B&G Foods, Inc.
Q4 2018 Earnings Call Transcript

Published: 27 Feb 2019

[Operator:]

Good day, and welcome to the B&G Foods Fourth Quarter 2018 Earnings Call. Today’s call is being recorded. You can access detailed financial information on the quarter and the full year 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, EBITDA, adjusted EBITDA, adjusted net income, diluted earnings per share, 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. Bob Cantwell, the company’s current President and Chief Executive Officer will begin the call with opening remarks. Bruce Wacha, the company’s Chief Financial Officer will then discuss the company’s financial results for the quarter, as well it’s guidance for 2019. After that, Ken Romanzi, the company’s President and Chief Executive Officer, effective April of this year, will discuss various factors that affected the company’s results, selected business highlights and his thoughts concerning the outlook for 2019 and beyond. I would like to turn the conference over to Bob.

[Bob Cantwell:]

Good afternoon, thank you for joining us today. Believe it or not, today is my 82nd consecutive earnings call with B&G Foods dating back to our initial bond offering in 1997. As some of you know, I joined B&G Foods 35 years ago. Life was a lot simpler back then. We were basically a standalone pickle and pepper company owned by Sara Lee. Overtime, our ownership changed several times and we ultimately were required by the private equity firm Bruckman, Rosser, Sherrill and Company or BRS. And then life changed again when we went public in 2004. We have grown tremendously over my time at B&G Foods and since the IPO, building through acquisitions and diverse portfolio of nearly 50 brands. We increased our net sales and adjusted EBITDA from $374.8 million and $67.7 million at the time of the IPO to $1.7 billion and $314.2 million today. Our market cap and enterprise value were $245.5 million and $625.5 million when we went public, compared to $1.7 billion and $3.3 billion today. We have also paid almost $830 million in dividends to shareholders drawing our time as a public company. While there had been challenges over time, we have remained committed to our core financial principles of generating shareholder returns through creative M&A and unyielding focus on cash flows and a steady return of cash to our shareholders in the form of dividends. As we announced in late July – in January, I will be retiring from my role as President, Chief Executive Officer and Director of B&G Foods in early April. In accordance with a succession plan established in 2017, B&G Foods’ Board of Directors has appointed Ken Romanzi as my successor. We have been firmly committed to a smooth transition and for all intents and purposes, Ken has been effectively in charge of B&G Foods sales, marketing and operations since late 2017. So in large part the transition is already complete. And while I’ll be retiring as CEO, I expect to remain actively involved at the company, both as a shareholder and in an advisory role on M&A and corporate finance transactions. I know that the company remains in good hands with its current management team and I look forward to watching the company continue to grow for years to come. I now would like to turn the call over to Bruce, and then to Ken, who will also lead the Q&A portion of the call.

[Bruce Wacha:]

