heroic efforts. Some of you may have noticed the small gesture we made to recognize our heroes back in June, when two of our Terre Haute, Indiana manufacturing team members rang the closing bell of the New York Stock Exchange virtually. What a proud moment to have our team members represent the entire B&G Foods organization on the world's financial stage. Throughout the pandemic, we remained steadfast and increasingly focused on our major priorities to deliver the results I will highlighting today. They are to one, protect the health and safety of our employees. Two, meet unprecedented customer and consumer demand. And three, make the investments necessary to ensure the long-term financial health and success of B&G Foods. Thanks to the tremendous efforts of our employees. We had an outstanding second quarter with net sales increasing 38.1%, and adjusted EBITDA, growing 44.6% ahead of the second quarter of last year. We reported adjusted diluted earnings per share of $0.71 for the quarter, an increase of nearly 87% compared to last year. Our sales performance was driven by very strong base business volume growth, pricing and some M&A benefit. Our adjusted EBITDA as a percentage of net sales was 20%, 90 basis points above year ago, as we began to see some nice operating leverage from increased volumes. As Bruce will share, we actually saw more operating leverage, but some of the benefit was offset by increased COVID costs. These operating results, coupled with excellent working capital management, allowed us to generate very strong net cash flow from operating activities of $188.8 million for the quarter, bringing our cumulative year-to-date net cash from operations to an astounding $246.4 million. We have always maintained that B&G Foods is a cash flow generating machine, and this quarter certainly proved that. We used the portion of this strong cash flow to repay revolver borrowings. And our net debt to pro forma adjusted EBITDA has been reduced by more than one term since the start of the year to 4.99. Furthermore, on Tuesday of this week, our Board of Directors, declared our 64th consecutive quarterly dividend since going public in 2004. The B&G Foods team accomplished this, while remaining committed to the health and safety of all of our employees and to do our part to keep our nation supplied with food during this difficult time. We continued to take a wide range of precautionary measures at our manufacturing facilities, and other work locations in response to COVID-19. And although, we're operating in a very challenging environment. Our operations team has done a fantastic job ensuring that our supply chain has been able to meet an unprecedented increasing demand for our products, by keeping our manufacturing facilities operating, while at the same time ensuring the health and safety of our employees. The other heroes in this pandemic are the brands of the B&G Foods portfolio, that consumers turn to and they found themselves having to provide great tasting, comforting and highly trusted brands, products and meal solutions for their families when required to cook and eat at home more than ever before. We have a portfolio of products perfect for these troubling times, with brands and very attractive categories across frozen and shelf stable vegetables, spices and seasonings, breakfast foods, snacks, meal solutions and baking. With at least one of our brands in approximately 80% of U.S. households, and found in nearly every aisle of the grocery store, we have brands and products for each meal of the day, and for all age groups. During the second quarter, we experienced tremendous strength in almost all of our brands, with 85% of our brands growing in net sales versus a year ago, including Green Giant, Ortega, Clabber Girl, Cream of Wheat, McCann's, Grandma's Molasses and Victoria, to name a few. And as Bruce will share a bit later, the list goes on and on. Incredibly, a number of our brands have doubled in net sales versus year ago for the quarter, including Bear Creek, Joan of Arc, and Mama Mary's. For the most part, our brands with more food service exposure did not grow at high rates, but those same brands did have very strong retail consumption. The oppressive growth in net sales across our portfolio was driven by strong sustained consumption throughout the quarter. For the 13 weeks ending June 27, as reported by Nielsen, the total B&G Foods portfolio grew 34.5% versus a year ago in consumption through retailer checkout lanes. About two times the total food and beverage growth rate, and among the fastest growing publicly traded food companies in the U.S., since the beginning of the pandemic. Importantly, we gained or held share in nearly three quarters of our brands and categories. Our largest brand Green Giant grew 45% in net sales, driven by strong consumption growth of nearly 58% in shelf stable vegetables, where we gained 1.5 share points in the frozen vegetable category, and more than 22% consumption growth in frozen vegetables, where we maintained share versus last year for the quarter, but grew share in May and June, exiting the quarter with strong momentum. Frozen vegetables as a category are growing nicely, didn't quite keep up with center store shelf stable categories, due to less space for consumers to stock up. But the category did increase a healthy 22% in consumption versus last year. While, we don't expect these outside growth numbers to continue forever, we do believe our sales trends will remain elevated, as long as people are going to be sheltering or working a bit more from home, eating out a little less, and eating at home a little more. And quite candidly, we believe these trends will remain elevated for quite some time, even after the pandemic eventually moves on. Consumers are learning about and enjoying cooking at home, and our brands, our categories are a perfect fit for them. We believe this, because we're seeing a significant increase in volume from new buyers of our brands. As measured by Nielsen, 2.6 million new households purchased our brands since COVID struck, a 3% increase across our portfolio, with some brand like Underwood, increasing new households by as much as 18%. Encouragingly, these new buyers appeared to have a strong appetite to continue buying our brands as the repurchase intent, or the percentage of new buyers who plan to buy again remains high, with Canoleo [ph] reporting a 26 repeat rate for new buyers of our brands led by Green Giant at 34.4%. Retaining these new households will be a key driver of elevated sales levels beyond the pandemic. But our existing households are also driving significant growth, as they have increased consumption of their favorite, trusted brands. We also saw a large increase in people shopping online, and our business certainly benefited from that. We estimate that e-commerce sales represent approximately 3% to 5% of our total net sales, and are growing rapidly inclusive of click and deliver and click and collect across our retail customer base. Our Amazon business alone grew 340% versus year ago for the quarter, and more than 330%, year-to-date versus last year. In summary, our brands, products, and most importantly, our people stepped up to deliver outstanding results during an unprecedented period of time. I couldn't be more proud of our people or more excited about our future, based on our performance over the past quarter. I'll share some thoughts on how we plan to capture future opportunity, after Bruce provides you with more details on our second quarter performance. Bruce?

