B&G Foods Inc (BGS) 2017 Q3 法說會逐字稿

Good day, and welcome to the B&G Foods Third Quarter 2017 Earnings Call. Today's call is being recorded. You can access detailed financial information on the quarter in the company's earnings release issued today, which is available at ir.bgfoods.com.

Before the company begins its formal remarks, I need to remind everyone that part of the discussion in today's call includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them. We refer you to the company's most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The company will also be making references on today's call to the non-GAAP financial measures, adjusted EBITDA, adjusted net income, adjusted diluted earnings per share and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release.

Bruce Wacha, the company's Executive Vice President of Corporate Strategy and Business Development, will start the call by discussing the company's financial results for the quarter. After that, Bob Cantwell, the company's Chief Executive Officer, will discuss various factors that affected the company's results with the business highlights and his thoughts concerning the remainder of 2017 and beyond. After the preferred remarks, Bob, Bruce and Amy Chiovari, the company's interim Chief Financial Officer, will be available to answer your questions.

I will now hand the call over to Bruce.

Thank you, operator. Good afternoon, everyone. Thank you for joining us today, and happy Halloween. It is a pleasure to report our financial results for our fiscal third quarter, which ended September 30, 2017.

For the quarter, we generated $408.4 million in net sales, $94.1 million of adjusted EBITDA and $0.55 of adjusted diluted EPS.

Net sales for the third quarter of 2017 increased 28.3% to $408.4 million compared to $318.2 million in the third quarter of 2016.

Net sales growth for the quarter benefited from strong performance across much of our base portfolio as well as the spices & seasonings and the Victoria acquisitions, which were completed on November 21, 2016 and December 2, 2016.

Our base business net sales increased by 3.2% or $10.1 million for the third quarter. Increases in unit volumes contributed to $13 million of the increase, partially offset by $2.9 million decrease in price and mix.

We had growth in net sales for half of our brands during the quarter, including 10 brands that increased in excess of 5%.

Our innovation product helped drive net sales growth of 6.4% for our largest brand, Green Giant, when compared to the prior year quarter, with double-digit growth of frozen Green Giant products more than offsetting net sales declines in Green Giant's shelf-stable and other products.

Another leader on our portfolio, Pirate Brands, delivered 21%. Yes, that's correct, 21% sales increase for the quarter. Pirate Brands benefited from strong back-to-school, new distribution wins and the timing of promotional events with certain customers.

We also had strong quarterly performances from many of our other brands in our portfolio such as Polaner, Underwood, New York Style and Cream of Wheat.

Our recent acquisitions have also continued to perform well and are tracking ahead of our initial expectations. The spices & seasonings business contributed $70.4 million in net sales for the quarter and is ahead of our initial forecast by about 20%.

Meanwhile, Victoria had another solid quarter under our ownership and contributed $9.7 million in net sales for the quarter.

Gross profit increased by $7.9 million or 6.8% to $123.3 million for the third quarter from $115.4 million for the third quarter of 2016. Gross profit as a percent of net sales was 30.2% in the third quarter of 2017 compared to 36.3% a year ago. Gross profit as a percent of net sales was in line with our 2Q and our 2Q year-to-date gross profit as a percent of net sales of 30.2% and 30.3%, and it is trending in line with our expectations of 29% to 30% for the full year.

SG&A expenses increased by $0.5 million or 1.3% to $43 million from $42.5 million in the third quarter of 2016. SG&A as a percent of net sales improved and was 10.5% for the third quarter of 2017 compared to 13.4% for the third quarter of 2016.

Adjusted EBITDA increased by $9 million for the third quarter of 2017 to $94.1 million compared to $85.1 million for the year-ago period. Adjusted EBITDA as a percentage of net sales was 23% for the third quarter of 2017.

Net interest expense was $23.4 million for the third quarter of 2017 compared to $18 million for the third quarter of 2016. The increase in interest expense was primarily attributable to additional borrowings made in the fourth quarter of 2016 to fund the acquisitions of the spices & seasonings business and Victoria.