Good afternoon. Bob, thank you for your generous introduction for hiring and mentoring me and for all that you’ve done to build this organization during your tenure. While there are many things that we did well in 2018, we missed on the margin side, which unfortunately depressed our adjusted EBITDA and adjusted EPS; two very important measures of our performance. Our net sales came in as expected. We grow our base business to healthy 1.6% for the quarter and nearly 1% for the year, despite a very challenging top line environment for our industry. We had a very strong year for cash generation generating more than $200 million in net cash provided by operating activities for the year. We nailed our inventory reduction plan target, reducing inventory by more than $100 million during the year from approximately $502 million at the beginning of the year to approximately $401 million today. We also reduced our long-term debt by almost $600 million for the year from a little bit of $2.2 billion at the start of the year to $1.6 billion today. In addition to our cash flow, our debt pay down efforts, we’re also helped in large part by the sale of Pirate Brands during the year. As a reminder, this is a brand that we acquired in 2013 for $195 million and then sold in 2018 for $420 million, more than double the price we paid for the brand five years ago. In 2018, we generated company record net sales of $1.7 billion, company record EBITDA of $397.4 million and diluted earnings per share of $2.60. After adjusting for certain items affecting comparability described in our earnings release, our adjusted EBITDA was $314.2 million and our adjusted diluted earnings per share was $1.85. While we are disappointed with these numbers, we have an action plan in place that Ken will walk you through shortly, that makes us confident that our expectations to grow the business in 2019. In the fourth quarter of 2018, we generated net sales of $458.1 million, EBITDA $188.6 million, diluted earnings per share of $1.70, adjusted EBITDA of $58.5 million and adjusted diluted earnings per share of $0.34. Our net sales of $458.1 million represents an increase of $9 million compared to the fourth quarter of 2017 after adjusting for the sale of Pirate Brands. Our core brands performed very well during the quarter, led by Green Giant, who’s net sales increased by approximately $7.3 million or nearly 5% during the quarter, seeing growth in net sales both frozen and shelf stable products at the same time for the first time under our ownership. Ortega net sales grew by approximately $2.4 million in the quarter or 7.2%. New York Style grew by approximately $0.8 million or 8.8%. Cream of Wheat grew by approximately $0.8 million or 4.3%. Maple Grove Farms grew by approximately $0.5 million or 2.8%. Our spices & seasonings business in the aggregate, including brands like Mrs. Dash, Ac’cent and spices & seasonings business that we acquired in late 2016 had a strong turnaround in the fourth quarter growing by $6.5 million or 8.4%. Back to Nature, during the quarter, we trimmed unprofitable SKUs such as cereal, juices and soups, and we were negatively impacted by some distribution losses, which resulted in a decrease in net sales of $5.5 million or 27%. Victoria was down $2.5 million or 20.3% for the quarter, primarily due to the shift in timing of a key promotional event with one of the brands largest customers to the third quarter of 2018, where we benefited from the fourth quarter of 2017. All other brands in the aggregate decreased by $8.6 million or 6.8%. Gross profit was $49.9 million for the fourth quarter of 2018 or $86.8 million after excluding the negative impact of $36.9 million for certain items affect comparability described in earnings release. Gross profit was $93.9 million for the fourth quarter of 2017. Gross profit has expressed as a percentage of net sales after excluding the items affecting comparability that I just mentioned with 19% for the quarter. Gross profit as a percentage of net sales was 20.1% in the fourth quarter of 2017. Gross profit as a percentage of net sales was negatively impacted by industry-wide and anticipated increases in freight expenses as well as negative product mix, which is partially offset by procurement savings, a decrease in warehousing expenses and an increase in net pricing. Selling, general and administrative expenses decreased by $4.4 million, or 8.4%, to $47.6 million for the fourth quarter of 2018 from $52.0 million in the fourth quarter of 2017. Due to a decrease in acquisition/divestiture-related related expenses. Expressed as a percentage of net sales, selling, general and administrative expenses improved by 70 basis points to 10.4% from a 11.1% in the fourth quarter of 2017. We generated a company record EBITDA of $188.6 million during the fourth quarter of 2018 with a large benefit for more gain on the sale of Pirate Brands in October. After adjusting for the sale of Pirate Brands, and net of certain other items affecting comparability detailed in our earnings release, we generated $58.5 million in adjusted EBITDA during the quarter, a decrease of approximately $10.4 million from 4Q 2017. The sale of Pirate Brands was the primary driver for this shortfall and accounted for a little bit more than $7 million of the adjusted EBITDA. Outside of Pirate Brands and similar to the first three quarters of the year, we witnessed elevated freight costs as well as increased promotional costs associated with our canned vegetable business and some negative product mix that we were unable to offset entirely with our sales price increases and cost savings initiatives. During our third quarter conference call, we outlined our expectations for an incremental $14 million to $15 million or so of adjusted EBITDA benefit for the fourth quarter versus the prior year period to achieve the bottom of our full year adjusted EBITDA target of $338 million. Unfortunately, while our base business remains stable, we were unable to achieve these incremental benefits. This was primarily due to five factors. First, we achieved approximately $2.1 million in pricing in our base business during the quarter. A step in the right direction, but less than the $10 million that we hope for. We captured the benefit that we expect to do achieve from our list price increases that we implemented last April, but we are unable to get sufficient benefit from our planned reduction to trade and promotional spending that was required to hit our full $10 million target for the quarter. Customer supported our trade deals very well, which illustrates their positive support for our brands, but we sold more on volume on promotion than we planned, which negatively impacted margins. Second. While we grew volume sufficiently to achieve the bottom end of our sales guidance. Some of these gains were driven by our Green Giant canned business, which tends to have higher promotional spend and a lower margin profile than the rest of our base business. Our inability to hit the high end of our net sales target with volume gains driven by our higher margin brands further limited our ability to achieve our adjusted EBITDA targets for the quarter and he contributed to our lower margin mix costing of some $5 million in loss adjusting EBITDA opportunity. Third procurement savings primarily driven by tariffs, caused us $2 million to $3 million more than anticipated. Forth, while we manage the whole freight flat for by some of our cost savings initiatives, these costs remained elevated compared to historical levels and we did not achieve the $3 million to $5 million in benefits that we’d hoped for in the quarter. And finally, during the course of $100 million inventory reduction process, we identified and wrote down some $5 million or so in inventory that was a hit to our adjusted EBITDA in the fourth quarter. As I mentioned previously, we finished the year with approximately $1.6 billion in net debt. We reduced our net debt to pro forma adjusted EBITDA to approximately 5.3x at the end of the year. We remain firmly committed to maintaining our dividend policy and remain well positioned to opportunistically pursue M&A and. Our board of directors reaffirmed its commitment towards dividend policy yesterday by declaring our 58th consecutive quarterly dividends since our IPO in 2004. At yesterday’s closing stock price, our current dividend of $1.90 per share per year represents a dividend yield of 7.8%. During 2018, we paid our shareholders approximately $125 million in dividends. In addition, we repurchased and retired $8.4 million of common stock or 295,000 shares during the quarter at an average price per share of $28.39, bringing our total for the year of $26.9 million of common stock or approximately 1 million shares. We currently have $23.1 million of authorization to repurchase our common stock under the $50 million stock repurchase program approved by a board of directors last year. Before we move to our guidance for fiscal 2019. I would like to remind everyone that our 2018 results include a little bit more than three quarters of Pirate Brands, net sales of $74.8 million. For 2019, we expect net sales to be in the range of 1.635 billion to 1.665 billion or inline with our 0% to 2% long-term topline growth model. We expect adjusted EBITDA $305 million to $320 million. Adjusted earnings per share of $1.85 to $2. Net interest expense of $87.5 million to $91.5 million including cash interest expense of $84 million to $88 million and interest amortization expense of $3.5 million. Depreciation expense of approximately $40 million, amortization expense of approximately $18 million and effective tax rate of approximately 44.5%. Cash taxes, excluding the tax effects from the gain on sale of Pirate Brands to be less than $5 million. And finally, we anticipate CapEx to be approximately $45 million to $50 million for 2019 which is in line with last year. Based on a mid point of our adjusted EBITDA guidance range. We expect that our adjusted EBITDA less CapEx, cash taxes after excluding the tax effects from the gain on Pirates Brand sale and cash interest to be approximately $180 million. Asset acquisitions, we expect our net debt to adjusted EBITDA to be 5.0x to 5.1x at the end of next year. Although we typically provide only annual guidance and do not typically provide quarterly guidance given the sale of Pirate Brands. We thought that it made sense to provide guidance for the first quarter of 2018. In addition to the impact of the divestiture of Pirate Brands which produce for us net sale of $74.8 million and adjusted EBITDA of approximately $20 million during our three quarters plus of ownership in 2018. We also expect to see a $2 million of incremental inflationary pressure during the quarter, consistent with our outlook for the remainder of the year. Our sales price increases in the majority of our cost savings initiatives for 2018, will not be effective until after the end of the first quarter. Additionally, due to the timing of this year, we expect to see small shifts in some net sales from the first quarter of 2018 to the second quarter in 2019. Taking all of that into account, we expect the first quarter of 2019 net sales of $400 million to $412 million, adjusted EBITDA $78 million to $82 million and adjusted diluted EPS of $0.47 to $0.52. As I mentioned earlier, we are disappointed with our 2018 margins and profits and we expect better in 2019. However, our drop in adjusted EBITDA from $333 million to $340 million in 2018 was $19 million versus $12 million after excluding the estimated $7 million impact from the sale of Pirate Brands. This decline was largely driven by industry-wide inflationary pressures that we were not able to fully offset with our price increases in cost savings initiative in 2018. Despite the drop in adjusted EBITDA, we had a very strong cash flow year and generated nearly $210 million in net cash from operating activities. And we remain committed to our dividend as well as our growth by acquisition strategy. And now I would like to turn the call over to Ken to give a little bit more perspective on our 2018 results, as well as the roadmap to get to our 2019 forecast. Ken?

