B&G Foods Inc (BGS) 2016 Q3 法說會逐字稿

Good day, and welcome to the B&G Foods, second-quarter 2016 earnings conference 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 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 all of 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. Tom Crimmins, the Company's CFO, will start the call by discussing the Company's financial results for the quarter. Next, Bob Cantwell, the Company's CEO, will discuss various factors that affected the Company's results, selected business highlights, and his thoughts concerning the remainder of 2016.

I'd now like to turn the conference over to Mr. Tom Crimmins. Tom?

Thank you, Operator. Good afternoon, everyone and thank you for joining us today net sales for the third quarter of 2016 increased 49.2% to $318.2 million compared to $213.3 million in the third quarter of 2015. Net sales of Green Giant acquired on November 2, 2015 contributed $113.8 million to our net sales for the quarter. Base business net sales decreased 3.7% or $7.7 million and this increase was attributable to a $5.9 million decrease in unit volume and $1.8 million net reduction in prices. Gross profit increased 61.2% to $115.4 million in the third quarter. That's compared to $71.6 million for the third quarter of 2015. Gross profit expressed as a percentage of net sales increased 270 basis points to 36.3% for the third quarter of 2016 from 33.6% for the third quarter of 2015.

The increase in gross profit percentage was primarily driven by the acquisition of Green Giant. Gross profit percentage was also positively impacted by the decreased cost for certain commodities and packaging which we anticipate will yield approximately $7 million in total savings in 2016 as well as distribution savings and product mix. Partially offset by the unfavorable impact decreased base business volume had on cost absorption and a net reduction in base business prices. Selling, general and administrative expenses increased 55.5% to $42.5 million for the third quarter compared to $27.3 million for the third quarter of 2015. Which was primarily driven by incremental Green Giant related expenses. Acquisition related and distribution restructuring expenses increased $2.5 million for the quarter. The remaining SG&A increase was attributable to increases in consumer marketing of $7.4 million, selling expenses of $3.5 million, warehousing expenses of $1 million and general and administrative expenses of $0.8 million.

Expressed as a percentage of net sales are selling general and administrative expenses increased 50 basis points to 13.3% for the third quarter of 2016 from 12.8% for the third quarter of 2015. Net interest expense for the third quarter increased 59.5% to 18 million from $11.3 million for the third quarter of 2015 which was primarily attributable to additional indebtedness outstanding during the third quarter of 2016 as compared to the third quarter of 2015 as a result of the green giant acquisition. Our reported net income on our US GAAP with $32.4 million or $0.50 cents per diluted share for the third quarter of 2016 as compared to the reported income of $19.8 million or $0.34 cents per diluted share for the third quarter of 2015.

The third quarter 2016 adjusted net income was 36.7 million or $0.56 cents for --adjusted diluted share compared to adjusted net income of $22.7 million or $0.39 cents per adjusted diluted share in the third quarter of 2015. Our adjusted EBITDA increased 60.2% to $85.1 million for the third quarter of 2016 compared to $53.1 million for the third quarter of 2015. Third quarter 2016 adjusted EBITDA expressed as a percentage of net sales increased to 26.7% as compared to 24.9% in the same period in the prior year. Moving on to the balance sheet, we finished the third quarter with approximately $1.3 billion in net debt. Our net leverage was approximately 4.1 times the midpoint of our revised 2016 projected adjusted EBITDA and our current dividend rate is $1.68 per share per annum for approximately $111.6 million in the aggregate based on our current share count. With only a little more than two months to go in fiscal 2016 we have revised our prior guidance as follows.

We now anticipate our net sales to be in the range of $1.3 billion to $1.4 billion (Sic-see press release "$1.38b to $1.40b"). Our adjusted EBITDA to be in the range of $322 million to $328 million and our adjusted diluted earnings per share guidance which has been revised to reflect our projected profitability as well as the dilutive effect of the August 2016 issuance of 3.75 million shares of common stock at $2.11 to $2.17. In addition we project 2016 interest expense of approximately $73 million including cash, interest expense of $68 million and interest amortization of $5 million. We project 2016 depreciation expense of approximately $23 million and amortization expense of approximately $13.3 million. Finally, we expect our 2016 effective tax rate to be approximately 37.1%. Now I would like to turn the call over to Bob for more details on the quarter and his thoughts on the remainder of 2016. Bob?