Thank you, Ken. Good afternoon, everyone. I hope you and your families are staying safe and healthy. As Ken mentioned, we had a really incredible performance in the second quarter, despite the many challenges that we faced, as consumers flocked to our products and those of other packaged food manufacturers during this time of crisis. This has driven a slowdown in away from home or restaurant-oriented consumption, while contributing to a dramatic increase in food at home consumption, that we expect will continue at elevated levels for some time. And we certainly would not be able to achieve this performance without the efforts of our team of dedicated employees, across all of B&G Foods, who continue to work very hard in the face of this pandemic. Separately, we are very thankful for the loyalty of our consumers who are gravitating towards our brands in this time of uncertainty. We believe that our portfolio of products and our channel mix is well suited for the current situation that we find ourselves in today, and we believe that this environment will benefit our net sales well after the pandemic recedes. In the second quarter of 2020, we generated net sales of $512.5 million, adjusted EBITDA of $102.6 million and adjusted diluted earnings per share of $0.71. Results that were all far and excess of the prior year, and in fact, represented record second quarter performance for the company. Our net sales increased by an astounding $141.3 million or 38.1%, increased volumes contributed to the majority of the growth in net sales that we have seen in the quarter, including approximately $111.7 million in increased benefit from base business net sales, $15.6 million of increased benefit from volumes due to M&A, and $15.3 million from net pricing. The impact of foreign exchange resulted in an approximately $1.3 million drag on net sales for the quarter. The net pricing benefit of $15.3 million was primarily driven by the impact of our 2019 list price increases, the trade spend optimization program that we initiated in 2019, and a temporarily lower trade spend environment. The trade spend environment has already begun to normalize, and we expect less pricing benefits in the third and fourth quarters of this year. Increases in our net sales to supermarkets, mass merchants, warehouse, clubs, wholesalers and e-commerce customers have more than offset declines that food service customers, which for fiscal 2019, represented only approximately 13% of our overall net sales. As we disclosed on the first quarter call, our net sales in April increased by more than $70 million or more than 60% ahead of last year. Net sales for May increased by more than $50 million, an increase of approximately 50%. And for June, net sales increased more than $15 million dollars or 10% year-over-year. While our second quarter was very strong, we saw what appears to be an emerging theme in this pandemic, while typically we see a strong build ahead of the holidays that encourage large gatherings like 4th of July. We did not see that build this year and actually saw a decrease in sales in the final week leading up to the holiday, when compared to the prior year period, which did benefit from that traditional holiday build. Interestingly, this would be one of the few times since the beginning of the pandemic, that we did not see a weekly year-over-year increase in net sales versus the prior year. July, however, started off with a bang and looks to have had growth rates and net sales versus July of last year of some 30% to 35%, based on preliminary results. When looking at June and July combined, our net sales growth was approximately 20%, which is more similar to what we are currently seeing in the consumption scanner data. Green Giant continues to be the leader in our portfolio, with net sales, including net sales of the Le Sueur brand of approximately $164.1 million, an increase of approximately $51.2 million, or 45.4% in the quarter. Over the last 12 months, Green Giant, including Le Sueur has generated just over $600 million in net sales. We saw outsized growth in net sales for both are shelf stable and frozen Green Giant products in the second quarter, with shelf stable adding $33.6 million in net sales, or an increase of over 130%, and frozen, adding $17.6 million in net sales or an increase of 20.1%. Frozen growth was driven by core legacy frozen bag and frozen bag-in-box line, as well as innovation products, such as Green Giant Rice Veggies, Green Giant Veggie Spirals, and Green Giant Veggie Tots. Shelf stable Green Giant continues to benefit from Amazon's [ph] demand for canned vegetables. Clabber Girl, which we acquired on May 15, 2019, and also was not in our April and first-half of May 2019 results was also a major contributor in the second quarter growth. Net sales of Clabber Girl were approximately $26.5 million for the second quarter of this year, and what is ordinarily a slow period for the category, compared to approximately $8.4 million during the portion of the second quarter last year that we owned Clabber Girl, plus an additional $8 million or so, under prior ownership. Among our other large brands, we had exponential growth from Cream of Wheat, which increased net sales by approximately $6.3 million or 54%. Victoria, which was approximately $3.8 million or 37.7%, and Ortega, which was up approximately $12.8 million or 37.4%. Our spices and seasonings in the aggregate increased net sales by $17.4 million or 21.4%, with an acceleration in the second-half of the quarter, despite continued softness in food service. We have seen a strong build developing in traditional grocery throughout the course of the quarter, as well as more recently increased demand in food service. Net sales of Maple Grove Farms were up $0.2 million or 1.5% in the second quarter, with strong retail performance offset by softness at some key food service customers. Similarly, New York Style was down $0.7 million or 6.9%, due to a combination of food service exposure, as well as more muted performance that we are seeing in the aisle, relative to the center of store and frozen aisles. And we also saw strong performance across the rest of our portfolio. In fact, outside of our seven large brands and our spices and seasonings, net sales of the rest of our portfolio increased by $35.3 million, or 38.2%. And as Ken mentioned earlier, approximately 85% of our brands increased net sales during the quarter, with approximately 80%, including B&M, B&G, Grandma's, Las Palmas, Mama Mary's, McCann's, Polaner and Underwood increasing net sales by double digits in the quarter. Gross profit was $134.1 million for the second quarter of 2020, or 26.2% of net sales. Excluding the negative impact of approximately $0.5 million of acquisition, divestiture related and non-recurring expenses during the second quarter of 2020. Gross profit would have been approximately $134.6 million or 26.3% of sales. Gross profit was $91.9 million for the second quarter of 2019 or 24.7% of net sales. Excluding the negative impact of $4.9 million of acquisition, divestiture related and other non-recurring expenses during the second quarter of 2019, gross profit would have been $96.8 million, or 26.0% of net sales. Selling, general and administrative expenses were $44.3 million in the second quarter of 2020, or 8.7% of the quarter's net sales, up slightly in dollar terms, but a decrease of approximately 200 basis points as a percentage of net sales. Selling, general administrative expenses were $39.9 million in the prior year quarter, which was 10.7% of net sales. The dollar increase was composed of increases in selling expenses of $2.7 million and general and administrative expenses of $4.7 million, partially offset by a decrease in M&A and non-recurring expenses of $2.7 million, warehousing expenses of $0.2 million and consumer marketing $0.1 million. We generated $102.6 million in adjusted EBITDA in the second quarter of 2020, compared to $71 million in the prior year period. The increase of $31.6 million in adjusted EBITDA represents our third consecutive quarterly increase in adjusted EBITDA, as compared to the comparable prior year quarter, following our lapping of the one-year anniversary of the divestiture of Pirate Brands in the fourth quarter of last year. Strong base business performance that has been enhanced by the increased sales, resulting from the onset of COVID-19 pandemic, and the resulting shelter at home and work from home policies. Adjusted EBITDA as a percentage of net sales was 20% for the second quarter of 2020, an increase of approximately 90 basis points over the 19.1% generated during last year's second quarter. Adjusted EBITDA as a percentage of net sales was negatively impacted by approximately 90 basis points, or approximately $4.7 million in COVID-19 expenses related to health and safety precautions, including enhanced sanitations and employee screenings, and increased compensation paid to our manufacturing employees in the form of temporary wage increases, special bonuses and continued pay during quarantines. Adjusted EBITDA was also negatively impacted by an additional $3 million or 60 basis points, due to the impact of foreign exchange. Net interest expense was $24.8 million in the second quarter of 2020, an increase of about $1.6 million compared to the prior year period. We generated $0.71 in adjusted diluted earnings per share in the second quarter of 2020, compared to $0.38 in adjusted diluted earnings per share in the prior year period, driven by our strong operating performance, and a reduction in our share count. B&G Foods has historically been a strong cash flow generator, but our second quarter results were unprecedented for us. We generated $188.8 million in net cash provided by operating activities in the second quarter of 2020, and we have now generated $246.4 million in net cash provided by operating activities, through the first six months of the year. As you may recall, we highlighted our intention to reduce working capital this year and generate outsized net cash provided by operating activities. Our planned reduction in working capital has been accelerated by the impact of COVID-19. This combined with a substantial increase in our net sales for the first six months of the year, have dramatically improved our net cash from operating activities. The other aspect to think about with regards to our strong cash flows is our balance sheet, and how our performance this year has impacted our net leverage and accelerated our deleveraging goals. During the first six months of the year, we have reduced our net debt by approximately $170 million to $1.7 billion at the end of the second quarter. We have reduced our net debt to pro forma adjusted EBITDA from 6.1 at the start of the year to just under 5 times today. We are now well within our stated target range of 4.5 to 5.5 times net debt to pro forma adjusted EBITDA, and we expect continued strong financial performance throughout the back-half of the year to further reduce our net leverage in 2020. While we have suspended giving guidance for fiscal 2020, due to the unpredictable macro environment, everyday, we're learning a lot more about the world that we are currently living in. Based on the current environment, with still elevated incidences of confirmed coronavirus cases, we expect continued shelter at home and work from home activity. Unfortunately, we also expect a soft economy and higher than normal levels of unemployment. As a result, we believe that we will remain in an environment, where people are eating more meals at home than in the prior year, boosting our traditional grocery sales, while putting pressure on our food service sales. Based on what we know today, we expect to see continued elevated levels of net sales, adjusted EBITDA and growth in net sales and adjusted EBITDA throughout the remainder of the year. Ultimately, we expect our retail shipments to eventually tie fairly closely over time, to our retail consumption trends. And this is effectively where we have found ourselves, when we look back at our June and July periods. Our factories are running full steam to keep up with this demand, which is helping to generate positive operating leverages. But we also expect that these benefits will continue to be offset in part by the incremental costs of the precautions that we feel are necessary to operate safely in this environment. As a result, we believe that our margins will generally remain in line with, perhaps with a small upside to the prior year and quarterly levels. However, it is very hard to predict timing or the full impact of COVID-19 pandemic will have on our business, or to provide financial guidance in this environment, and as a result, we are continuing to spend giving guidance. The ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others, the duration of social distancing and stay at home mandates, and whether a second or third wave of COVID-19 will affect the United States and the rest of North America. Our ability to continue to operate our manufacturing facilities and maintain our supply chain without material disruption, and the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating habits. I would now like to turn the call back over to Ken to highlight our plans for the rest of the year. Ken?

