B&G Foods Inc (BGS) 2020 Q2 法說會逐字稿

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 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 the conference over to Ken. Sir, please go ahead.

Thank you, operator. Good afternoon, everyone. Thank you for joining us today for our second quarter earnings call. I hope that everyone is 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 flowing. Our frontline employees have truly shown they are 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 2 of our Terra 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 remain steadfast and increasingly focused on our major priorities to deliver the results I will highlight for you 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 a 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 a 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 1 turn 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 nations supplied with food during this difficult time.

We continue to take a wide range of precautionary measures at our manufacturing facilities and other work locations in response to 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 increase in 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 when they find 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 in very attractive categories across frozen and shelf-stable vegetables, spices and meat-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 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 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 foodservice exposure did not grow at high rates, but those same brands did have very strong retail consumption.

The impressive 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 2x 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 3/4 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, while growing nicely, didn't quite keep up with the 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 outsized growth numbers to continue forever, we do believe our sales trends will remain elevated as long as people are going to be sheltering or working a bit more from home, eating out a little less and eating at home a little more. And quite candidly, we believe these trends will remain elevated for quite some time, even after the pandemic eventually moves on. Consumers are learning about and enjoying cooking at home. And our brands, our categories, 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 brands like Underwood, increasing new households by as much as 18%. Encouragingly, these new buyers appear to have a strong appetite to continue buying our brands as the repurchase intent or the percent of new buyers who plan to buy again remains high, with [Catalina] 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 & collect across our retail customer base. Our Amazon business alone grew 340% versus a 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, who are 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 flock 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 in excess of the prior year and, in fact, represented record second quarter performance for the company. Our net sales increased by 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 at foodservice customers, which for fiscal 2019 represented only approximately 13% of our overall net sales. As we disclosed on the first quarter call, our net sales in April increased by more than $70 million or more than 60% ahead of last year. Net sales for May increased by more than $50 million, an increase of approximately 50%. And for June, net sales increased more than $15 million or 10% year-over-year.

While our second quarter was very strong, we saw what appears to be an emerging theme in this pandemic. While typically, we see a strong build ahead of the holidays that encourage large gatherings like Fourth of July, we did not see that build this year and actually saw a decrease in sales in the final week leading up to the holiday when compared to the prior year period, which did benefit from that traditional holiday 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 in 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 our shelf-stable and frozen Green Giant products in the second quarter, with shelf-stable adding $33.6 million in net sales or an increase of over 130%; and frozen, adding $17.6 million in net sales or an increase of 20.1%. Frozen growth was driven by core legacy frozen bag and frozen bag in a box lines, 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 a renaissance demand for canned vegetables.

Clabber Girl, which we acquired on May 15, 2019, and thus 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 in 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 up approximately $3.8 million or 37.7%, and Ortega, which was up approximately $12.8 million or 37.4%.

Our spices & 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 foodservice. We have seen a strong build developing in traditional grocery throughout the course of the quarter as well as more recently, increased demand in foodservice.

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 foodservice 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 deli aisle relative to the center of store and frozen.

And we also saw strong performance across the rest of our portfolio. In fact, outside of our 7 large brands and our spices & 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 nonrecurring 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 nonrecurring expenses during the second quarter of 2019, gross profit would have been $96.8 million or 26% 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 and administrative expenses were $39.9 million in the prior year quarter, which was 10.7% of net sales. The dollar increase was composed of increases in selling expenses of $2.7 million and general and administrative expenses of $4.7 million, partially offset by a decrease in M&A and nonrecurring expenses of $2.7 million, warehousing expenses of $0.2 million and consumer marketing of $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 1-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 6 months of the year.

As you may recall, we highlighted our intention to reduce working capital this year and generate outsized net cash provided via 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 6 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 6 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 6.1x million at the start of the year to just under 5x today. We are now well within our stated target range of 4.5 to 5.5x net debt to pro forma adjusted EBITDA, and we expect continued strong financial performance throughout the back half of the year to further reduce our net leverage in 2020.

While we have suspended giving guidance for fiscal 2020 due to the unpredictable macro environment, every day, we are 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 foodservice sales.

Based on what we know today, we expect to see continued elevated levels of net sales, adjusted EBITDA and growth in net sales and adjusted EBITDA throughout the remainder of the year. Ultimately, we expect our retail shipments to eventually 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 suspend 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 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 and Gnocchi and Cauliflower Breadsticks. We will also leverage our acquisition of Farmwise by introducing Green Giant Veggie Fries and Green Giant 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 the launch of a shelf-stable version of Green Giant Rice Veggies, a nutritious alternative to traditional dry rice made from 100% plant-based legumes like lentils, sweet peas 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 product launches with increased marketing investment to ensure their success. In addition, we'll 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 time line, 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 this 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 Foods 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?

(Operator Instructions) The first question is from Brian Holland, D.A. Davidson.

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. Curious what specifically you would point to? Because obviously, you're in categories that are effectively positioned with some of your competitors. So what do you point to specifically as driving the inflection in share for maybe being moderately or worse negative to positive today? That would be the first part of the question.