Thank you, Tom and good afternoon, everyone. We are pleased with our profit -- profitability this quarter and could not be more excited about the launch of our new Green Giant products and our new marketing campaign that has begun to awaken the Green Giant across America. We are, however, disappointed with our base business net sales decline of $7.7 million for the quarter. With five of our brands counting for the majority of the short fall. We have been experiencing a challenging competitive environment for our syrup brands which in the aggregate declined $2.4 million for the quarter. The decline is primarily attributable to maple syrup price deflation. The Canadian exchange rate has benefited the maple syrup category for a few years now and we are seeing some smaller competitors with shelf space by deeply discounting their prices. In addition our maple syrup net sales have been negatively impacted by contractually mandated price reductions with certain of our food service customers. Under those contracts we are required to reduce prices when the U.S. dollar strengthens against the Canadian dollar. We believe that the maple syrup environment will remain highly competitive for the near term and we expect to walk away from or lose some low margin or zero margin maple syrup sales. TrueNorth posted our second largest decline for the quarter. Down approximately $2 million as compared to the same period last year. On prior calls we highlighted the challenges we have been facing with TrueNorth as a result of historically high almond prices which drove our retail price for the brand up to a level that consumers resisted.

Almond prices have since returned to historical norms and we are in turn have lowered our prices. In response our single largest customer for TrueNorth products rolled back pricing in the middle of the third quarter, but we have not experienced the uplift in sales volume that we originally anticipated. We expect that many of our customers will follow suit in Q4 and reduce their shelf prices for TrueNorth. We are hopeful that reduced pricing to consumers will generate increased demand. To further increase consumer demand and generate brand awareness, we have also put in place plans for increased product demos at our largest customer. Bottom line, however, is that while we believe we are on the right track to turn around a sales for TrueNorth, it may take longer than we originally anticipated. We expect an additional decline of approximately $2 million at TrueNorth and net sales in the fourth quarter.

We have also experienced some competitive pressure in our Ortega business specifically in taco shells which caused softness in the third quarter. We do not expect that trend to continue into the fourth quarter. We recently adjusted our pricing for Ortega taco shells and we anticipate a strong fourth quarter for the brand. Our Cream of Wheat business was soft during the third quarter, but we believe that was mostly timing related. We look forward to a strong winter season for Cream of Wheat and continue to be encouraged by the positive consumer response for a Cream of Wheat To-Go cup product as well as growth in the brand's traditional Stove Top offerings. Pirate's brand experienced soft sales for the quarter, but has performed nicely for the year-to-date period with net sales up 2.5%. We are extremely pleased that the (inaudible) for Pirate's Booty has increased 8% since 2015.

Our sales team continues to focus on increasing distribution and activating key marketing programs which are producing solid returns. Now moving on to additional positives for the quarter, Mama Mary's pizza crust business was a strong performer in the quarter with net sales up over 10%. Our sales team has done an incredible job filling in distributions for that brand as well as ensuring consistent placement of the product within stores so the consumer always knows where to locate it easily. Our Las Palmas brand continues its success in the quarter with net sales up over 7% and now up over 6% year-to-date. Bear Creek had a solid quarter with net sales up over 4% as we continue to see increased distribution with single serve cups. On another positive note although the brand's net sales declined a little over 1% for the quarter, we believe we have started to see this stabilization of our New York Style business.

During the third quarter we made some distribution gains and saw our increased consumer demand. As for the overall competitive environment, other than in specific categories I mentioned earlier, we have not seen any significant signs of a pick up in aggressive pricing or promotional spending by our peers so far this year and do not expect that to change as we look toward 2017. We do expect to see our overall base business trends continue through the fourth quarter and we anticipate an over all decline of approximately 2% with much of the decline a result of the weakness in TrueNorth and maple syrup.

Switching now to Green Giant whose buy in came in as expected for the third quarter. Operationally our transition services agreement with General Mills has ended and with the exception of General Mills continuing to co-pack certain products for us in Belvidere, Illinois, we assume full responsibility for the business at the start of the fourth quarter. We anticipate that there will be some growing pains in the early stages of post transition period as it will likely take between three to six months for us to reach a smooth operational rhythm for the business. However, I believe that our very capable team at B&G Foods will provide our customers with the same excellent level of service for Green Giant that we have historically provided our customers for all our other brands.