Our reported net income under U.S. GAAP was $32.7 million or $0.49 per diluted share for the third quarter of 2017 as compared to reported net income of $32.4 million or $0.50 per diluted share for the third quarter of 2016.

Our adjusted net income for the third quarter of 2017, which excludes the after-tax impact of acquisition-related expenses, was $36.8 million or $0.55 per adjusted diluted share compared to $36.7 million or $0.56 per adjusted diluted share in the year-ago period.

Moving on to the balance sheet. We finished the third quarter with approximately $22.6 million in cash and $1.9 billion in net debt. Net debt was approximately 5.2x the midpoint of our adjusted EBITDA guidance for full year 2017 or $360 million.

We also added to our family of brands with the acquisition of Back to Nature, which was announced in August of this year and closed on October 2, 2017, just after the end of the third quarter.

As Bob will discuss later in the call, we are very excited about this acquisition, and we continue to move our portfolio into on-trend categories. In this case, by adding a leader in better-for-you snack brands while also increasing our access to certain higher-growth customer channels.

We are pleased to announce that we're increasing our guidance for net sales for fiscal 2017 to $1.66 billion to $1.685 billion from $1.64 billion to $1.67 billion. This increase in net sales guidance reflects in part the Back to Nature acquisition, which is expected to contribute approximately $17.5 million of net sales in the fourth quarter.

We are also reaffirming our previously stated guidance for adjusted EBITDA of $352.5 million to $367.5 million and our adjusted diluted EPS of $2.03 to $2.17 per share.

We expect to achieve gross profit as a percentage of net sales of 29% to 30%, adjusted EBITDA as a percentage of net sales of approximately 21% to 22%.

We expect 2017 interest expense will be approximately $90 million, including cash interest expense of $84.5 million and interest amortization of $5.5 million.

We project 2017 depreciation expense of approximately $32 million and amortization expense of approximately $17.5 million.

And finally, we expect for 2017 an effective tax rate to be approximate 37.1%.

For the 3 quarters, we have generated $264.3 million in adjusted EBITDA compared to our full year guidance of $352.5 million to $367.5 million. This would leave us with a target of $95.7 million for the fourth quarter adjusted EBITDA to hit the midpoint of our range or $360 million.

As we look to bridge this number, please keep in mind that we generated $62.4 million in adjusted EBITDA during last year's fourth quarter. This leaves us an incremental $33 million to produce during this year's fourth quarter. We expect Green Giant to produce $20 million to $25 million of the incremental adjusted EBITDA due to 3 factors: an increase in net sales driven by the brands frozen, innovation products; a decrease in marketing expenses for the brand quarter-over-quarter due to a shift in timing of marketing expenses to the earlier part of this year; and finally, a beneficial comparison to last year's fourth quarter where we were out of stock to certain products during a key holiday period.

In addition to the incremental adjusted EBITDA that we expect Green Giant to produce, we expect the spices & seasonings and Victoria businesses, which were acquired during the fourth quarter of last year, to contribute an incremental adjusted EBITDA of approximately $8 million to $10 million as a result of full fourth quarter ownership in 2017. We expect the balance of $1 million to $2 million of the incremental EBITDA to come from the remainder of the portfolio.

Finally, we are reaffirming our long-standing commitment to our dividend policy. Pursuant to this policy, we have payed dividends every quarter since our IPO 13 years ago. Our dividend is currently $1.86 per share per year or approximately $124 million in the aggregate based on the current share count.

Now I'd like to turn over the call to Bob for more details on the quarter. Bob?

Thank you, Bruce, and good afternoon, everyone. While the current consumer environment in the industry remains challenging, as many of our peers have recently noted, we believe that we have a focused portfolio of brands that are relevant to today's consumers, and that we will continue to offer a compelling value proposition to our retail partners.

While there are always challenges in our industry, we are pleased to start the second half of 2017 with a positive year-over-year trends for the third quarter and a healthy outlook for the remainder of the year.

Our 28.3% growth in third quarter net sales benefited from a pair of key acquisitions in the fourth quarter of 2016. But also important and as Bruce said earlier, we were very pleased to report that our base business net sales grew by approximately 3.2% during the quarter.