[Ken Romanzi:]

Thank you, Bruce. And Bob, thank you for your terrific leadership and all the wonderful things you’ve done for B&G Foods over the past 35 years. And thank you so much for your confidence in me to take the reins of this great company you’ve built. You’ve been a terrific partner and mentor to me as I assimilated into B&G Foods and I’m excited for you to continue to advise us on M&A and capital market activity. I’m truly honored to take the helm as CEO of B&G Foods. I was so very excited to come here when I joined a little over a year ago because of the company’s well known acquisition growth strategy, its best-in-class adjusted EBITDA margin profile and its reputation as a lean operator. And I’ve been pleasantly surprised by the extent of its can-do culture and the dedication of our employees to make a difference and drive real value for our shareholders. I am committed to nurse with good about B&G Foods and continue a successful strategy to build shareholder value. We live in a challenge type of food companies, but I’m confident B&G Foods is up to the task of succeeding in this environment. Simply put, we are very disappointed in our 2018 results. We had a great year on many fronts highlighted by the reawakening of Green Giant and the entire frozen vegetable category with industry leading innovation, driving solid core brand sales and consumption growth, initiating a multi-year cost savings program, realizing significant value creation with the sale of Pirate’s Booty and generating a lot of cash. But, expectations are expectations. Our earnings results this past year were far from our expectations due to lower than expected margins. We were not able to overcome the resurgence and costs inflation across many input factors weigh more than just freight. While we were among the leaders in taking less pricing in last April, we were unable to gain the net price realization through trade promotion productivity we hope for and our cost savings program was just too new to yield significant results last year. To drive assaults going forward, we’re going to redouble our efforts across both of these fronts and we’re going to start at the top. As you may have seen the press release we issued earlier together with our earnings release, we’re restructuring our leadership and senior management team to be leaner and more focused against core functional disciplines as part of a companywide cost reduction program, I will highlight later. The changes we’re making are expected to reduce annual ongoing G&A expense by $7 million or approximately $4 million in 2019 to offset other inflationary inputs. The company announced today that Vanessa Maskal, our Executive Vice President of Sales and Marketing, plans to retire in April 2019. As many of you know, Vanessa has been a key member of our management team for nearly two decades. During her time at the company, our sales have grown from roughly $411 million to more than $1.7 billion today. We thank Vanessa for all of her leadership, hard work and dedication over the years. Her presence at B&G Foods will certainly be missed. We reorganized our leadership team with the following appointments. Ellen Schum will become our Executive Vice President and Chief Customer Officer. We hired Ellen last July and she has been running our U.S. Retail Sales Organization since then. A long time Nabisco veteran, we are confident Ellen can pick up the reins of managing the solid customer relationships Vanessa and her team have built over the years. Jordan Greenberg, a longtime B&G Foods veteran and the key architect behind reawakening Green Giant, will become our Executive Vice President and Chief Commercial Officer responsible for all of our marketing, strategic and annual planning and key growth initiatives. And finally Erich Fritz will be joining B&G Foods as Executive Vice President and Chief Supply Chain Officer to oversee all of our operations, quality, research and development and acquisition integration efforts. Erich joins us from Ocean Spray and he’s an industry veteran with whom I’ve worked over many years and will be a valuable addition to the team. Erich will partner with Bill Herbes, our Executive Vice President of Operations and his team as we continue to evolve and grow as a company. With these new leadership appointments coupled with our existing strong operations, HR, legal and financial leadership, I am confident we have the right management team in place to be successful today and in the future. This new leadership team will be intensely focused on delivering our 2019 plan, a plan rooted into a goal of solid core brand growth of 2% more aggressive list pricing than last year and the ramp up of our costs productivity program. Our biggest challenge in 2018 was on the cost side of the equation and we expect 2019 to be no different. Following an outside increase in freight costs of more than $30 million in 2018, we’ve expect freight inflation to continue but at a more moderate pace in 2019, up $15 million to $20 million before our cost saving initiatives. We also expect input cost inflation of another approximately $10 million for the rest of our cost of goods, driven by increases in wages, ingredients, packaging and pension expense. To combat these inflationary pressures and position ourselves to grow adjusted EBITDA, two core pillars of our 2019 plan are pricing and the realization of cost savings initiatives from the cost savings program we commenced in 2018. Last year, we’ve benefited from approximately $10 million in price increases of our base business, successfully increasing list prices across much of our portfolio last spring, but we fell short of our targeted reduction in promotional trade spend. In 2018, we will have a small wraparound benefit from the 2018 increases over the first four to five months of the year. Further, we’ve implemented another price increase effective this April, much more weighted toward list pricing and trade reductions on more brands than last year and we’ve included Canada as well, which we did not in 2018. And while we’re continuing to revise our promotional activity to become more efficient, we’re not counting on much savings in our financial projections until we can prove it to ourselves, we will improve our profitability. The good news is that customers are still strongly supporting our same-store brands. The bad news is the costs of these promotions limited our net pricing impact, but we remained convinced there are many productivity opportunities. They’re not easy to get at, but they’re there. If we can get it them, we may have upside in our pricing model. All in, we expect to benefit by approximately $15 million to $20 million in pricing this year, which includes $20 million to $25 million of annualized price increase that will go into effect this spring. Our second quarter assumption to combat inflation in 2019 is costs savings. After a complete review of our cost structure in 2018, we only just began to implement the first initiatives of the program late in the year. That yielded some $3 million to $5 million in the fourth quarter. In 2019, we expect to drive another $15 million to $20 million in cost savings, growing to $20 million to 25 million in 2020, and these cost saving initiatives which are expected to help offset cost inflation falls under five large buckets. One logistics, two, procurement, three manufacturing, four, product and packaging and five selling general and administrative. In logistics, we expect to see the full year of benefit of our West Coast distribution center in Fontana, California that opened last September. In addition, we are now in the process of realigning our frozen distribution network in a similar way with similar expected savings, relocating a frozen warehouse to move closer to our customers to reduce expense freight miles while improving customer service. Furthermore, while we will miss our beloved Pirate plus the sales and earnings that went along with him, when we sold Pirate’s Booty to Hershey, we also expect a side benefit in our logistics cost model, as the cost of storing and transporting these transporting these bulky products were significantly higher than the remainder of our dry grocery product portfolio. In total, we expect $5 million $6 million in logistics benefits during the year. In procurement, our team has renegotiated many of our materials supply arrangements and several of our co-manufacturing arrangements, which is expected to yield savings of $4 million to $5 million this year. In manufacturing, we have added some automation to several facilities and our relocating production of some products to more cost effective locations. One example of a real win-win is the relocation of where we will produce our flagship SnackWell’s product. Devil’s Food Cookie Cakes. So relocation from one manufacturing partner to another is expected to not only yield a $1.5 in cost savings but also result in a consumer preferred product improvement and the ability to add innovation to our product lineup. We’ve also taken a serious look at savings but then our product packaging costs and have right size packaging, reducing weight where appropriate in our Green Giant frozen portfolio. These benefits are expected to yield $4 million $5 million in 2019. And lastly, as I mentioned before, we’ve taken a hard look at G&A expenses as and have begun rightsizing our organization in part due to the Pirate Brand divestiture. With some recent retirements at the senior management level, we will operate with our leaner management structure and we’ve also eliminated positions that were dedicated to supporting the Pirate Booty business. As I previously mentioned, we expect these actions will reduce our G&A costs structure by approximately $7 million on an annual basis. In 2019 these expected savings should offset increased expenses from year-on-year salary and merit increases the full year cost impact of employees added mid year and 2018 and pension expenses. Now our intention is not to shrink our business over the long term. Rather, we believe our new leaner structure will make us more effective as well as more efficient. In fact, we’re investing in our sales organization with some key hires to support our direct selling efforts in the club channel and with several key grocery customers relying less on third-party brokers. So 2019 plan is rooted in list pricing and cost savings initiatives that are more aggressive in 2019 then in 2018. To obtain the higher inflationary pressures we expect both of these pillars are supported by sales growth consistent with our long term objective of zero to 2% top line growth. Our sales expectations in 2019 build from strong momentum and consumption in 2018 of 1.9% for the year and 1.7% in the fourth quarter. Evidence that our retail partners are not giving up on our center store brands and the consumers are continuing to fill their shopping baskets with our products on a regular basis. And January consumption maintain good momentum, up 4.2%. Much of our in 2019 will be driven by the continued momentum in Green Giant or consistent frozen innovation since the fall of 2016 has now surpassed $200 million in annual retail sales. Fourth quarter consumption range remain strong at double digit growth. The fifth consecutive quarter of that double digit growth. As we discussed before, we see Green Giant as the vegetable brand of the future, not only innovating in the frozen vegetable category but also helping consumers get more vegetables in their diet by launching new products made with vegetables outside of traditional frozen vegetables. We began shipping Green Giant Cauliflower Pizza Crust, Green Giant Protein Bowls and Little Green Sprout’s organic vegetables last fall and will continue their rollout in the first half of this year. We expect to follow that with another round of innovation slated for the fall of 2019 to get a head start on 2020. So that’s our 2019 plan. Sales growth consistent with our long-term stated objective of zero to 2% growth, our broader and more reliable pricing strategy and the ramp up of our multi-year cost saving program. In summary, as the next CEO of B&G Foods, I would also like to emphasize we remain very focused on M&A as a key leverage to create shareholder value and we remain committed to our current policy of paying a substantial portion of our cash available to pay dividends to our shareholders. Our major transaction in 2018 was the opportunistic sale of Pirate Brands for $420 million, providing a terrific return and allowing us to better position our balancing for more acquisitions. But we were also able to remain active on the volume side with the acquisition of McCann’s Irish Oatmeal. Now while McCann’s was on the smaller side for us, it was strategic, adding to our already strong hot breakfast portfolio of Cream of Wheat for largest lineup of pure maple syrup in the U.S. commenced by Maple Grove Farms and Spring Tree and the two leaders of molasses; Brer Rabbit and Grandma’s. With leverage a little over 5x today, we are actively looking for accretive acquisitions. And we’re very excited that we will retain Bob as a key advisor to the company, working closely with myself, Bruce, Scott Lerner, our long-term General Counsel to assist in our M&A efforts and hopefully win us many more new and exciting brands for years to come. This concludes our remarks and now I’d like to begin the Q&A portion of our call. Operator?