The new Green Giant frozen vegetable product launch which includes veggie tops, rice veggies, mashed cauliflower and roasted veggies is going very well. Several retailers can't even keep the products on the shelves. We believe the distribution gains we earned for the Green Giant through a new product innovation will help drive the brand going forward. We expect incremental net sales in the fourth quarter for the new items will be between $6 million to $8 million. Through innovation and financial support for Green Giant, we believe we can now move the needle and grow our market share and we can move the whole category. From an HR perspective our organization build out strategy for Green Giant is now complete with almost all open positions filled. The successful execution of our plant has enabled us to establish a frozen sales and distribution platform and further enhance our already well-established center of the store shelf stable and snack platform.

And finally in September we announced that we entered into an agreement to acquire the spices and seasonings business of ACH food companies. A leading supplier of spices and seasonings to retail and food service customers for approximately $365 million in cash subject to opposed closing inventory adjustment. We project the acquisition will contribute annually approximately $220 million to net sales and $38 million to $40 million to adjusted EBITDA after we close and complete the integration of the business. We expect the acquisition to close during the fourth quarter of 2016 subject to customary closing conditions including receipt of regulatory approvals. We look forward to adding these strong brands to the B&G Foods family.

So in closing as we are already a third of the way through our fourth quarter we are looking for a strong close to an incredibly exciting and transformational year at B&G Foods. Despite the challenges that certain brands have presented this year I remain very pleased with where we are as a company and where we are going. We have an extremely strong portfolio brand supported by the best team of employees in the business.

With that I would like to open up the call for questions. Thank you. Operator?

Thank you Mr. Cantwell. (Operator instructions).We will now take our first question from David Palmer with RBC Capital Markets.

Thanks, Good afternoon. Could you perhaps elaborate on the progress with the Green Giant innovation so far? In the scanner data we can't see the innovation. It looks like we are capturing some of the drag from discontinued sku's and not getting the benefit from some of the new products you say are flying off the shelves. We are not really capturing that so far so could you perhaps elaborate on what is indeed happening out there? And if you have a sense of when that will show up in the scanner data that will be useful for our tracking purposes.

Sure. On the second part you should see that scanner data quickly. I am not sure of the timing and why you haven't -- we started shipping customers really middle of September some of the larger frozen customers really beginning of October. It is on shelf and most major customers across this country as we speak. Like I said we are expecting anywhere between $6 million and $8 million of sales in the fourth quarter here. You should be able to find it.

It is pretty much everywhere as we speak and any major customer has it as of today. There are a couple of customers who are not taking it into latter part of the fourth quarter. But the larger customers as you would expect have it as we speak. Now in the month of September we only sold through about a million dollars of the product. Really the sales were starting to pick up here. The two largest customers in this country as a retailer really took it at the beginning of October. You won't really see those sales reflected in data until the next data run here probably toward the end of this month, early November.

And you mentioned that you anticipate potential growing pains as you take full control of Green Giant. You've obviously had some time to anticipate this changeover, so why -- what do you mean by growing pains, and how would that manifest itself in terms of the result? And then I will just throw one more in. You are talking about being galvanized around improving base trends into early 2017. What are your top one, two and three initiatives to really get the base trends going and where your focus will be? Thanks.

Ok. So from the growing pains comment it has nothing to do with sales. It is more kind of back off as distribution and making sure it is in the right warehouses to service the customers. We planned it. We are doing it. We know as soon as we took it over that level of expectation we will have to fight through some growing pains. That's what we are doing each day. It is more of what I call the back office logistics of making sure it is getting to customers and it is in the right distribution center. When we look at the base business in addition to innovation, it is truly about the consumer plans here. We filled out the shelves nicely with innovation and we are trying to fight back on some of the discontinued base items that had been discontinued over the last few years under the prior owner, but it is all about the support of the business. We are spending between $18 million to $20 million in the fourth quarter supporting the business with advertising. We are going to continue that through the first half of 2017. We have a long-term plan of continuing to support this business at a pretty high level. It is really about making sure we get the consumer back to the franchise and we believe we can do that through marketing this brand at a much higher level than it has been done. You have to go back five plus years to this level on this brand.

Thank you.

And we'll take our next question from Farha Aslam with Stephens, ,inc.

Good evening.

Good evening.

When you look at Green Giant do you expect that sales number to be around $520 million for the year?

Yes, we do.

And then in terms of your marketing spend, this total marketing spend for that Green Giant business for 2016 versus what you had expected when you started, is it about the same?