Thank you, Bruce. As Bruce mentioned, these unprecedented times make it extremely difficult to predict the future. So, we will remain focused on the things we can control and nimbly react to the things we can't control. During the second-half of the year, we will continue to work closely with our supply chain partners and customers, to ensure we continue to provide uninterrupted service to meet the increased demand, resulting from the pandemic, while, of course, keeping our employees safe and healthy. At the same time, we will continue our new product innovation and other brand building efforts, as we look to turn some of this pandemic-related increase in demand into long-term growth opportunities for our brands. We are taking this opportunity to make incremental investments behind brand innovation, marketing and building out our e-commerce capabilities. While the introduction of new products have been somewhat delayed due to COVID driven retailer shelf reset delays, we remain very excited about our innovation pipeline and have received terrific response from our customers. This fall, we'll continue to launch several new products, including Green Giant frozen vegetable carb replacement products, including Green Giant Pizza with Cauliflower Crust, Green Giant Veggie Hash Browns, Green Giant Cauliflower Gnocchi and Cauliflower Breadsticks. We will also leverage our acquisition of Farmwise by introducing Green Giant Veggie Fries and Green Gaint Veggie Rings, our Cauliflower based take on Onion Rings. Regarding the Farmwise brand, we’ll also relaunch that brand in a natural channel, plus a few of the current mainstream retail customers later this year as well. On the dry grocery side of the business, we plan to continue to launch of a shelf stable version of Green Giant Riced Veggies, a nutritious alternative to traditional dry rice, made from the 100% plant-based legumes like lentils, sweetpeas and chickpeas. We are also going to do one of our first cross promotion where we plan to launch Green Giant Frozen Vegetables, seasoned already with Dash salt-free seasonings to introduce Green Giant consumers to the Dash brand. While many customers delayed their new product resets, we certainly have not needed the volume this year, given the large increases in our base business. And introducing these items later this year than planned and even some pulling at the next year should provide a greater growth in 2021 than we originally planned. We plan to support these new product launches with increased marketing investment to ensure their success. In addition, we will shift more investment to e-commerce to make sure we continue to engage with consumers during this rapid increase, in the adoption of this new shopping behavior. Our e-commerce business is growing rapidly and we see strong trends building throughout the pandemic, which we expect to continue. Our goal this year was to be fully e-commerce capable by year end. but we're ahead of our internal timeline, and we expect to be fully capable by the beginning of the fourth quarter. We've experienced tremendous growth in e-commerce sales year-to-date, without even being fully e-commerce capable. So, we expect even stronger trends going forward. Lastly, we'll take the tremendous opportunity that the unfortunate pandemic has given us to generate significant cash flow and further deleverage our balance sheet, so we can continue to execute the tried and true B&G food strategy of maintaining a stable base business while growing through accretive acquisitions. This concludes our remarks, and now we'd like to begin the Q&A portion of our call. Operator?