Our third quarter results were driven by solid performance across much of our portfolio, with 50% of our brands generating net sales growth in the quarter and 10 of our brands generating net sales growth in excess of 5%.

Our largest brand, Green Giant, was one of our best performers in the quarter, led by our innovation products that are helping to reinvigorate the entire frozen vegetable category.

Net sales of Green Giant frozen products increased by 19%, the second consecutive quarter of double-digit growth on the strength of our innovation products, and we believe that Green Giant frozen is quickly reestablishing itself as a powerful brand in the frozen aisle.

Overall net sales of Green Giant increased 6.4% for the quarter, which is in line with our internal planning. We continue to expect great things from Green Giant in the fourth quarter of 2017 and in the years ahead.

In the third quarter of 2017, we announced that we were extending the Green Giant frozen line to include Green Giant Veggie Spirals in 3 varieties: zucchini, carrot and butternut squash. We expect to begin shipping these products in January 2018, and we have seen very strong retailer acceptance so far. We are also very encouraged by the feedback we are receiving from consumer testing.

Pirate Brands was another key driver of our performance for the quarter. As we discussed on our second quarter earnings call, we expect to benefit from the timing of certain promotional events with a key customer that had occurred during last year's second quarter and was scheduled to occur in the third quarter this year, and we did. However, Pirate Brands' 21% growth in the quarter was also driven by very strong back-to-school sales, new distribution and strong execution during the quarter.

We also had nice wins across the portfolio to round out the quarter, with Polaner, Underwood, New York Style and Cream of Wheat all showing incremental net sales growth of almost $1 million or more during the quarter. Obviously, not all of our brands grew during the quarter. For example, we saw a modest decrease in net sales of Ortega, although we strongly believe in the health and vitality of this brand over the long term.

Our spices & seasonings business has also been performing well and contributed net sales of $70.4 million for the third quarter and $200.9 million for the first 3 quarters of 2017.

Spices & seasonings is well on its way to exceeding our initial net sales guidance of $220 million for the year. While Victoria, also acquired in the fourth quarter of 2016, is expected to exceed our initial net sales target of $41 million for the year.

Now moving on to Back to Nature food acquisition, which closed on October 2. We are excited to add this on-trend better-for-you snack business to our portfolio. The Back to Nature's brand product offerings include non-GMO, project-verified, organic and gluten-free cookies, crackers and other snack products.

Back to Nature Foods also offers the SnackWell's brand of low-fat and no-fat snacks.

Back to Nature has been a pioneer in the better-for-you snacks food category, and we believe this brand gives us a bigger seat at the better-for-you table. We also believe there is a great opportunity to increase distribution nationally for this business as not all grocery accounts carry its products today.

In addition, our R&D and marketing teams are already researching brand extension opportunities. We expect Back to Nature Foods to contribute approximately $80 million in net sales and $70 million of adjusted EBITDA next year, and we anticipate being able to grow the brand over time.

Speaking of R&D, we have a very talented R&D team that will continue to innovate, and we expect to continue to launch a number of new items across our portfolio in 2018 and beyond. To help our R&D team continue that great work, we are building a new R&D and innovation center at our Parsippany headquarters. Construction is almost complete, and we expect the new R&D innovation center to open later this year.

And finally, on the M&A front, consistent with our acquisition strategy, we continue to search for opportunities to enhance our portfolio of brands and add stockholder value through accretive acquisitions. Even after completing 3 acquisitions in the past 11 months, we remain well positioned for future acquisitions and remain within our long-term comfort zone for leverage of 4.5 to 5.5x net debt to adjusted EBITDA. We also remain committed to our long-standing policy of returning cash to shareholders through the payment of dividends.

In closing, we are pleased with our results for the third quarter and expect the momentum to continue in the fourth quarter. We expect to see strong net sales growth and share gains in our Green Giant frozen products while also benefiting from a balanced performance for the rest of our portfolio.

Our 7 largest brands and our spices & seasonings business account for more than 75% of our net sales and 80% of our adjusted EBITDA. These brands, which include Green Giant, Cream of Wheat, Maple Grove Farms, Ortega, Pirate Brands, Victoria, Back to Nature and spices & seasonings brands such as Mrs. Dash are in categories that we believe are generally attractive and largely on trend with today's consumers. This focus allows us to manage the rest of the portfolio for cash flows while opportunistically deploying capital where we see opportunities to enhance our brands.