And the second part is, what plans do you have in place? And what kind of urgency do you feel you need to preserve that improvement in your relative performance?

So did you ask us what we thought -- 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 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 and then positive. Our strong consumption started in the third week of March and that we haven't looked back, and we've been -- 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 our promotions, which was a negative impact versus a year ago. As we plan, we're fully past all that. So now we're kind of on even keel from a promotional standpoint and then, of course, our innovation is adding a lot. So the only other delay was spices & seasonings as a category was fascinating, while the categories like pasta sauce and rice and canned beans and baking products and things of that nature started taking off. Spices & 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 in 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 still kind of following the same beats?

I think from a capital allocation standpoint, we've always strive to what we thought was best for shareholders, which is, one, returning excess cash in the form of a dividend, still a high priority, keeping a 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 the much lower leverage, our balance sheet is very healthy today.

As far as reinvestments, 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.

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 a 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 accretive acquisitions. So having a nice, strong base business, is the best thing we can do through that, and we're excited about being able to get back on the acquisition drill.

The next question is from Andrew Lazar, Barclays.

I guess in thinking about -- realizing, obviously, there's a lot of dynamics at 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 a 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. Is there -- 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, there's still a lot of operating leverage there. So I don't know if it's just incremental investment, as you mentioned, and your COVID cost, 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 of things to remember, one is we produce in-house, about 50% of our products and about 50% through co-packers. And so we're not necessarily getting the same incremental leverage on co-packed items.

From an internal manufacturing, we are 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 a 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.

Got it. All right. And then, Ken, it's interesting. There's obviously a pretty big debate raging in the food space right now over how sticky, right, some of this incremental consumption 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 again, not in the 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?

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 think I mentioned in last -- I believe I mentioned in the last earnings call, 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 the 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 a -- we're part of the -- B&G 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 a banana bread in the oven. That means you have time to whip up a quick-serve lunch. That's what we're finding to people's behavior. I find it 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 us 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 & seasonings and breakfast. I mean we -- again, the breakfast portfolio is a perfect example as people are home, where we're seeing hot cereal still growing 30% to 40% consumption in more summer months versus a year ago.

So in a word, it's really about the world is going to be different even when a vaccine arrives.

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

You talked about the terrific response you've received from new products, although it sounds like very few of your supermarket customers did shelf 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're happy with the base business growth. So we'll take our customers' lead on when they want to put it on shelf the right way. 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 these 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 as net SKU increase. So if we introduce 5 new SKUs, we don't necessarily get a hole in that 5 as long as we come up net positive. This -- whenever there's new products, everybody is going to have to give it 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. So -- and that's all planned in our forecast because there's -- we have 2 types of cannibalization. There's systematic cannibalization, meaning I'm going to launch a new -- 5 new SKUs, but I'm going to lose 2. So I've lost the volume from those 2 SKUs. So that's systematic cannibalization. And then, of course, there's 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 pizza and tots and hash browns and potato section and this is -- and gnocchi and the frozen pasta aisle and now dry rice to veggies over in the dried rice aisle. This is all the real estate for Green Giant, which we believe will be -- drive more incrementality.

We have a question from Nik Modi, RBC Capital Markets.

Yes. 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 it via online? I mean, is this just a replacement what someone would buy in a brick-and-mortar environment where the more incrementality here? So that's the first question.

And then the second question is, to the degree we've a seen surge in cases, we're hearing from retailers around the country that they're starting to stock up and 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.

So your first question was about the e-commerce. I mean, e-commerce, we believe, is a cost adventure, you've 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, it's -- we're doing a better job online now than we were before, and we'll continue to do a 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 us -- want to make sure that their electronics storefront is we are well represented, just like they want as well represented in their physical storefront, and they don't want any difference. And 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 how are you seeing that?

Retailers preparing for second wave. Yes. I mean, I guess, you look at the news reports. So as soon as we -- you saw news reports that States were now perhaps got a little bit too aggressive and people got lax (inaudible) 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 in, 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 not -- and restaurants are going backwards again, they're going to be ready for the increased activity at store level. And we'll see that in -- if that happens, we'll see that in the in the consumption numbers as reported by Nielsen and IRI services.

We have a question from Carla Casella, JPMorgan.

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 spend or how the retailers are viewing trade spend? And is that opening back up? Or do you see a returning trade spend out of -- coming out of COVID?

We saw a little bit of relief on trade spend in the first half of the year. And we're -- 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 times. So we'll take the lead from our customers. We're ready to match our promotional activity from a year ago. We'll take it from our customers as to whether or not they want to continue to do that.

We have a question from Bryan Hunt, Wells Fargo.