Thank you. At this time we'll be conducting a question-and-answer session. [Operator instructions] The first question is from Brian Holland with D.A. Davidson. Please go ahead, sir.

Thanks. Good evening, gentlemen. And congrats on the strong quarter. I wanted to ask about, pre-COVID one of the concerns on the business was kind of the relative performance of your kind of composite categories. As I think, you noted today there's been an inflection there within the past couple of months. So, I'm curious what's specifically you would point to because obviously, you're in categories that are effectively positioned, but so are your competitors. So, what do you point to specifically as driving the inflection and share for maybe being moderately or worse, negative to positive today? That'd be the first part of the question. And the second part is, what plans you have in place? Or what kind of urgency do you feel you need to preserve that improvement in your relative performance?

So, did you ask us why we thought we were gaining share in these categories?

Yes, sure. So, I think there's, if you look at the data, in the past couple of months, there's been an inflection where I think on whole, you've been a little bit negative, sometimes maybe a little bit worse. Now that's going positive. So, curious within those categories, if there's one or two things that you would highlight where you feel like you've benefited more than your competitors in those categories?

Well, I'm not sure. I'm not following you in terms of the fact that we were negative than positive. Our strong consumption started in the third week of March, and we haven't looked back. Our consumption growth has been tops in terms of food companies across the board, ever since the start of the pandemic. There were some areas like in Green Giant frozen vegetables where we're still cleaning up promotions, which was a negative impact versus year ago. As we planned, we're fully past all that, so now we're kind of on even keel from a promotional standpoint, and then of course, our innovations adding a lot. So the only other delay was spices and seasonings as a category fascinating well, while the categories like pasta sauce and rice and canned beans and baking products and things of that nature, started taking off. Spices and seasonings was almost like a delay by about a month, because I think people were using up the spices and seasonings they had in their cupboard, and due to their increased activity in cooking and baking, you saw them come back. And that category as well as our brands really start to take off in April, where most of the other categories that have benefited from COVID took off in March.

That's perfect. That's helpful color. I appreciate it. And then just one more. I guess, thinking about your capital allocation priorities, obviously with the big bump in EBITDA this year, you've got a lot more cushion here, and you can look at debt paydown as you've done so notably so far through the first-half of this year. There's also maybe reinvestment you talked about the traction that these brands have had as consumers are migrating towards at home. Is there any shift in the capital allocation priorities here in the near-term, given the bump in EBITDA and maybe the opportunity to seize on this maybe big bump in household penetration? Or no real change there and so kind of following the same beats?

I think from a capital allocation standpoint, we've always strived to do what we thought was best for shareholders, which is, one, returning excess cash in the form of a dividend, still high priority. Keeping healthy balance sheet and keeping and making sure that balance sheet is primed for M&A and other investments. And so those first two things, always felt confident about, but clearly demonstrating with a much lower leverage, our balance sheet is very healthy today. As far as reinvestment, absolutely, I think, Ken has highlighted over and over again, the importance of making investments in marketing and e-commerce and positioning our brands to be as strong coming out of the pandemic as they are today. And then obviously, we're always on the prowl for M&A. It's a matter of finding the right ones and being selective and disciplined, but also very much a priority for us.

Thanks, Bruce. I appreciate it. That's all I have, gentlemen.

Yes. And just to be clear, so from capital allocation, we'll make investments in marketing and e-commerce. But we still plan to have above plan and significantly above year ago EBITDA growth and cash to give to Bruce, so that we can continue our dividends as well as reduce our leverage. We've heard loud and clear from the investment community that our leverage got a little too high for folks for their stomach, and we want the flexibility to get back to our strategy of creative acquisition. So, having a nice strong base business, the best thing we can do for that and we're excited about being able to get back on the acquisition drill.