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Cornell Burnette with Citi Research. Please go ahead.

[Cornell Burnette:]

Thanks a lot. Good evening, everyone. Just wanted to jump in here and just get a little insight on the fourth quarter. It seems kind of similar to last year, kind of death by a thousand cuts when you look at the different pieces that went against you and really drove the wide delta and in terms of where EBITDA was supposed to be. And I just wanted to know, when you look back and look at this post mortem, is it perhaps somewhere down the line where you thought maybe just you got a little bit ahead of your skis in terms of the way the guidance was laid out for the year. And then secondly, when you talk about kind of having some negative impacts for mix; where the sales of the canned Green Giant products negative margin, and that’s what happened, or is it just that those sales kind of did a little bit better than what you expected, but also when I look at the rest of the base, perhaps there wasn’t as much growth as you thought the rest of the base could have achieved when you went into the quarter?

[Bruce Wacha:]

Yes. So, first on your Green Giant question, I think that’s the right answer. They’re profitable sales. The issue is we hit kind of the low end of our target for net sales in the fourth quarter. And unfortunately, the way that worked is we hit it with the Green Giant can business as opposed to our higher margin base core B&G brands that had higher margins. Had we done that, we would’ve had a couple extra million dollars of EBITDA for the quarter, or have we gotten all of them, the fire on all cylinders, that would’ve been much better. I think – and answer your first question, really our fourth quarter this year look a lot like the fourth quarter last year with the exception of Pirates coming out. So if we were off $10 million, a little bit more than $7 million of that was Pirates. And the rest was really similar to the story that we saw a year, whereas we’ve said, just nickels and dimes that came off and unfortunately added up. That is probably the fourth quarter that people should expect from a cadence in terms of fourth quarter as a lower margin quarter. We did think we were going to do better. We outlined earlier in the call some of those areas in terms of expecting to get better pricing. We held the line at freight, but we were hoping to do a little bit better than that. We were hit with some of the tariffs that came through on the procurement side and these have limited the upside, but as far as the stability of the business, pretty flat to last year, after removing Pirates and then just a couple of million dollars shortfall after that.

[Cornell Burnette:]

And then on the pricing side and a part of what you’ve kind of outlined here was that, hey, list prices were fine, but you didn’t do so well on the promoted side. Kind of when you go forward and you look at the 2019, kind of, how do you guard against that and what type of risks does that pose to your pricing guidance, because you have more pricing coming along the way in 2019? And just wonder if you kind of set up to see something similar happen where maybe it doesn’t come through the way you would’ve anticipated. So what’s different in 2019 versus 2018?

[Ken Romanzi:]

Yes. Hi, this is Ken. A couple of points. Number one, the reason why we felt we could get $10 million in the fourth quarter, we were starting to see traction on trade promotion and savings earlier in the year as well as list price. So we felt we can continue that. We didn’t see the continued trade. So as you might expect, there’s a lot variability in trying to get trade promotion savings. For 2019, in order not to repeat that, as I mentioned, we’re saying we’re going to get in pricing is all do to list. We are taking trade promotion actions, but the benefits we think we can get there, we don’t even have in our projection. So we’re going to rely on the list to deliver on our financials and we’re going to continue to try to get more efficient in trade. So, for instance, in this past second quarter, we saw some nice pricing on trade promotion reduction. We just weren’t able to replicate in the fourth quarter. So until we can more replicate reliable savings in trade, we’re not going to put it into our projections.

[Cornell Burnette:]

Okay, thank you. I’ll pass it along.

[Ken Romanzi:]

And we’re adding more business, like for instance, this past year we didn’t take pricing off Back to Nature and spices and we aren’t going to do that this year. And we didn’t take pricing in Canada and we’re going to do that. So we’re taking more or less than we even did last year because – against more business.

[Operator:]

[Operator Instructions] We will take our next question from Karru Martinson with Jefferies. Please go ahead.

[Karru Martinson:]

Good Evening. Bob, I wish you well on your transition. It’s been a long time covering you guys with you in the role there. I just wanted to ask about the promotions and the pricing actions. Was this in response to a competitive landscape that changed or was there just pushback from the retailers?

[Bob Cantwell:]

It’s not necessarily pushback from the retailers. When you reduce trade promotion, you’re really saying how much volume I really going to sell on deal and at what rate. And so while we change rates, is always an estimate as to how much volume you’re going to sell it full price versus how much volume you’re going to sell on deal. We just sold a lot more volume on deal than what we projected. So as I said, until we get – really get a more reliable model, this is the first time we’re really trying to – as a company, we’re really trying to dive in the trade. We know that there are efficiencies there. We started to experience some, which is what gave us – we’re bullish in the fourth quarter after what we saw earlier in the year, but it proved elusive to us. So we’re going to continue with a plan to find the productivity in trade, but again, we’re not going to rely on it until we can prove it and see it in the bottom line results.

[Karru Martinson:]

Okay. And how do you feel that the environment is out there in terms of trying to pass through some of this inflation that we’re seeing?

[Ken Romanzi:]

Pricing is never easy, but we see it this year a little bit easier for us because we were – we kind of lead with our chin last year. We were amongst the first or maybe even a first food company to announce as we got on it very early. We’re now in amongst of everybody, just about everybody talking about pricing. And so it’s never easy, but we’ve got a lot of companies this year and because the cost inputs are up across the Board, where last year early in the year, mostly it was freight. Now everybody’s seeing it across all the inputs, including our retail partners who see it in their private label goods because it’s cardboard and it’s packaging material and it’s steel and it’s all of those costs inputs. So everybody’s experience it, including our retailers with our own brands.

[Karru Martinson:]

Okay. And then just lastly on the M&A front, and certainly there’s been a lot of expected divestures coming from some of the big guys. You’ve talked about wanting to be accretive, but is there a thought process as to the size and where you guys would be willing to take leverage to secure some of these assets?

[Bob Cantwell:]

So we’re typically in that 4.5x to 5x target net debt to EBITDA. There have been instances when we’ve been willing to go higher for the right deal, but it’s got to be the right deal. And so we’re going to continue to be opportunistic and look. We’re encouraged by the stories of rumor divestitures and we’re out there looking.

[Karru Martinson:]

Thank you very much, guys.

[Ken Romanzi:]

But we’re also going to continue to be very disciplined in what valuation. So some of the things we hear out there are, whether they evaluate – valuation expectations will be there because this company, and I I’ll be committed to that. This company is very committed for us to be a creative and for us not to overpay for businesses.

[Bob Cantwell:]

At the end of the day, the math has to work and it’s got to be cash flow accretive and that’s how we’ve always run the business.

[Operator:]

We will take our next question from Brian Hunt with Wells Fargo. Please go ahead.

[Dave Cook:]

Good afternoon. It’s Dave Cook on for Brian. Just wanting to touch on the promotional trade support, again. I guess any fear that you have that this is more indicative of a structural change in the packaged food environment where you have to promote these brands more heavily to compete with private label and nichier brands or just kind of too early to tell at this point?

[Bob Cantwell:]

The one thing, maybe Ken can talk a little bit more big picture, but just to remind people, last year at this point in time we told the investment community we were going to raise price. There was some skepticism because nobody had really raised price in five, seven years. We’ve benefited from price increases of about $10 million, $12 million in 2018. So I don’t know that I’d say there was a structural issue that’s preventing us from doing so we just didn’t get as much as we wanted to.