So while the current consumer environment remains challenging, we are happy with the portfolio that we have and believe that we are positioned to achieve our goal of flat to 2% net sales growth in our base business in both the near and long term. Consistent with past performance, we expect to successfully integrate the Back to Nature acquisition over the next few months.

We also expect that our base business net sales for full year 2017 will be positive. Therefore, as Bruce mentioned earlier, we increased our net sales guidance for the full year and reaffirmed our adjusted diluted earnings per share and adjusted EBITDA guidance. We will provide our guidance for 2018 when we release our fourth quarter and full year 2017 results.

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

(Operator Instructions) At this time, we'll go to Rob Moskow with Crédit Suisse.

Obviously, the sales here are better than what I had feared, and that's great news. I did have some concerns about costs and revenue into 2018. And maybe, first of all, did I hear you say that you thought the base business would grow in '18? That's the first question. And then secondarily, logistics costs, we've heard about contracts going up 5%, maybe even 10%. Can you give us any visibility for your business in '18? And is it something that you can manage through?

So we certainly think -- well, 2 things. Yes, answer our base business expectation for 2018, and we'll give a more formal guidance with our year-end call, but we expect it to grow overall, which includes Green Giant. So Green Giant is part of that base business. And yes, just like everybody else, logistics costs are real and going up, and that 5% to 10% number is kind of what we're hearing and what -- a little bit of what we're seeing. We can manage that. That's a number kind of worst case for us, give or take, would be $5 million. And we just have to manage through that. Sometimes, it's actually good when the whole industry is moving up, including key customers who also truck their products around from their distribution centers. And everybody kind of experiences that, and hopefully, you can ultimately pass price and/or save money elsewhere.

Okay. I mean, I was getting to a higher number than $5 million. Is that because maybe I've overestimated logistics as a percentage of your cost of goods? I mean, that's...

I think so. I think we're looking at $5 million, not much more than that overall. And certainly, all of us were seeing a little bit of that now, but like we were able to absorb what we saw on the third quarter and still report good results. So it's not a number that we're certainly another kind of brick on the load, but it's something that we can deal with and don't expect that to be a big -- we have other challenges as we go forward, and that's just one of them, and it's something we can deal with.

May I ask a follow-up? Well, maybe you can tell us about your other challenges. But first half of '18, is that going to be a very easy comp for you? And if so, what are the factors that make it an easy comp? Is it just the overall environment will normalize compared to first half of '17? Or is there anything specific that you're doing in the first half of '18 that can get you off to a good start?

Well, I think from the comp side, as we look at our business, we certainly have a lot of activity in kind of the piece of green -- the frozen Green Giant business growing very fast for us and certainly, going in the right direction. And we've really rolled over all the negativity on Green Giant with some of the lost distribution that we were rolling against in the first half of this year. And we still have some shelf-stable issues but not from the frozen, and the frozen is just growing very nicely. And then hopefully, on the rest of the base business, we had some one-off comps this year with just timing of large promotions like the Pirate's Booty scenario that hopefully, we don't have as we go into 2017. So hopefully, from a sales point of view, which drives bottom line, things should look pretty good for us in the first half of 2017 -- 2018 and hopefully, for the whole year.

At this time, we'll move now to Farha Aslam with Stephens Inc.

Green Giant, are you reaffirming that the brand should have sales of about $520 million to $530 million? And any color in terms of more detail on what level of growth we should expect for next year?

Well, we're going to hold off on that. I mean, growth is going to be very strong next year, but we'll give a little bit more guidance here when we do our year-end call. But yes, we're very comfortable in that range of our Green Giant, $520 million to $530 million for this year.

That's helpful. And then on Pirate's Booty and Ortega, could you just give us some color on the sustainability of Pirate's Booty into the fourth quarter and possibly into next year; and also, some color on exactly how weak Ortega was and your outlook for the brand?