The next question is from Andrew Lazar, Barclays. Please go ahead, sir.

Hey, Ken and Bruce, how are you?

Good, Andrew. How are you?

Fine.

Very well. Thanks. I guess, in thinking about realizing obviously there's a lot of dynamics that play here in terms of forward-looking guidance and things like that. Your comment about EBITDA margins in the back-half maybe being in line with or a little better than year ago. I mean, obviously, through the first-half the volume leverage that you've gotten off of this increased volume has been phenomenal. And we've seen that come through for obviously, a lot of food companies. Are there certain aspects or discrete things that I'm less aware of that might restrain some of that volume leverage in the back-half? Because, obviously, you're still going to see what would seem elevated consumption levels for a while. I think you mentioned that very recent trends were settling in that kind of 20% level. And, even if they sequentially decelerate from here, it's still a lot of operating leverage there. So, I don't know if it's just incremental investment as you mentioned, and/or COVID costs, maybe there's some quantification of those to give us a sense of it. But anyway, just -- you get the gist to my question.

Yes. So a couple of things that -- to hit on there, so part one, obviously elevated sales and with that elevated EBITDA. And then the question is what happens with margins. And as you saw, considerable leverage from an operating standpoint from an SG&A. From a COGS standpoint, a couple things to remember. One is, we produce in-house about 50% of our products, I mean about 50% through co-packers. And so we're not necessarily getting the same incremental leverage on co-packed items. From an internal manufacturing, we are definitely seeing operating leverage. However, some of that benefit is also offset by incremental COVID-19 costs. And for us, we're looking at this from a long-term perspective. It's the right thing to do, but it's also the smart policy, we're making sure we can take every precaution in our factories, to keep people safe and to keep them running for an extended period of time, rather than sacrificing any of that, and there's a cost to operating in that environment. So, we think there's benefit. We showed there is benefit this quarter, but there's probably a ceiling on how much that benefit can be just given the world that we're living in.

All right, thanks for that. And then Ken, it's interesting there, there's obviously a pretty big debate raging in the food space right now over how sticky right some of this incremental consumption and from new consumers and lapsed consumers will be. You seem pretty confident that even sort of post-pandemic there could be some positive halo, right from all this on some of your key brands. I too think it's maybe unrealistic that 100% of these new buyers will all of a sudden sort of leave these brands, once they've sort of tried them. But again, I know there's a big debate about that. But your level of confidence in that, I'm just trying to get a better idea of what drives that for you? And not in this sort of the current environment, but the post-pandemic world, what gives you that level of confidence that your brands can see some of this continued benefit? Thank you.

Good question. So, the reason why we're so confident is actually when you look at our growth, while we love the new households, I believe I mentioned in the last earnings call and I've been doing this for almost 40 years. And new households are like the fountain of youth for a brand marketer. We fight for years to try to get a percent increase in household penetration, and Underwood saw an 18% increase alone. However, when you look at a lot of the increased volumes, a lot of it's the same households just buying and eating more. So, the reason why I'm so confident, it doesn't have as much to do with our brands. Our brands are perfectly positioned. I'm confident, because I haven't talked to -- you know, we're part of the -- B&G big is part of the Consumer Brands Association, the CBA, the old GMA, the old Grocery Manufacturers Association. And there isn't a food company out there, and in fact, there isn't a banking company or any other company, I haven't heard that said post-pandemic, we’re going to be in a new world of work from home versus work from work. So I'm enthusiastic, because if just a small percentage of people stay at home, you got that means you have to have breakfast at home, that means you have time to run downstairs and throw banana bread in the oven, that means you have time to whip up a quick-serve lunch. That's what we're finding in people's behavior. I find that my own behavior being more at home. So, it's really about everybody feeling that the post-pandemic world is not going to be the same as the pre-pandemic world, even if there's a virus vaccine tomorrow. That's what makes it so. So as long as people are going to be at home just a little bit more, that's positive trends for categories like we have in vegetables and baking and spices and seasonings and breakfast. I mean, again, the breakfast portfolio is a perfect example as people are home, where we're seeing hot cereal still growing, 30% or 40% consumption in warm summer months versus year ago. So in a world, it's really about the world's going to be different even when a vaccine arrives.

Thank you.

We have a question from William Reuter, Bank of America. Please go ahead.

Hi, thanks for taking the question. You talked about the terrific response you've received from new products, although, it sounds like very few of your supermarket customers did shop resets in July. Are you expecting that these are being delayed until the fall? Or do you think those resets are being just skipped and they'll do one in January of '21?

It's a mixed bag. So we have a tally on every one of our customers. Some are planning to do the fourth quarter, in time for the fourth quarter and some are delaying until next year. And we've got that all appropriately in our forecast. But you know what, we're so excited to get the new products to market, but we certainly don't want to do anything that our customers don't want. And again, we are happy with the base business growth. So, we'll take our customers lead on when they want to put it on a shelf the right way. They're having their own labor challenges. And so shelf resets in many cases are being delayed until next year. But it's not the majority. I mean, I don't know the exact number, but it's a fairly balanced between just delays versus -- delays in this year versus pushing off till next year.

Is there any way to quantify what that shelf space you may be gaining from this new product introductions? Would be in either between fall and January of next year?