It is about the same. We are spending between $32 million and $35 million against the business this year. And some additional slotting for all of the new distribution even on top of that.

And then as we go into next year do you anticipate that marketing spend is stable, goes up or goes down?

Well, the good news is it will hopefully go up. As we grow sales we plan on putting more money back into it above and beyond what we spent this year. In addition it is going to be more directed to consumer marketing. There is a lot of set up in year one from agency expenses to creating commercials, et cetera and that will be able to not be spending that level of money in 2017, but using that spend against the consumer. We will actually have more working media against the consumer in 2017. But we will be spending at least what we spent this year and expect to spend more as we grow sales.

And then my final question is back on the base business. If you see the turn around trends do you anticipate doing it via increased innovation, pricing, promotion? Any color you could provide there?

Well, I think as we look at the base business we certainly got some minuses and we got some pluses. We feel very comfortable today about where the base business is going except for really two pieces of the business. One is we are going to fight our way through on TrueNorth. And we'll see where that goes. The business shrunk down to a $10 million business. As we look at comparatives next year hopefully we are growing that, but we won't see the level of just pure dollars declines we saw this year just based on the size of the business.

The other really big challenge we have and it is really about price deflation in our syrup category. And that is not going to get fixed because at the end of the day syrup coming out of Canada at where the exchange rate is today is allowing some smaller competitors to really drop prices and reduce prices in the whole category. And we are making decisions sometimes to fight back in certain customers and sometimes to walk away just because we are getting down to little to no profit on those sales. One of the things you are seeing from even as we look at the mix of the base business product, one of the reasons our EBITDA percentage in addition to all the cost savings in Green Giant is going up is the sales that we have been losing and the large chunk of those sales are coming in syrup and TrueNorth and prior to this quarter New York Style is some of our lower margin businesses. So as we mix out of that a little bit it is actually helping our overall EBITDA percentage. As we look at our biggest challenge year-over-year next year, it is going to be in syrup because we are going to make decisions potentially to walk away from some business and not match some ridiculously low prices where all we are doing is saving sales and not making any money.

Thank you.

And we will take our next question from Bryan Hunt with Wells Fargo.

Good evening, Bob and Tom.

Good evening.

Good evening

I guess my first question and I'm pretty curious about what is going on in the rest of the businesses and you touched on it, Bob, but historically we have seen when we have had material price deflation or cost deflation in various grains like soy ,wheat and corn and we are seeing it all now, but you have seen the industry become more promotional. One, why is it not happening today across more categories in your opinion? And two do you think the potential exists going forward given the outlook for cost?

Well, you know, I think when we look at just purely the size of the cost savings that we have this year year-over-year that Tom mentioned earlier of $7 million with a good more than half of that packaging versus commodities. There certainly price deflation in certain commodities. None of those commodities are a big part of -- those specific commodities that you are referencing that have come down are not big parts of some of the products that we sell.

We are not seeing it in the categories we compete in today. Except for this kind of odd thing in maple syrup -- maple syrup because the price is way down because of the exchange rate over the last few years. I think it is just the nature and the luck of the categories we're in more than anything else with that, so there is nothing we compete in today that has a major commodity move down trend in a big way that is material to the products in the category themselves that we compete in.

Do you think the outlook for 2017, raw material costs, is similar to what you saw this year?

Well, we are seeing it. We typically are trying to lock in and roll out at least 12 months at a time. And we know today, the early stages and we expect more, but we are already locked in to save at least $3 million next year. we expect that to be more as the months go on here. We are not seeing any trends -- it is always miscellaneous things, but we are not seeing the trend going the other way right now.

Great. Kind of switching gears and looking at the ACH transaction, they have a facility and you do other spices whether it is Mrs. Dash or Accent, do you see moving that into the other facility or is that a planned synergy number?

In our numbers today we bought a business as usual. Over a long period of time we look at moving things in and out of all of our facilities. We are certainly looking at different things, but when we talk $38 million to $40 million, that's the business we bought as it stands without potential moving anything into that facility or potentially out of the facility. All possibilities.

All possibilities. and we have seen you do that in the past with things like Mama Mary's. And then lastly, the challenges on the headline looked greater than maybe you have eluded to in the call or they have been toned down, but if you look at the challenges whether it is competition in maple syrup the TrueNorth headwinds is there anything in your base business--- or included in what is going on in Ortega -- not Ortega, but in your Mexican portfolio, but are any of those other challenges making you more hesitant to go out and make acquisitions trying to settle a portfolio's performance before you take your next big bite?