So Ortega, we saw on Ortega, it was short a little over $1 million for the quarter, pretty much flat for the year. So the brand is rock-solid. We certainly have strong competition with our friends at Old El Paso, among others, but we have our fair share of that category and are actually doing well, and it's a good category to be in. Pirate's just had lots of upside. We talked about, at the end of the second quarter, the one issue we had, which is really promotional timing with a key customer that slipped into the third quarter. But in addition to that, we also knew we had additional distribution on Pirate's that was in place and some other programs with other customers, so we knew Pirate's was going to be really strong in the third quarter. We don't expect a 21% growth in the fourth quarter, but we expect Pirate's to continue to grow in the fourth quarter, also year-over-year. And if we're going to do 20%, that's great, but it won't be at that level because we don't have that onetime promotional flip. And we expect Pirate's to continue to grow. It's a key brand in our portfolio. It's a brand that resonates with consumers, especially consumers with young kids. It's a very meaningful brand in our portfolio that we see some real upside to.

Final question, in terms of general pricing, your ability to get pricing in this current environment and any pressure that you're seeing.

Well, like Bruce mentioned in his part, pricing -- we had negative pricing in the quarter of about $2.9 million. I would expect to see a $2 million to $3 million negative price hit in the fourth quarter also. Certainly, there is some pressure on pricing in certain categories. So we have lots of brands and lots of categories. Some of the commodity-driven category, certainly, our canned items on Green Giant, our canned Joan of Arc beans, et cetera, we're getting pushed on pricing there. We expect that to continue. But there's a general belief here when you talk about just general cost increase such as the whole -- the distribution cost increase that lots of companies are talking about now and experiencing, even though that we don't think it's a big hit to us, we think those are the kind of price increases that we should be able to pass on, if needed, if we can't save elsewhere, and we can't cut cost in different ways. So -- but if it's a major commodity move, we don't have any commodities we know of that are moving in a negative -- in a large negative fashion for us, we believe we can pass prices on those too, but certainly, more commodity-driven products with a lot of low-price competition such as canned vegetables and canned beans, taco shells on Ortega, a little tougher to move pricing because the competition is outselling cheap. But for most of our brands, we don't have that low-price competition, and we think that, if needed, we can move pricing. We don't see a major need on any major pieces of our business and concerns on costs in a big way as we go into 2018 that we have to be aggressive taking prices off.

We'll now move to David Palmer with RBC Capital Markets.

This quarter, your organic chips sales, they were up 3% versus about a 2% growth in the scanner data. And given all the potential areas of non-measured channel noise, including what you're doing with spices, with Sam's, and then you mentioned the dollar store canned veggie declined last quarter, I can only imagine that those 2 matching is maybe a coincidence or at least things going up and down away from what we see in the measured channel data. So looking ahead to fourth quarter, if we're looking at -- I think, we're looking at measured channel data that's up, some small amount, just trying to get a sense of what we should be thinking about beyond that measured channels data that will give us a sense of what your organic sales growth would be in the fourth quarter. And I have a follow-up.

Sure. I mean, we, obviously, are targeting fourth quarter sales to be up. So one thing to make sure you're correcting for when you're looking at the scan data is the Tone brand within that spices & seasonings where we did have a customer that switched to private label. And so that is one area at the scan data where it will show negative if you're not thinking through and giving us an incremental benefit. We show (inaudible), but you'll still see that in the fourth quarter.

So you're thinking organic sales would be up in the fourth quarter, just to be clear.

Absolutely. And what I said in kind of my comments, with a very strong third quarter here, we are now year-to-date, only down on our -- what we call our base business, 1.4%. We expect to take that 1.4% into a positive number by the end of the year, full year. So we're going to be up very nicely in the fourth quarter.

The guidance -- I mean, at least as we're implying -- as we're inferring from this, implying for the fourth quarter, it kind of feels like people's estimates for previous to this or towards the high end of that and the range is you -- as you left it, is still fairly wide. Is there something that we should know about variability that you left it at that wide of a range going into the fourth quarter that we should be thinking about?