I don't have the numbers offhand, but we look at it is net SKU increase. So, if we introduce five new SKUs, we don't necessarily get a hole in that five, as long as we come up net positive. Whenever there's new products, everybody's going to have to give at the altar, so to speak, in terms of giving up SKUs because there's not unlimited space. So, we always look to make sure that we're highly net positive in the SKU count that we have. And that's all planned in our forecast, because there's -- we have two types of cannibalization. There's systematic cannibalization, meaning I'm going to launch five new SKUs, but I'm going to lose two. So, I've lost the volume from those two SKUs. So that's systematic cannibalization. And then of course there is always consumer cannibalization that sometimes some of the new consumption comes from your base consumption. The reason why we're so excited about Green Giant is that we're not launching just a bunch of new vegetable products. We've been on a long-term trend of launching new products, really focused on other categories made from vegetables and going after real estate in those areas. So that's what we're most excited about. So, pizza and tots and our hash browns and potato section and this is -- an gnocchi and the frozen pasta aisle and now dry riced veggies over in the dried rice aisle. This is all the real estate for Green Giant, which we believe will drive more incrementality.

Great. I’ll pass it onto others. Thank you.

Thanks, Bill.

We have a question from Nik Modi, RBC Capital Markets. Please go ahead, sir.

Good evening, everyone. Hey, how are you? I have just two quick questions. The first one is online. And obviously, every company is seeing a surge online. I'm just curious, from your vantage point, what kind of consumer is buying a product online? I mean, is this just a replacement of what someone would buy in a brick-and-mortar environment where incrementality here? So that's the first question. And then the second question is, to the degree we've seen a surge in cases. We're hearing from retailers around the country that they're starting to stock up to prepare for a second wave. So, I'm just curious, if that's something that you've seen and maybe you referenced that in your July commentary that things are off to a very good start. I'm wondering if that has anything to do with it. Thank you for your help.

So, your first question was about the e-commerce. I mean, e-commerce we believe is a cost adventure, you got to be there because people are changing their buying patterns. So, we see a mixture. There's younger millennial shopping, but also there's older people. So, online is now, as older people don't want to be exposed as much in going shopping in store, older people are shopping online and have it delivered at home as well, or the click and collect version. So, to me, we're doing a better job online now than we were before, and we'll continue to do the better job. So, perhaps it's a little bit more incremental than what we've seen before, but at the end of the day, online is not necessarily. I don't know of any data that says online is driving increased consumption, it's just a mix of shopping. You've got to be there. You've got to be present. And our retailers demand it. So, our large retailers want to make sure that their electronic storefront is we're well represented, just like they want as well represented in their physical storefront. And they don't want any difference, they want it to all be the same. So that it's absolutely simple for the customer that no matter how the customer wants it, shop in store, click and deliver, click and collect. They want it to be seamless for the customer. And they want us as manufacturers to make sure that our products are ready to be able to be seamless in front of their customers, and that's what we're working -- that's what we've been working hard, when I talk about getting e-commerce ready and capable. In terms of -- your second question was, remind me it was.

Yes, just retailers preparing for a second wave and are you seeing any of that?

Yes, I mean, I guess, if you look at the news reports, so as soon as we saw news reports that states were now, perhaps got a little bit too aggressive and people got lackadaisical and California shut down and now Florida is having an issue. We absolutely saw an increase in average daily orders in our open order book looking out immediately. It's fascinating. So, as soon as you saw big states, we started to see a little bit of a jump, not necessarily and well, you could say, I guess, in building inventory, my guess I don't know about retailer inventories in total. But I guess you could say, once they hear that states are shutting down and restaurants are going backwards again, they're going to be ready for the increased activity at store level. And, if that happens, we'll see that in the consumption numbers as reported by Nielsen and IRI services.

Excellent. Thank you for your help.

Thanks, Nick.

We have a question from Carla Casella with JPMorgan. Please go ahead, ma'am.

Hi. I guess this goes along with the questions about new products and the trends there. But also, any trends you're seeing in terms of trade spender? How the retailers are viewing trade spending? Is that opening back up? Or do see a returning trade spend coming out of COVID?

We saw a little bit of relief on trade spend in the first-half of the year. But we're planning on making sure that we're going to be promoting equal levels from a year ago, for the rest of the year, unless of course, there's a huge jump in pandemic fears again, then, as they did in the first part of the year, customers may not want to be as aggressive on promotion as they might be in pre-COVID time. So, we'll take the lead from our customers. We're ready to match our promotional activity from year ago. We'll take it from our customers as to whether or not they want to continue to do that.

Okay, great. Thank you.

We've a question from Bryan Hunt, Wells Fargo. Please go ahead, sir.

Thank you. I just have two questions. One, if I look at inventories and granted, you have seasonal fluctuations, because the pack, but you're at the lowest level in three and a half years. And I was wondering, were you all missing sales throughout this period or recently, because you're out of stock? Can you talk about the quality of the inventories you have? I imagine they're probably the best you've ever had. You've been able to clean out any old inventories. Again, just talk about that. Your inventories and whether you missed any sales?

We are in a really good inventory position. We actually went into the quarter with -- we are high in inventories. And that helped us in the first part of the pandemic, because when March and April boosted, we were able to runoff a high inventories as we got our manufacturing system geared up for, when those inventories are going to be depleted, which is a big reason, I think, why that plus keeping our people safe and our plants running, I think, and having the right brands and categories is why I think we're number two in terms of consumption growth of any major food company, in terms of growth for us year ago, as reported by Nielsen and IRI. We had a few product lines where our customer service levels were well below 90%, which is we don't like to be there. We want to be 95% or more. One's canned vegetables because the pack is only one time a year. And that you packed that as the crop comes in, in the summer, in the fall and you've got to make that last year. So, we saw some issues there. While Underwood has grown dramatically, we saw some constraints there. It's not material. It wouldn't have had a huge impact on our EBITDA, on cash flow. But, yes, sales could have been a little bit higher because three or four of our product lines, we struggled to keep up. But out of 50 plus brands having an issue on three or four of them we thought was a pretty good performance. And we've resolved some of those issues. And we're just in the last month alone, have gotten back, increased our service levels. Clabber Girl is a great example. We purchased that building. We purchased that brand and that company. And the building that we produce baking powder, is still for doing the same thing that that building was intended, was built to do over one 100 years ago. They've been pushing -- they've been making -- they've been packing more baking powder than they ever dreamed during this time frame. And we're actually now going to be expanding some of that production in some of our other facilities to help to meet these amazing demands, because our research shows that while people have gone through a lot of baking powder, that it's not like they have too much. That’s something that many of us just buy a can a year. But people are going through that can. And our customers are saying they want to be -- they’re gearing up for a strong fourth quarter, because people have to still be ready to do their traditional baking in the fourth quarter. So, whatever production problems, not production problems, but whatever shortages we had in the past, we're rapidly solving to get ready for the rest of the year to get those customer service levels back above 90%.