No, not at all. We're working diligently internally and have created certain people running certain of our small brands to really focus on those brands in a different way. We're in a challenging center -- for most of what we do it is a challenging center of the store movement. When we look at our portfolio 40 plus brands we don't see issues with the brands -- pure issues with the brands honestly, except for TrueNorth today, because we have to figure out what we can do with that, but it is a small brand in our portfolio. Syrup, we don't need to lose except for price deflation dollar one of volume. We are making volume decisions and it is all about maple syrup. I keep saying syrup, but it is maple syrup numbers that just we can't make a margin that is acceptable to us we are willing to potentially walk away from some of that. There is nothing outside of TrueNorth that is really troubling overall in our portfolio that would make us get concerned about actively pursuing other acquisitions as we speak.

Best of luck in the coming year.

Thank you.

We will now take our next question from Karru Martinson from Jefferies.

Good afternoon. Just on the ACH Food Company acquisition, just wanted to get a sense on the Webber brand that was sold under license. Just wanted to get a sense of where that license extends out to and how much of the business is the license portfolio here.

Well, it is a piece of the 220 million. It is a small piece give or take $30ish million in sales. It is a small piece They certainly met the hurdles that this license will continue as long as we want to use it. And it is a really nice brand. It is a very nice brand that hopefully has some opportunities even further. They did a really good job at building it up to where it was. Hopefully we can take it further down the road here.

Ok. And there has been a lot of noise about millennials are not shopping traditional grocery. Grocers are talking about traffic declines. When you look at your portfolio of products how do you feel that you are represented whether it is a traditional mass club dollar stores. Where are the areas you can get into more doors as we go forward?

There is not a lot of doors that we can get into that we are not in today. Most of our products are relatively fully distributed. We are also selling a number of our products through outlets like amazon, et cetera that is growing every day. It is still a small piece of everybody's overall business in our industry, but it is growing. We see those kind of outlets as real opportunities to make sure we are reaching millennials and suburbanites that buy things and have it delivered to their garages in suburbia America. We need to be in supermarkets, we need to be in clubs we need to be in CVS and we need to then be able to be on those kinds of sites that are servicing those customers online.

We are pretty much doing that across the board, there is not an outlet that we are not selling our products in today, and most of our larger brands are selling in all of the outlets that you could think of today. We don't have huge presence in customers like whole foods, et cetera and salads. We do sell some of our brands some of our brands are just not natural fits for those outlets. But where it is an outlet where a brand like ours that we own is in we have our brands in those outlets.

Thank you very much, guys. Appreciate it.

Sure.

And we will now take our next question from Sean Lawton with Piper Jaffray.

Yeah, another question on ACH because we haven't talked about it a lot the first conference call, I think. Anything on the seasonality for that business? Just something we should be thinking about in terms of modeling? And then how has this business been performing over the last few years? Has it been one that has been a little under loved and under marketed? Or has the business been performing over the last few years?

Well, on the business performance first we are getting a nice little business here that has not been under marketed. That P&L has a reasonable amount for marketing in that P&L that the former-- eventually the former owner when we closed the deal was spending on the brand. Business in general was up 1%, 2% a year over the last number of years. A lot of that has been Webber. Webber is driving that more than anything else, but a lot of brands in their portfolio are flat to up. It is pretty solid business.

Certainly when you think about spices it should be solid business. As millennials may eat at home a little more each day, and all of us are trying to cook a little more -- cook a little more at home. Spices are a great category to be in. It is the right category in today's environment. basically regular everyday spices, when you sell oregano and basil, it is pretty straight forward and across the board. You get a little holiday blips when people need something for their Thanksgiving dinner, but not meaningful. Webber will be a little more because of the nature of what that is. It is Webber and people relate to it as grilling blends more than anything else. It is certainly going to sell a little bit more -- a little more during summer barbecue season when you make -- but as we look at this you are not going to really even notice the blips plus or minus on a monthly basis. Relatively flat on a monthly basis.

Ok. And then I guess on the guidance for the EBITDA in Q4, it looks a little lower than I would have anticipated and part of that could be that we have some of the ACH deal in our numbers. Can you talk about -- is this like a level of services on the transition service agreement or are there other disruptions that you are seeing in Q4 or was this a pull forward to Q3? Just trying to understand the number that we're getting to for Q4?

