BGS - B&G Foods: Leverage Overhang Continues

2023-06-06 15:54:13 ET

Summary

• B&G Foods, Inc. has long been far too leveraged in my opinion, looking to allocate too much capital to too many stakeholders.
• I was always skeptical on the model, as inflationary trends and higher financing costs have hurt the shares in a big way.
• Despite a small asset sale, lower dividends and some shares being issued, leverage remains sky-high and the name of the game.

In the summer of last year, I concluded that leverage concerns for shares of B&G Foods, Inc. ( BGS ) were emerging again, this time for real. As the company and the economy at large as battling with inflationary pressures, B&G saw margin pressure, pushing up leverage ratios a lot from already elevated levels.

Moreover, the timing of higher leverage, combined with interest rates moving sharply higher, pushed up financing costs in a huge way. This combination made me very cautious, as I have felt that the business was far too aggressive with leverage for quite a few years already.

Leveraged Flood Player

B&G is a smaller to medium-sized food player, combining high leverage ratios with high dividends, quite a stubborn strategy as management aims to please all stakeholders at the same time. M&A ambitions, high dividends, growth ambitions, make that management simply has not sufficient capital to achieve all these goals.

Pre-pandemic, B&G was a $1.7 billion food business which generated about $300 million in EBITDA, as net debt of $1.9 billion worked down to a more than 6 times leverage ratio. The earnings power of around $1.75 per share was more than fully paid out in the form of a $1.90 per share dividend, only adding to the leverage position. With base sales under pressure, I was very cautious.

The pandemic provided a lifesaver as first quarter sales rose 9% in the first quarter of 2020, with growth accelerating to 38% in the second quarter. This provided a boom in earnings and an option to deleverage, but instead, the company opted to buy baking products business Crisco in a $550 million deal in the fall of the year.

In the end, the company saw sales boom to $2 billion in 2020, as EBITDA was up 20% to $360 million, pushing up adjusted earnings to $2.26 per share. With the business originally guiding for 2021 sales to fall to $2.05-$2.10 billion, that suggested that organic revenues would fall outside Crisco, worrying given the added leverage. This made me very cautious as investors pushed shares up to the $30 mark at the time.

As it turned out, 2021 sales rose 5% to $2.05 billion, which comes on the back of an 8% fall in base sales, with earnings down 17% to $1.88 per share and adjusted EBITDA being flattish at $358 million. The company guided for stabilization in 2022, but amidst emerging inflation, the company had to cut the guidance. In fact, the company actually sold some shares to shore up the balance sheet , but leverage ratios remained very high.

With management finally understanding the severity and risks of the leverage, I was very cautious, as leverage ratios were higher than was the case in the past, demand might be under pressure and financing costs might creep up as well, combined being a dangerous cocktail.

All Downhill

With shares still trading at $25 in the summer of last year, when I was really cautious on B&G, shares have gone all downhill ever since. By the end of the year, BGS shares were down to $11, and despite a recent recovery to the $15 mark, they now trade at $13 per share.

In August, the company reaffirmed a $2.10-$2.14 billion sales guidance for the year, but cut the EBITDA guidance to $300-$320 million amidst lingering inflationary pressures, cutting the EBITDA guidance further to $290-$300 million alongside the third quarter earnings report.

Towards the end of the year, B&G announced that it has reached a deal to sell the Back to Nature brand to Barilla America in a deal on which no financial details were announced, nor on the revenue contribution or on the proceeds from the deal (at the time).

In February, the company posted fourth quarter results which revealed a growth acceleration on the back of the inflationary trends. Fourth quarter sales rose 9%, pushing full year sales growth up to 5% with revenues reported at $2.16 billion, ahead of the initial sales guidance. Adjusted EBITDA of $301 million was a bit stronger than guided for as well, following the latest downward revision in the third quarter. Full year adjusted earnings fell from $1.88 to $1.08 per share, as the fourth quarter adjusted earnings number of $0.40 per share was actually up a penny on the quarter before.

Net debt was posted at $2.34 billion, translating into a huge leverage number based on the $301 million EBITDA number, at 7.8 times EBITDA, although a fourth quarter adjusted EBITDA number of $93 million and change was solid. The company guided for stabilization in 2023 with sales seen at $2.15 billion and EBITDA at a midpoint of $320 million, plus or minus $10 million, with adjusted earnings seen at a midpoint of $1.05 per share.

First quarter sales of $512 million were down nearly 4% on the year before, amidst tougher comparables and the sale of the Back to Nature business, as adjusted earnings per share were down two pennies to $0.27 per share. The company maintained the full year guidance with net debt down to $2.25 billion, following a $50 million price tag received for Back to Nature, for a 7 times forward leverage ratio.

B&G Foods continues to look to please investors, paying a $0.19 per share quarterly dividend (cut from $0.475 per share on a quarterly basis before), although the question can be asked if this is really rewarding for investors in the long run.

While B&G Foods, Inc. management has made some adjustments in the capital allocation practices, it is far not enough for me to become upbeat and potentially involved here.

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