So, are you having any -- or what are the issues within your supply chain, if you're having any, whether it's internal or external with your co-packing partners?

Our co-packing partners have been very good, it's been very spotty in terms of one or two product lines, where they haven't been able to scale up quite as much. So, in fact, we're going to relieve that and do some supplemental packing on our own of a brand of a product line or two that we haven't packed before. For the most part, our co-pack partners have helped us out in terms of helping us in places where we've been at maxed. We've actually brought on a couple of co-packers -- couple of product lines that we didn't traditionally co-pack to have them help us gear back up for sustained high consumption rates.

All right. Then my last question, Ken, is, you talked about pack just a minute ago, can you talk about how the crops look and maybe what your plan is for pack this year relative to a year ago? That's it for me. Best of luck. Thank you.

Thank you. The pack, from what we understand, is good. The spring was good, so there wasn't delayed plantings. So, we hear that the crop is going to be decent. Peas are basically in. We didn't get all the peas we wanted, but we got a lot, very close to what we wanted. The pea crop has been short for a few years running, so it continues to be short from what we would ultimately like to have. And we haven't heard any issues on the horizon, but there's still a long way to go. We still got a lot of summer and the harvest goes in the fall and mother nature is physical. But so far, we've heard it will be a better crop than it's been in the last couple of years.

Thanks for your time and stay safe.

Thank you.

The next question is from Michael Lavery, Piper Jaffray. Please go ahead, sir.

Thanks. Good evening.

Hey, Michael.

Two questions related to inventories. One on the trade inventories, your organic sales growth and your IRI, the numbers we see sales growth aren't very far apart. But with such a surge, do you know what the retailer inventories look like? And how much of a restocking lift we should be looking for in the second-half or third quarter, maybe specifically? And then on your own inventories with the working capital benefit that you've gotten. Can you give us any sense, just your year-to-date and quarter cash flow, of course, are very strong? Just any sense of how much of that may reverse as you restock some of your own inventories as well?

Yes. I'll turn it over to Bruce on our inventories. The big headline there's going to be -- obviously our inventories will now build given we're going to bring the Green Giant vegetable pack in. But our retailer inventories, we're not sensing that there's any big huge stock load, meaning retailers-built inventories, then depleted, and now they're going to rebuild. Most of our inventories are -- most of our customers around really, efficient supply chain replenishment program. So, it's really all about if they're seeing more shoppers in the store, and the takeaway gets, increases they're going to order more. So, it's not as much of a lag effect with our retailers. Like I said, we saw that I think it was the first or second week of August already, open orders looking out in the future pop up because, places like California and Florida are running into difficulty. So, it's pretty immediate versus some long-term stock up and drawdown effect.

And Michael, with regards to our inventory, I mean, we had talked after our fourth quarter call or during our fourth quarter call about desiring to bring working capital down a little bit this year. So, some of this is planned, some of its accelerated, but still within plan. I think you're right, back-half of the year, particularly around pack season, we usually ramp up inventory during the third quarter, fourth quarters is usually a draw down. There is a fair amount that's in flux, because it really is, what happens with COVID-19, what happens with back to school. We're seeing strong demand and assuming that continues. We're producing everything that we can, so we've got enough product to sell the people. And that's kind of how it's been chugging along for the last few months. And we got to be prepared going forward.

Great. Thank you very much.

We have a question from Rob Dickerson, Jeffries. Please go ahead, sir.

Great, thank you. So, just this one general question on the investment rate potential, I guess both in the back-half of the year, but then maybe for the foreseeable future. Look, obviously, you have a very nice topline bump, category positioning seems good, doing well in certain categories on the share side. But kind of like average for your company say now for the most part if you kind of get this nice, increasing household penetration, kind of once in a lifetime, so to speak. But then as you kind of come out of that, there will be some decelerating sales maybe not that quickly, but it would decelerate to some extent. And then what the feel is so like everybody that's been able to increase that household penetration, which sake of argument, let's say is kind of everybody. Then everybody rushes in and then reinvest to try to hold it right and the competitive environment gets more competitive by trade spend, kind of getting a little bit tougher in the back half of this year, marketing budgets or what have you get, kind of are going off. That's what we’re hearing, compared to general food in general, excuse me. So, the top line remains elevated. And I guess this goes back to maybe Andrew’s question about, like kind of what gives you the confidence not only that, food at home could remain off a bit, which I tend to agree with too. But that competitive dynamic, doesn't really skyrocket to an extent that you kind of leave yourself enough room at this point to really be able to spend up, right, because we're all talking about Q3, June, July. I'm thinking about 2021. I'm thinking about how do you budget for next year? What could the top line be? How much do you need to reinvest? Kind of any color on that reinvestment side how you kind of, hold on or you keep that household penetrations sticky in the next 12 to 18 months?