Well really it is two things. One is -- just to make sure everybody understands, ACH results -- are not in those guidance numbers. That guidance without ACH. We still don't know when a closing date will be yet. We are heading towards the last two months of the year here. Really that's just timing. In the last quarter we get a few weeks of sales and profits in our numbers. Guidance is pretty relatively consistent with kind of the quarterly results from prior quarters. A little lower margin business on Green Giant in the fourth quarter for two reasons. One is this trade promotional spending. This is the time when you spend money in frozen and cans. You sell a lot of product during Thanksgiving, and then a little during Christmas, but a lot of product in Thanksgiving. The deals in those categories.

The other pieces, we are spending between $18 million and $20 million in marketing on Green Giant in the fourth quarter. We came into the fourth quarter and put it into perspective. We spent $14 million year-to-date on Green Giant. So for nine months we spent $14 million and we are going to spend between $18 to $20 million in the fourth quarter and that is really what is doing it. I think we tried to guide the (inaudible) to the timing of the spend for this year just because of getting everything ready. When we give guidance for 2017, that spend will be a little smoothed out it will certainly be heavier in the winter months. So the first quarter and the fourth quarter. But it will not be as all oriented to one quarter and when we look at 2017 for Green Giant.

That's kind of what is impacting the EBITDA there to be flattish or even down a little bit at the midpoint of the guidance at this point. Thanks a lot, I'll pass it on.

We will now take our next question from Rob Moscow with Credit Suisse.

Hi, Bob. I think you mentioned back-office logistics-- as saying it might go through some growing pains. I guess I am not quite sure if you are calling out incremental costs that you are incurring right now or just kind of warning us that those costs might accelerate in the future if certain things happen. So can you give us anymore specifics as to what fourth quarter looks like?

Sure. Certainly this is not a cost comment on Green Giant integration. This is just all about -- Monday, October 3rd we entered into the world of shipping frozen product and doing it all ourselves. Which we are totally fine with doing. Now it is just a matter of planning and procurement and making sure in the number frozen warehouses we employed to ship product that is in the right spot at the right time and we are getting it to the customer when they want it. So we don't think there are any real issues in doing that. We just know that we are just kind of babysitting every order that comes in to make sure we do the best we can. And it is a learning experience. It is $300 million of give or take frozen business now going through our system through a different distribution system. So from the can side, relatively easy dropping that into our warehouses and shipping it. The frozen side, not difficult, it is just different. We are doing that and we know and we have all hands on deck from the top down and just making sure this is getting done as best as possible right now.

That is helpful. And just to -- I heard some people question whether there would be another equity raise at some point just to recapitalize the balance the balance sheet. Maybe even finance ACH But you are quite clear here that ACH is financed through what you have right now and how do you look at where you are in terms of your capital ratios right now?

I think when you look at where we are today and Tom mentioned the net leverage is 4.1 times. When you look at ACH coming on board $38 million to $40 million and we are paying $365 million for it, after we pay for that between cash on our books and using some of our revolver, the leverage is only 4.4 times. So it is a very comfortable spot down the center of where we like to be between four and five times. But we are always looking at opportunistic when is the right time to create value for our shareholders by, looking at the balance sheet. We don't see a need for it today, but you never know when the right time is. I think we have always come to market typically after we do the next deal, so it is really ACH is paid for with the last equity raise we did in the summer. So, come to market with another big deal that we create a lot of incremental cash flow and increase dividends and increase value. At some point you need to come back to the equity market to raise equity.

Makes sense. Thank you.

And we will take our next question from Eric Gottlieb with D.A. Davidson

Yes, good evening.

Good evening.

I have a couple of questions. First back to Green Giant. You originally said we will achieve certain margins after a six-month growing period. Is this the six-month growing period you were referring to or this is in addition to?

On Green Giant?

Yes.

We are at the margin level. You have seen that flow through the P&L. That's the margin level we have been running at. We are looking at Green Giant generating give or take $115 million in EBITDA for us this year. Very strong margin business. We are not going to expand on them. Hopefully we can and there's always savings and synergies, et cetera but we are running the business of what we now expect to run it.

When I hear growing pains and when I hear distribution. I jump back to when you entered the snack business-- where there were problems filling up the trucks. I know you have never really dealt with the frozen business all that much but is this the kind of growing pains we should be expecting or is it not going to be as long or as deep?