Not from variability. I mean, we certainly moved the bottom of the range $20 million up to be more realistic. And when you kind of put numbers on paper, hopefully, we're on the high side of that range. But the very -- I mean, we already are through October. We know what those results are. We only got basically 9 weeks left in the year. We're not seeing anything that's going to blow up. Everything seems to be churning the way we expected. So there's not a lot of variability, as you know from our business, plus or minus that could change that dramatically in the quarter anyway. So Green Giant is going to continue to grow. We expect a number of the other base businesses to have a pretty strong fourth quarter also. Net-net, we're going to be up very nicely in our base business, and seasonings is going to churn along like it's been churning along all year. So from a sales perspective, we're looking at a pretty rock solid finish to 2017.

One quick one, on gross margin, you had, obviously, a very unusual last 12 months where the onboarding of the supply chain create a lot of noise, and now you're lapping that. But if you're going to get into a normal seasonal rhythm of your business, would the gross margins be below, average or above average? Right now, you're saying it's slightly below the year-to-date run rate for the fourth quarter. Is that -- and I'm wondering if there's an insight there about maybe selling more of the basic veggies during the holidays and that offsetting some of the scale of it being a high sales quarter. How does that going to work going forward? And I'll...

So -- we're at just kind of this 30.2% gross margin kind of year-to-date. That's kind of pretty much been what we've been tracking every quarter. So it's been fully consistent. But as you -- if you look at kind of gross margin in the fourth quarter of 2016, it was a little over 26%. So it does drop from the 30% range to -- in that 26% range in the fourth quarter, all driven because of Green Giant promotional activity for kind of Thanksgiving, particularly, but then through Christmas, which will net our gross margin down to kind of in that 29% to 30% that Bruce had talked about. But we look at very consistent gross margins with last year. And last year, we were at 26.4%, so it should be very similar in the fourth quarter of this year, and it's the Green Giant effect on our business in the fourth quarter.

But certainly, if you look back historically, you'd see 2014, 2015 gross margin in the same levels on an annual basis.

We will now move to Andrew Lazar with Barclays.

I guess, one key question for me is you raised, obviously, the sales guidance for the year, in part due to the addition of Back to Nature. You didn't change the EBITDA guidance at all for the full year, albeit I know it's somewhat wide range. So I'm just trying to get a sense of does Back to Nature, is it expected to contribute much in the way of EBITDA in the fourth quarter? Because if it is, then perhaps that means the underlying base business EBITDA is a little bit less robust. If it doesn't, then that's not so much of an issue. Do you see what I'm trying to get?

Not a lot of impact in the fourth quarter. Keep in mind that we just took the business on. We'll have it from one quarter, but there's some things that we're doing from the cost-savings standpoint, bringing that business on, including the office down in Florida. So really, you see the impact in 2018 when we talk to $17 million of run rate EBITDA.

And we had also said when we did acquisition, we think about 6 months to have that run rate EBITDA. We're very comfortable now as really 3 months from now, so beginning in January. Because we're basically eliminating their G&A effective the second week of January, which is why we're not going to show much EBITDA on Back to Nature at all in the fourth quarter.

Yes. Got it. That's helpful. And then, obviously, as you said, you're not going to really give guidance on '18, of course, until the fourth quarter call. But are there a couple of things that, maybe you can clarify, that we do know now that are sort of discrete contributors, if you will? In other words, I guess, how much left? We know what Back to Nature is expected to contributing incrementally on EBITDA. With respect to ACH and Victoria, try to remember how much we think those contribute incrementally in '18. And then beyond that, it would just be, obviously, whatever happens with the base business. Is that right?

Right. Well, Victoria and seasonings, we have for the full year of '17, so it's really just whatever we grow them is incremental. There's no -- so we've had them for the full 12 months in '17. We bought them at the end of '16, so there's no just pure acquisition and incremental growth from them.

So it's really just base businesses EBITDA growth and then, whatever obviously comes from Back to Nature?

Correct. Yes.

What we do have for both of the acquisitions from last year is the incremental pick up in the fourth quarter. That brings us to our guidance.

At this time, we'll move to Eric Larson with Buckingham Research Group.