[Ken Romanzi:]

Yes. And I would say to add to that, a list price increase – our customers put us through a lot of phases to prove that we deserve that price increase by showing a breakdown of what our cost structure is and we go through a tremendous amount of paperwork and a tremendous amount of justification. So while there’s so much work to be done, we prove it out because it’s pretty simple, show the cost input inflations. So it’s relatively not easy, but it’s relatively simple to understand a list price increase. Trade promotion, like I said before, it’s much more of a forecasting exercises of how much am I going to pay or how much am I going to sell at full price versus promoted price, and how much does the customer buy on promotion. That gets much more delicate in terms of being able to forecast that. And like I said before, we were able to garner savings on reducing some very heavy trade deals we were doing on a few of our brands and we garnered the savings and we tried to do that again in the fourth quarter. And if the customers support promotion better than you think they would, you’re going to sell a lot more on promotion. So promotion is almost easier to adjust because, if you don’t want the hot price point and you don’t want the secondary display in the front page ad because you think it’s too costly, you can give that up. And while the retailer won’t be tremendously happy, it’s not like they can force you to do a promotion. The problem is it’s harder to forecast almost than list price increases because we have very good Walt Disney models to tell us what’s going to happen on the list. What we can’t find out is how much a customer going to buy on promotion versus non-promotion in the midst of changing a promotional strategy or reducing promotional allowances.

[Ken Romanzi:]

I can reduce promotional allowances by 10%, but if they buy 30% more on deal, that could almost wipe out that promotional allowance savings. So it’s more of a forecasting sight that quite frankly we as a company has to get better at because, again, it’s my first time, we’re really trying to make significant savings on a pretty big line item, a trade promotion is a big part of our pricing model.

[Dave Cook:]

Okay. And then the turnaround in Green Giant shelf stable. I guess is that, that’s mostly innovation or easy comparisons or what – I guess, what do you think that’s driving that?

[Bob Cantwell:]

Simple answer on Green Giant is that we overlapped our loss of distribution on Walmart. But as we mentioned in previous calls, outside of Walmart consumption on Green Giant cans was basically up. Partly because we believe there’s still some brand value in Green Giant, so people couldn’t find it at Walmart they found it someplace else and we were effective in our promotional plans with our retailers. So our business was up outside of Walmart. And so when we started to overlap our loss in Walmart distribution, the business grew and we expect our can business to grow this year since we’re not overlapping any losses, impact our gaining distribution in some channels on our Green Giant can business. Now that’s a double-edged sword because that is a lower margin business, but it’s still a positive margin and we just got to forecast the mix right in terms of growing that business. So we expect Green Giant is going to grow nicely in 2019 on both the frozen and the shelf stable side, and it’s all through distribution on shelf stable, not innovation.

[Dave Cook:]

Okay. And then lastly on acquisitions. I guess with everything you guys have on your plate, leadership changes, aggressive cost savings you’re rolling out. Is it fair to assume you’re looking more heavily at smaller acquisitions or are you equally looking at small versus large and large acquisitions?

[Bruce Wacha:]

I would say we’re looking and math has to work.

[Dave Cook:]

Thank you very much.

[Ken Romanzi:]

Yes. Our leadership changes are not going to slow that down. We have people that are – one person’s really new, other people who are already in existence and we have a good stable people that that are existing and worked on the acquisition. So from a leadership standpoint, we’ve already had people involved that looking at acquisitions who are on the – who are amongst the new leadership team that I outlined earlier.

[Operator:]

We will take our next question from William Reuter with Bank of America. Please go ahead.

[William Reuter:]

Hi. Firstly, you guys have talked about the second quarter price increases that should help your margins. When you’ve talked to your customers about those, what have they talked to you about? Some of your competitors in terms of them pushing through price increases, do you think that’s going to be a consistent message amongst your competitors as well?

[Ken Romanzi:]

Without getting into specific conversations with customers I think you can follow other public companies, for example, what’s out there in the press. And I think that majority is packaged food companies and household personal care companies, people who are shipping and selling things in grocery stores. Most people are talking about price increases.

[William Reuter:]

Okay. And then – so it sounds like these strong sales of the Green Giant can products really helped your fourth quarter sales, but that would mean I guess that other product sales were a little bit weaker. I guess, I’m not sure if I heard in the prepared remarks to what do you attribute the weakness in some of those higher margin products?

[Ken Romanzi:]

I don’t know, I’d say that it’s weakness, again, we grew sales, we grew our base business. We just didn’t get the incremental growth over and above. So when you think about our base business fourth quarter and full year, we were up 1.5 and 1. So good solid performance, we just didn’t get the incremental growth that we were hoping for.

[William Reuter:]

Okay. And then just lastly from me. As you’ve talked to, I guess some e-commerce customers, I would imagine that will continue to try and work selling some of your products. How do you think that’s going to evolve over the next, let’s say, year or two years in terms of them increasing your product sales?

[Bob Cantwell:]

I think it’s going to take time. We’re certainly focused on e-commerce. It’s less than a couple percent of business for most people that do things like we do. It’s going to grow over time and our job is to continue to grow our position as well.

[Ken Romanzi:]

And one thing I’d add is that, we work very closely with some of the big mainline retailers who actually – they are offering a very good solution. I mean, all you have to do is turn on the TV and see it – all that great advertising from Walmart in terms of go online and pick up, and it’s not just all about delivery and they provide the full shopping basket solution. So, we’ll continue to work with the big player and Amazon, but we’re also continuing to work with some of the very large retailers like Walmart and Kroger on their online solutions. It’s still a very small piece and we’re playing a little bit of catch up on that in terms of getting all of our digital assets ready to do business with them and are committed to doing that in a much more aggressive way so that we’re – when it does, when the full shopping basket does take off online, we’re going to be right there available with the key players in the business.

[William Reuter:]

Great. That’s all from me. Thank you.

[Operator:]

We will take our next question from Ken Zaslow with Bank of Montreal.

[Ken Zaslow:]

Well, good afternoon, everyone.

[Bob Cantwell:]

Hey, Ken.

[Ken Zaslow:]

Bob, I wish you well and congrats on your semi-retirement, I guess.

[Bob Cantwell:]

Thanks.