Certainly not going to be deep and very different. Snacks came into our warehouse and it was a different product going with everything else. Frozen is through a third party warehouses, it is just frozen product. this is just making sure, there is a lot of movement around with frozen coming from Mexico and making sure it is in the warehouses and needs to ship to customers. I don't think this is a really big problem for us, but with everything we are just walking through the transition each day. We have -- we feel very comfortable the team is doing the job the right way and we are almost finished month one of that kind of transition period where we are by ourselves.

Got it. And then moving on to syrup, how much in sales potentially could you potentially be walking away from?

It all depends. You know, it all depends. It could be $1 million. It could be $10 million. It depends -- it really depends on as time goes on if somebody kind of just wants a drop price at a certain customer or two or three or four at prices we just don't want to match, we have to make some decisions here. One of the interesting things about maple syrup that is pretty different than anything else we are involved in, and everything else we compete with large companies typically, and that's actually a lot easier to work with whether it is our competitor in frozen or our competitor on Ortega. There are large businesses who also have margin that they are trying to achieve. It is easier to compete. Maple syrup, we are the only big guy who is a big company. Most everybody else are fairly small and somewhat ma and pa companies if they can sell another million dollars and make $10,000 sometimes on that million they are happy. We are not going to do that. We are looking -- each instance comes up. It is not going to affect overall profitability or any concerns, but we potentially may walk away from sales if competition gets at some very low prices.

Got it. And then moving on to TrueNorth, I assume the whole space had the same net costs. So what did competitors do?

Everybody raised prices. If you were -- I mean if you were at Costco buying bulk almonds they sell a lot of large bags of almonds and pecans and everything, all prices went up. From clubs and everything, they understood raising prices. And at the end of the day at some point the consumer who is buying it at one price says I don't want to pay another $1.50 or $2.00 a bag, and we saw that hesitation. So-- so I think we have dropped prices. The challenges on the small brand which, this is what it is. This is not like we raised prices on cream of wheat and it will sit on the shelf and people who buy cream of wheat the last 50 years will buy Cream of Wheat. They may have gotten turned off by a large price increase if that happened on Cream of Wheat, but as soon as you lower it they are back buying it. This is a little different because it is not a big business. It doesn't have complete permanent shelf space everywhere it sells like most of our products. Now it is just a fight back to make sure consumers know it is out there. It is a great product. We just need to make sure consumers know it is out there and today is a good day.

With that I will pass it on. Thank you.

We will now take our next question from Jon Anderson with William Blair.

Hi, Bob and Tom.

How are you doing?

Good. Just on Green Giant and actually more broadly on the frozen category in general, do you think you're bringing more innovation than the competition for this fall reset that we are talking about? And what's been the overall reception from retailers around kind of the relaunch and your ability to get merchandising and promotion for the brand and new offering.

Well certainly the retailers are completely on board with the relaunch. Our net point of distribution gain is well over 100,000 net points of distribution across the country. Most major retailers took-- and we launched 15 items most major retailers across the country took an average of 11 many took all 15. They are excited about the innovation, but they are also very excited about the long-term support we are committing to and trying to drive this brand. And really hopefully drive the whole category. Hopefully we grow faster, but we believe that our support is really going to drive the category in total. Retailers look at this as certainly this is a high volume category and they turn a lot of dollars in frozen vegetables. We can drive more foot traffic or more usage occasions and it is great for everyone. Retailers have been very supportive of our campaigns.

On the sales side for Green Giant, the $520 million you referred to earlier, Bob, is that the base business excluding the incremental revenue you talked about for the new products and how should we think about that on a full year basis maybe for 2016 and how that flows through into 2017?

Well, I think on the -- I want to hesitate on the 2017 numbers for Green Giant and we will certainly give really comfortable guidance on where we believe we can be in our year-end conference call on Green Giant. We will have a much better feel and I believe today the innovation is going to be a real win for us in a big way. We will have a much better feel after a few months of actual sales and consumer trends and consumer repurchases as the next few months go by. We are looking at $520 million on Green Giant and it would include another $6 million to $8 million. That's baked into that number as we speak.

That's helpful. Lasts one from me, if you think about M&A going forward is there a preference for frozen versus maybe stable temperature product? I ask because I am wondering if given kind of the state of the frozen platform today we can see more synergy opportunity from scaling that business as opposed to adding to the legacy business. Thanks.