A couple questions, and it relates kind of to the rollout of your spirals product, Bob. And I think last year, in the fourth quarter, when you've introduced your Riced Veggies, you've sort of underestimated demand. You didn't have the capacity or the inventory to meet the retailers' demand. And then again, that led to, I think, a purposeful increase in your inventories for Green Giant in the first half of this year. You wouldn't anticipate the same type of inventory build for spirals or anything such as that. And that may be is a good thing, but could you give us a little bit of thought on how the spirals rollout might take place in the first quarter?

Well, certainly, we are building spirals inventory now. We started building it toward the end of August, and so we are -- so we're fully ready and have capacity to support a very large launch and a very large hopefully brand addition. So that's not an issue. A lot of the inventory issue was some of the innovation last year, but it was more of us needing to build inventory because we didn't just have enough of the basics. But also build inventory in connection with closing down the former (inaudible) General Mills being added there at the end of September, which we're now out of. So we'll actually see a benefit on inventory reduction as we certainly go through the rest of this year and through the first half of next year versus what we saw this year. So we'll actually be taking cash out of inventory as opposed to building inventory over the next 9 months here.

Okay, good. I was going to ask the cash impact of that. Then just another follow-up on that. Your slotting allowances, I believe, took about 100 basis points out of your third quarter gross profit margin. Well, obviously, that -- well, I shouldn't say obviously, but you have the rollout of spirals. Will you have more slotting allowances impacting your fourth quarter and maybe into your 2018 gross profit margin as well?

So we'll certainly have, not in 2017 year, so not in the fourth quarter, but we'll certainly have slotting payments to be made on spirals in the first half of next year. But in the first half of '17, we spent most of our -- we spent a lot of slotting money also that were -- we front-loaded slotting last year as we filled out distribution for all the Riced Veggies and Veggie Tots, et cetera. So that will look almost identical. So once -- we've now gone through, and we'll have some benefits on marketing and slotting in the fourth quarter here this quarter that helps us versus last year. But once we get through this year end, the cadence of our spending for marketing to slotting and everything else will look very similar on a quarter-to-quarter basis in 2018 versus '17.

Okay. And then just one final question. Bob, I think the fourth quarter last year, I believe the fourth quarter captured the vast majority of the -- of that increased spend that you had for Green Giant. I don't know if you started that in the third quarter of last year. Did the third quarter this year include some marketing spend from Green Giant? Trying to get to an even cadence across the quarters. Did the third quarter include spend this year that you didn't have last year in Q3?

No. It's actually very consistent. And actually, this quarter was a little less than $1 million spend versus -- less than last year. As we roll into the fourth quarter, as Bruce mentioned, that's where you see the big spending reduction versus 2016.

At this time, we'll hear from Jon Andersen with William Blair.

Just sticking with marketing for a minute. I'm wondering if you can talk a little bit about your full year marketing spending plans. Are you still looking at about $90 million in total, and $20 million ends up kind of a reduction from gross to net and about $70 million below the line? But just wondering if that full year cadence, that full year level is kind of similar to what you previously thought.

That's correct.

Okay. And then the cadence of that, because the cadence has been different in 2017 than the cadence in 2016. As we look to 2018 and look to modeling the quarters in '18, are you expecting '18 to look a lot more like '17? Or is there some timing that you can talk to? Help us kind of think through the progression.

It'll look more like 2017.

Okay. Bigger -- one big -- bigger-picture question. The overall sales run rate for the company is you've doubled the size of the company since 2014 with Green Giant and the other acquisitions. I guess, I'm just trying to get a sense, maybe Bob, how you feel overall today about kind of the capacity of the organization, the execution capabilities of the organization. Obviously, this is a very strong quarter. Where are you in terms of just thinking about having the right resources and the capabilities to manage a business, which has doubled in size over the past 24 to 36 months?

Well, certainly, when I took over as CEO almost 3 years ago now, the goal was to build out this company and certainly, grow not only the top line and bottom line but to grow this organization. We've not only doubled the size of this business from a sales and kind of bottom line. We've doubled the size of kind of our corporate infrastructure. So from people expertise and sophistication that have come onboard through a new ERP system, all of those things are pretty much in place and moving forward to what I mentioned is a first in class R&D innovation lab, et cetera, that we're opening here in the next couple of weeks that we're all really excited by. So we're ready. We're ready to double our size again. So this organization is ready and structured to be ready to continue to grow through acquisitions. So feel really comfortable that we put in place an organization that can easily support a business twice, if not more, its size today.