[Ken Zaslow:]

When I think about the cost savings, Ken, it looks like your big initiative to start off is let’s rework the cost structure of B&G Foods. When you think about doing all these project, and I have to go through the transcript again, but when I go through all this, how did they change the growth algorithm beyond 2019 and is this just to offset the challenges or is there a business case to say, hey look, our growth algorithm previously was muted and we can actually now accelerate that?

[Bob Cantwell:]

Well, right now – so we’re pretty consistent with what we’ve been saying in terms of our achievement of top line growth. If look at the past companies value creation has come from double digit top line and bottom line growth through a creative acquisitions and not trying to overreach on a base business. So modest top line growth, the cost savings, you’re exactly right. We’re not, we’ve ramped up cost savings because right now we just have to input, inflations back in food there was deflation for many years, both in terms of costs as well as pricing at the retail level. So inflations back, but it’s never a bad idea to reduce our cost structure because when inflations gets under control, we’ll now have more efficient cost structure where we can work on improving our margin. So in the short term, we’re doing all of this to just maintain our margins in the longer term we hope to improve our margins and again we have a multi-year effort and we’ll be sharing with more ideas of what we’re going to be implementing down the road in terms of asset rationalization and some of the more heavy lifting cost savings ideas they just take longer to get at.

[Ken Zaslow:]

My second question is, how do you justify making an acquisition when you’re stopped it, at these levels when I would argue that we purchasing your status. How do you get a return even close to what you would believe that your stock would get by buying back stock? And it doesn’t seem like a close second year.

[Bob Cantwell:]

So I think the answer is, we’re looking at both, we have a share buyback authorization in place. We’ve bought shares, we’ll we could during open windows. And we’re also continuing to look at M&A and so I get the point from a value creation and accretion and share buy backs that is part of it. We’re also focused on growing the business. We’re not going to stretch doing an acquisition. It doesn’t make sense, but if there’s an opportunity to buy something that does make sense, we will also take that into consideration.

[Ken Zaslow:]

Okay. Thank you.

[Operator:]

We will take our next question from Michael Gallo with C.L. King. Please go ahead.

[Michael Gallo:]

Hi, good after noon. Bigger picture question. Ken. When you look at your overall portfolio, obviously you had the opportunity to the best Pirate at a very good price this year. Your small brands have clearly a underperformed and there’s quite a few of them. Is there a bucket of brands that you look at that perhaps used to make sense in the portfolio? Don’t make sense in the portfolio today where you might think about the divestiture or are you 100% happy with all the brands that you have? And you’ll just kind of continue to bolt out and move along. Thanks.

[Ken Romanzi:]

Yes. I mean, when you look into our brands, there was nothing for sale. But some like Pirates will sell either. But if someone wants to come and pay us 19 times earnings, we’re ready to listen. So, in some of these brands, we don’t want to be decretive by selling a brand below what we’re trading at. So, we have to be very careful about selling off EBITDA. And so if someone’s willing to pay for that, we’ll do it. But that’s why we don’t have outsize growth. We have fantastic Green Giant. We believe its upside in Victoria. We believe its upside and McCann’s and Back to Nature. But there are some brands that aren’t in growth categories and that’s why we have a very modest 0% to 2% growth, our algorithm on the top line. So we don’t like, and we’ve been through this with a board, we had a strategic planning session and me being new, they wanted to really test my conviction on how – where are we going to take the portfolio and it’s like we have to manage this portfolio amongst a bunch of several brands that’ll grow nicely like Green Giant. Many brands will become stable and there’ll be some declining brands and it’s a portfolio for us to manage forward in our long term 0% to 2% algorithm.

[Michael Gallo:]

Thank you.

[Operator:]

We will take our next question from Carla Casella with JP Morgan. Please go ahead.

[Carla Casella:]

Hi, most of my questions have been answered. But just to clarify, on your cost savings, the $15 million to $20 million, is that what should fall to the bottom line this year or that you should have an a run rate basis when you, by the time you finished the year?

[Bob Cantwell:]

So that’s what we’re planning on is actually hitting this year again, offsetting a lot of inflationary pressures. That’s just this year and it builds from there, because those are an annual, because there are many programs implemented throughout the year. So they’re not full year, they’re not all 12 months savings.

[Carla Casella:]

Okay. And is that the net number, net of the increased cost?

[Bob Cantwell:]

Sorry. So the way you should look at is, we’ve outlined with the benefit for pricing should be this year. What’s the cost savings should be this year. We also outlined where we see inflationary pressure both in freight as well as in our input costs. Then some of that should take us to the 305 to 320 in adjusted EBITDA guidance that we provided. Does that make sense?

[Carla Casella:]

Yes, it does. That’s great. And all my questions were answered. Thank you.

[Operator:]

We will take our next question from Eric Larson with Buckingham Research Group. Please go ahead.

[Eric Larson:]

Yes, good afternoon everyone and good luck to you, Bob. We’ve both been together a long time. So my first question here is, when you look at the fourth quarter you talk about a $10 million to $12 million benefit from pricing. I don’t think that’s a net – I don’t think that’s a net benefit. So when I look at the fourth quarter, particularly on the promotion side, it looks like he went in to the quarter with a little bit too much ease. When the bills started coming in, your checkbook was empty, you had to pay him, you didn’t get the lift on some of the brands that you’ve probably been promoted which is interesting. But I guess the question here is – this sounds like it’s this piece of it is more of a self-inflicted problem…

[Ken Romanzi:]

Eric, I’m going to just cut you off for one second. So maybe we were here earlier. We got to benefit from pricing, combination of lists and promotion in the fourth quarter, just a little bit over $2 million. We anticipated and where we missed on our forecast, we had hoped that that benefit was going to be $10 million. So we missed our forecast by $8 million, but we actually benefited from a pricing all in up $2 million. Okay, does that makes sense.

[Eric Larson:]

Yes. Okay. So then the next question is, as Ken was referring to earlier that promotion is – it’s a, forecasting issue and it generally requires kind of annual planning and you announced [indiscernible] advancing you work through it on a annualized basis. So why is this – how could, this happen again in 2019? I mean, what are the procedures you have put in place so that you don’t run your promotion number’s too high, I guess is the best way, right?