I think --we can handle acquisitions and center of store grocery snacks and now frozen. I do want to say frozen we still are only looking at as of today, our minds can change over time, but if it is frozen it is going to be vegetables. We are not going to today go into meal solutions et cetera and stretch who we are. So we certainly consider another smaller frozen vegetable brand if it became available. But that certainly means center of the store is more wide open because we are willing -- as long as it is high margin categories and it is a good brand, we are willing to look at many different categories and center of the store. But if frozen we want to stick to vegetables at this point.

Really helpful. Thanks guys, good luck going forward.

And we will take our next question from Andrew Lazar Barclays

Hi, Bob and Tom.

Hi, Andrew.

Hi, Andrew.

Two quick ones. I don't -- I may have missed this, but I think you said previously you expected Green Giant EBITDA to be in the $115 million to $120 million range. Is that still the expectation?

Yes, it is.

When, I guess, should we start to see -- you highlighted some of the innovation, but when we look at the Green Giant brand in totality in scanner data it is still showing some big year-over-year declines. When given all of the efforts and the relaunch and -- relaunch and everything else would we start to see that data look like it is starting to -- or the decline start to moderate and when are we going to see it stabilize at some point?

We expect on the base putting innovation aside that you are going to see that stabilization and hopefully grow really as we head into the first quarter and into the second quarter of next year. We think the real support of the brand is going to drive that in a different way. We expect those numbers to really start turning as we head into the first quarter. I mean, innovation is all on top and we will know better at least on this round of innovation and more to come in 2017, how well they are performing. Early results look extremely good where we placed it. Great products and it fits to consumers needs today. We see some real opportunity there. We look at the bulk of the business before the innovation that is give or take $300 million and kind of frozen sales, it is really kind of -- our expectation and our outlook is it really starts turning the corner as we kick into the beginning of 2017 and then certainly as we head through 2017 in a bigger way.

Got it and very last thing. I don't want to belabor this, but with respect to some of the growing pains,-- because you hadn't made a statement like that previously even though maybe it was assumed. It is a big integration and a new temperature state for you, but you hadn't made that comment before obviously. Trying to get a sense of whether this comes up now because the timing of the TSA rolling off and because you are actually starting to see some of these growing pains or it is more anticipating and trying to plan for what could happen as opposed to you are seeing things crop up as we speak.

Well, I think maybe the words meant more than reality. At the end of the day we are fundamentally taking on a $300 million business that has very high customer service standards. We are taking on a business from a top notch person in this industry who services customers at high levels. We expect to be able to do that plus and we want to make sure we meet all those standards. It is more about just meeting the customer service standards more than anything else. It is that window that at the end of the day could get real simple. If customer a wanted the product delivered into their distribution center by 11 O'clock in the morning and we are hitting that and we are not delivering that at 1 O'clock in the afternoon. Because in frozen which is very different than shelf stable there is always certain windows in -- from the distribution centers shipping it and the distribution center receiving it. You can't leave -- frozen has to go into the freezer. It can't be left on the floor where you have a lot more ability to adjust shipments, et cetera, when you are delivering dry groceries because people can stack it on the side when it gets to a distribution and then receive it in later. There is a lot of -- you don't have that ability in frozen. We are not seeing where we can't live to those standards. We expect as each day goes on, we are doing fine. We are just going to get better and better at it. This is a new $300 million frozen business for us through our infrastructure and it is really like I said the -- it is not the sales. It is not the marketing. All of that--we have been running all of that.

This is just making sure deliveries get to customers when they want it and how they want it. That's our number one goal here and we're working very hard and getting that done. We just want to point out it is not just here are the keys and everything was going to be absolutely perfect, but we don't see anything affecting our business at all. We actually see -- we are a month into this now and things are going and getting, really service levels are getting better every day and service levels are better as we speak.

Got it. Thanks very much.

Ladies and gentlemen it appears there are no further questions at this time. Mr. Cantwell I would like to turn the conference back over to you for any additional or closing remarks.

Thank you. We certainly look forward to reporting the progress of our Green Giant innovation results and our year-end conference call as well as our expected strong results for our overall business in the fourth quarter. Again thank you again for your support in the company and look forward to talking to you again in a few months. Thank you.

And ladies and gentlemen, that concludes today's conference call. We thank you for your participation.