Well, we haven't done our 2021 plan yet. We're still dealing with the current state of affairs. But this business is always very competitive. So I don't know if it's going to get any more competitive, post pandemic just because we're trying to capture new household. We're always trying to get new households and retain our households and fighting for share. What I would say is that we're very encouraged because this pandemic has allowed us, because the shelf set delays our pipeline is even more robust. So what I'm saying is if our pipeline was delayed by six to nine months, that just, we were already planning beyond that. So our innovation pipeline is really now chock full, because we've had six months or so delay. And so we're very encouraged because our innovation pipeline is going to be able to drive growth farther into the future than we were planning because it's not driving much of our growth this year. So we're excited about the innovation. The investment we make this year we're hoping to keep that for next year, rather than having to reduce it. But like I said, we haven't built our plan yet. We also next year will benefit -- we have a soft first quarter of this year. So we're planning, we're hoping for a good start to next year, and then we've really had to see how consumption shakes out as we build the rest of the -- build the rest of the plan for the rest of the year.

Okay. So just to kind of summarize, it seems like, because of that delay, because of that innovation line out that possibly kind of hopefully, it's maybe the return on that investment could even be higher, just given you are investing, kind of had to pull back a little bit per quarter, but then you reinvest later with better innovation that hopefully the probability of share gain sticks. Is that the right way to think?

Absolutely. Absolutely.

All right. Great. Thanks again. I pass it on.

Thank you.

We have a question from Robert Moskow, Credit Suisse. Please go ahead, sir.

Thank you for the question.

Hey Rob.

Hi. How are you all doing?

Good.

I had a follow-up question on the pack for the vegetable crop. And I want to know it -- do you just -- when you decide how much to buy? Are you making a forecast for what the demand growth is going to be for the next 12 months in vegetables? So are you aggressively buying this year more than you bought the prior year as a result? Or do you buy conservatively and then just assume, well, if demand is really strong, we'll get raw materials from other sources along the way. Just wondering how it works?

No, we have to forecast the business. And to be able to make sure that if you have one pack a year, you have to make sure that you can be secure enough for, you believe demand is going to be and that hurt BMG a few years ago and we lost a major customer, so the inventories popped up, because the customer, the pack was determined and vegetables were in the can before they knew about the last customer, but we did increase our sales forecast. So we get a chance from the start of the year through May, we get a chance to adjust our forecast. We did take it up and even down alternative supplemental suppliers when our major suppliers couldn't give us all we wanted based on the increased demand for canned vegetables in particular. And we got a lot of what we asked for. We didn't get everything for what we asked for. But then again, the crops not in yet. So the commitments though are up versus a year ago, because of the, we drew down so much inventory. So we had to -- when we do a new pack, we not only have to project demand, we have to get back to the inventory levels, that'll ensure good customer service, not only today, but a year from now.

Okay. But the net of this is you bought aggressively, more so than you did a year ago, because you expect the demand to continue to be strong. Does that make sense?

Correct.

Okay. All right. Thank you.

Yes. And to make sure we have enough stock inventory.

Okay. All right. Very good.

We have a question from David Palmer, Evercore ISI. Please go ahead, sir.

Thanks and congrats on the results. Hey, that free cash flow number through the first half of the year was about 120% of EBITDA. How should we think about the free cash flow conversion for the full year? Do you think it might stay at that sort of ratio or any reasons we should think higher or lower?

It's going to be big. Obviously, the one thing that to keep in mind, third quarter, we do buy a lot within the vegetable pack. So, that's always usually our softest quarter from a free cash flow standpoint. But as we've been saying, for some time, large demand causes large sales, large sales causes large EBITDA and large EBITDA is going to create a lot of cash flow.

Yes. So, but like north of like free cash flow being higher than EBITDA this year wouldn't surprise you?

I don't know that I'd expect it to be higher than then EBITDA this year because ultimately, we were reinvesting and buying some more inventory in the third quarter. But we'll have a real good year.

Got it? We're getting far enough along right now, where you've seen the -- and you might have data on this, consumer insights data where you see who's trying your product, and how many what your household expansion has been. And then you might even understand what the repeat of those consumers has been, in other words, giving you a clue as to what their actual satisfaction is. Do you have any data points there to share about which brands and categories you feel like you've had the most triers and the most satisfied triers?

It's across the board. As I mentioned, we saw 3% household penetration overall increase and we saw upwards of 80% and a brand like or -- I don't have all the numbers off the top my head but encouraging our largest brand, we saw increased household penetration Green Giant and a 34% indicated repeat rate. So, that's pretty -- that's those are pretty nice numbers.

And then the last thing is, when we see some of these scan data, it doesn't, it's not a perfect audit in terms of the promotional activity because of the core, the fact that there's not always people to check out what's going on in the stores. So, in some times, there is more promotional activity than it looks like. Are you really seeing what looks like, 5, 6, 7 points of drop and promotional activity, in terms of sold on promotion? Is your spending going down that much and then heading into the second half of the year there's, there seems to be a little bit more money out there to spend, or do you anticipate it being a more promotional environment in your key categories?

So, when Bruce talks -- when Bruce mentions pricing so most of our pricing is due to trade promotion efficiencies and some of its less promotion. So, when you go folk so and you see that in the, when you look at the Nielsen or IRI, incremental versus base volume, base volumes are up across the board. And in many cases promotional volumes are down. We don't necessarily think that the rest of the year is going to be more aggressive promotion than prior year. But we do we are planning to make to be promoting more in the second half of the year than we did in the first half of the year.

Got it. Thank you.

But that could change. You have another lockdown in more than just a couple of states and it could change, and there could be less promotion again, like in the -- like in March April timeframe.

Makes sense. Thank you.

Ladies and gentlemen, this concludes today's question-and-answer session. And we conclude the conference. You may now disconnect your lines and thank you for your participation.

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