[Ken Romanzi:]

Yes. So when you think about it, when we laid out our pricing plan last year, we anticipated like $15 million to $20 million benefit. We got $12 million of that. As the year rolls along, we felt pretty good and we thought we were going to come out better in the fourth quarter and so we missed on that. What can explain earlier is as we were going through our budget process for 2019, we have a price plan that is much more heavily benefit or based on list price increases. And what we’re looking at from a trade promotional spend basis is actually not in that budgeted number. So it will be a list of heavy plan as opposed to a combo plan. To avoid that risk that you’re referring to. So I guess I say we hear you we thought through that and that’s the plan that we created.

[Eric Larson:]

Okay. So the final question is, let’s talk the cash flow build for a second. Again, you’ve got $125 million commitment and annually to your dividend last year. You benefited from a lot of inventory reduction. What should be the free cash flow this year right now again, walk through it for me because there were a lot of issues at hand when you were going through your prepared comments, and your ability to really pay the dividend.

[Bob Cantwell:]

Yes. So we should benefit this year from about $180 million of excess cash before dividends with $125 million dividend payments.

[Eric Larson:]

Okay. I’ll take that offline. We’ll just figure out how – I’ll get to the details of that later offline. Thanks.

[Operator:]

We will take our next question from Andrew Lasar with Barclays. Please go ahead.

[Andrew Lasar:]

Good afternoon everybody. Ken, let me start with, as CEO elect when we think you’ve got to balance – a number of actions here. One is of course the sense of urgency around a lot of the things that you discussed today on pricing, cost structure and such as well. Some senior management changes. With putting out, I would think some goals for the year that you’ll be kind of on the hook for if you will, that are achievable, right? You’re reasonable and but achievable. And when – where you built in some flexibility, because the last couple of years we’ve seen that, as the years gone on, any number of things have happened, whether it’s things outside your control or within and haven’t played out the way you wanted. Is that a right way to think about? And if it is, can you take us through a little bit around, maybe it’s a bridge to from 2018 to 2019 or how you think you’re building in that sort of flexibility to be able to have a – better than average line of sight to be EBITDA sort of range that you’re talking about for 2019. Okay.

[Ken Romanzi:]

Well we’ll try not to do is put – bake in everything we feel we can achieve. I think we baked in a lot in the past. So, like I said, on pricing, we’re not taking in anything from trade promotion savings and we feel we can get it some, but we’re not baking that in, on cost savings, we are actually going after more than what we shared. So our internal numbers wouldn’t show up more than that, but in some of these things, so there’s slippage. So we tried to give a slip adjusted number. So those are really the two areas, if I can’t say that as a huge upside beyond the range we shared on sales and more sales doesn’t combat inflation. So that’s why we want to grow the business and we’re going to grow, but that’s not going to solve our inflation, which is why, pricing trade promotion and cost savings are the other two big buckets and three when you would breakout pricing between lists and trade promotion. So I would say that the way we’re doing is we’re executing on things that total up more than what we’re sharing in our financial bridge. So we can deliver, I am a believer in over promising, under promise and over deliver. it’s not like I’m totally new here. So I’ve been able to learn what we can achieve, what we can achieve now, we’ll have a more realistic fourth quarter forecast. And I think we’re understanding the margins on the business, particularly when you think about Green Giant cans. One year we lost it in Walmart and that hurt us, the next year now we have it back in. And so forecast in the margin implications on all of that. We’re learning how to do that. And now I think we have a more stable business going forward and we can be – I think a little bit more reliable in our forecast.

[Bob Cantwell:]

And the other thing just to add to that, just as a reminder, when you think about the last two years, beginning of 2017 I don’t think anybody in the packaged food industry was suggesting that there was going to be a fourth quarter that was going to come in the aftermath of two major hurricanes that were going to knock frayed up industry-wide. So that was kind of a big unknown. And that was the beginning of inflation. As Ken was talking earlier, we’re in a deflationary environment for some time even the beginning of last year, folks were talking about inflationary pressures on freight, but not really across the board and still deflation. And there was still that concept of either the lower price because of the costs are coming down. And so there’s been a lot of changes over the last two years from an industry wide phenomenon. It’s our job to anticipate that, as Ken said, we’re working to do that as best as we can, but I don’t think the inflationary pressures that we felt in the last two years, people were predicting in 2016.

[Andrew Lasar:]

Okay. Thanks for that. And then I apologize if I missed this, but as you all know the largest competitors in right in frozen veggies going through some of its own at rejiggering right of its portfolio – taking another look at what innovation they planned to bring to the market going forward. And maybe much of that won’t happen really till that, that fall timeframe around freezer case resets and things that you mentioned around your next wave of innovation. No doubt you were expecting that and anticipating it, but again, with this notion of flexibility, do you feel like you’re building an ample level of prudence in the way you’re also budgeting specifically around Green Giant Frozen with the likelihood and knowledge that you will have a stronger competitive response going forward then maybe you’ve had more recently.

[Bob Cantwell:]

Yes. Our feeling is that our largest competitor in that category from a brand standpoint was owned by a company that was bigger than us and very much into frozen. And while the change on the name on the door is still owned by a larger competitive company that’s more focused on that category. So I don’t know that a lot’s changed in that standpoint. They are formidable competitor better before our assumptions are going to continue to be a formal competitor.

[Ken Romanzi:]

But answer to your question, we were trying to be very realistic, you know, forecasting new products. It’s not an easy task either, but we have a few lead retailers that want our new products early. And so what we’re planning to launch in the fourth quarter of 2019 has already been embedded by them and we’re actually trying to hold them back and not introduce as many things as we want them as they want to.

[Andrew Lasar:]

Great. Thanks. I appreciate it.

[Ken Romanzi:]

So it’s always a gamble on what new products going to deliverable. We’re trying to be as reasonable as we can with as much of the forecasting and below that we have on new products. And it’s all based on the endorsement that feel we’ve got from lead retailers.

[Operator:]

That’s all the time we have for questions. Mr. Romanzi, I’d like to turn the conference back over to you for any additional or closing remarks.

[Ken Romanzi:]

Thank you all for joining. Again, it’s an honor and a privilege to lead B&G and we look forward to reporting on our progress throughout the year. Thank you.

[Operator:]

This concludes today’s call. Thank you for your participation. You may now disconnect.