I just have two questions. One, if I look at your inventories, and granted, you have seasonal fluctuations because of pack, but you're at the lowest level in 3.5 years. And I was wondering, did -- 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 -- it is -- we are in a really good inventory position. We actually went into the quarter with -- we're high in inventories, and that helped us in the first part of the pandemic because when March and April boosted, we were able to run off 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 are keeping our people safe and our plants running, I think and having the right brands and categories why we're -- I think we're #2 in terms of consumption growth of any major food company in terms of growth versus a year ago as reported by Nielsen and IRI.

We had a few product lines where our customer service levels were below 90%, which is we don't like to be there. You want to be -- we want to be 95% or more. Once canned vegetables because the pack is only one time a year, and yes, that -- you pack that as the crop comes in, in the summer and the fall, and you got to make that last a 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 and cash flow. But yes, sales could have been a little bit higher because 3 or 4 of our product lines, we struggled to keep up. But out of 50-plus brands having an issue on 3 or 4 of them was we thought was a pretty good, pretty good performance. And we've resolved some of those issues. And 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 doing the same thing that, that building was intended -- it was built to do over 100 years ago. They've been pushing -- they've been making -- they've been packing more baking powder than the 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 meet these amazing demands. Because research shows that while people have gone through a lot of baking powder there, 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 and get ready for the rest of the year to be -- 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 1 or 2 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 2 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 -- a 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.

The pack from what we understand is good. We -- 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 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 see have a lot of summer and the harvest goes in the fall and Mother Nature is feasible. But so far, we've heard it will be a better crop than it's been in the last couple of years.

The next question is from Michael Lavery, Piper Jaffray.

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. And can you give us any sense, 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 think I'll turn it over to Bruce on our inventories. The big headline there is going to be -- obviously, our inventories will now build given we're going to bring the Green Giant vegetable pack in. But on 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 are on 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 the -- 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 it is 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 quarter is usually a drawdown. 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 to people. And that's kind of how it's been chugging along for the last few months, and we. Got to be prepared for that going forward.

We have a question from Rob Dickerson, Jefferies.

Great. So I guess, just 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 top line bump. Category position 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, you kind of get this nice increase in 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 for the sake of argument, let's say, is kind of everybody, then everybody rushes in and then reinvest to try to hold it, right? So the competitive environment gets more competitive, right? Trade spend kind of get a little bit tougher in the back half of this year, marketing budgets, what have you, get kind of are going up or hearing from kind of general food in general? Excuse me.

So the top line remains elevated. I guess this goes back to maybe Andrew's question around like kind of what gives you the confidence not only that food at home could remain up a bit, which I don't 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? Just kind of any color on the reinvestment side, and how do you kind of hold or you keep that household penetration sticky over 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 households. 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 6 to 9 months that just we were already planning beyond that. So our innovation pipeline is really now chock full because we've had a 6-month or so delay. And so we're very encouraged because our innovation pipeline is going to be able to drive growth further 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. We -- the investment we make this year, we're hoping to keep that for next year rather than having to reduce it. But like I said, we haven't built our plan yet. We also -- next year will benefit -- we had a soft first quarter this year. So we're planning -- we're hoping for a good start to next year. And then we really have to see how consumption shakes out as we 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 lineup that possibly kind of hopefully, is maybe the return on that investment could even be higher, just given you're investing, right? You kind of had pull back a little bit in the current quarter, but then you get to reinvest later with better innovation that hopefully, the probability of share gain sticks. Is that [a fair comment?]

Absolutely. Absolutely.

We have a question from Robert Moskow, Crédit Suisse.

I had a follow-up question on the pack for the vegetable crop. And I want to know, do you -- 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're going to secure enough or what you believe demand is going to be. That hurt B&G a few years ago when we lost a major customer. So the inventory has popped up because the customer -- the pack was determined and the vegetables were in the can before they knew about the lost 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 found a supplemental suppliers when our major suppliers couldn't give us all what 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 of what we asked for.

But then again, the crop is 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 will ensure profit -- 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? Yes. Is that fair?

Correct. Yes. Yes. And to make sure we have enough, say, stock inventory.

We have a question from David Palmer, Evercore ISI.

Congrats on the results. The free cash -- 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 to keep in mind, third quarter, we do buy a lot within the vegetable packs. 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 EBITDA this year because, ultimately, we were going to be reinvesting and buying some more inventory in the third quarter, but we'll have a real good free cash flow year.

Got it. The -- we're getting far enough along right now where you've seen the -- and you might have data on this consumer insight data, where you see who's trying your product and how many -- what your households 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 18% in a brand like Underwood. I don't have all the numbers off the top of my head. But encouragingly, on our largest brand, we saw increased household penetration Green Giant in 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 the scanner data, it doesn't -- it's not a perfect audit in terms of the promotional activity because of 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 in 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 seems to be a little bit more money out there to spend. Do you anticipate it being a more promotional environment in your key categories?

We -- so when Bruce talks -- when Bruce mentions pricing, so most of our pricing is due to trade promotion efficiencies and some of it's less promotion. So when you go -- 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 promotions than prior year. But we do -- we are planning to make -- to be promoting more in the back half of the year than we did in the first half of the year. 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 March, April time frame.

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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