We'll now move to Cornell Burnette with Citigroup.

I just wanted to know. Obviously, over the past couple of years, there's been some steady losses in distribution at the Green Giant brand as it struggled. But I was just wondering, over the past couple of quarters as the sales have really begun to tick up and turn the corner, if you can kind of dimensionalize, a, are you starting to see some of that loss distribution come back into play? And then over the longer term, perhaps what's the size of the opportunity in kind of reclaiming some of this lost share that you had in the past?

Well, I think from the frozen side of Green Giant, the answer is yes. I mean, certainly, all the innovation customers want it, and we're getting some of the core and really have stabilized what we call the rest of the core, and we see some really kind of even consumer takeaway growth where that is stabilized. When we bought Green Giant, we saw the opportunity in frozen. We knew it was going to be a tough year to 2 to kind of to get a pretty badly declining brand of flat to up. And we're -- today, we're sitting here going -- we feel really good about where it is and where it's going. And the real good news is, our competitors are growing, too, which is actually good for the category. The whole category is growing. So with us and our lead competitor here, we are moving the whole category. So Green Giant only has ups on frozen. It -- we have some difficulties on shelf-stable and challenges just because of the low price environment that shelf-stable competes in. That's just the challenge. But the future of Green Giant, this is a business that was, in total, kind of a $700 million business. It's going to take time. We -- but we see some big growth here over the next few years, if not longer, and really moving. First step is get it over $600 million again. It's going to take a few years. Next step, we'll try to get it closer to $700 million. But this is just tremendous opportunity. It's the right category to be in with today's consumer, it's vegetables, we're selling vegetables, which is better-for-you. It's certainly a category we're excited about being in. And certainly, a category that we have a lot more innovation coming, and there'll be a lot more innovation in the pipeline over the next few years, including more innovation that we'll launch here in 2018. So hopefully, it's all up, and it's all up for us and the whole category.

Right. And then, in terms of maybe some of the spending behind the brand. I think, in the previous question, you had answered that in the third quarter, you spent about $1 million on the brand less than you did the year ago. What's the expectation for the fourth quarter in terms of the year-over-year delta and spending behind Green Giant?

Yes. It should be about $15 million to our benefit. But again, year-over-year for the full year, it'd be a similar number.

(Operator Instructions) And at this time, we'll move to Rob Moskow with Crédit Suisse.

I think my question was actually answered. But I got one more question. Your sales growth this quarter, 28%, 25% from acquisitions. Operating profit growth is only up 8%. And I just want to make sure -- I know fourth quarter, it's all going to come back. But if I have to isolate this quarter, why would that relationship between the sales and the operating income growth be so different? Is it because of higher spending this quarter on anything?

Well, it's consistently the same higher spending that we've experienced all year long, which is kind of why our gross margin has been right around 32% for the whole year and EBITDA margin right around 22%. And as we took over this business in the fourth quarter of last year, we knew we were going be -- being up by our own in the frozen world, we knew our distribution and warehousing costs were going to go up pretty dramatically. It is something we modeled in when we bought the business, and we've seen that substantial increase. That's a number that kind of year-over-year has hit our P&L for about $18 million. All have been modeled in, and it's kind of part of what we've had to explain through these first 3 quarters. Fourth quarter, you don't have that negative comparison because we were on our own in the fourth quarter. We took over the transition of this business effective October 1 last year. So fourth quarter has that level of spending that's why EBITDA margins were much lower in the fourth quarter, et cetera. So the comparison is very different. So nothing new has happened in the third quarter versus second quarter versus the first half of this year. It's really just the modeled acquisition spending that we expected that when we compare ourselves versus what the seller was doing for us in transition in the first 9 months of '16, we had much lower spending than our actual. But it's all been in the numbers that I've talked about every quarter that our EBITDA margin of 21%, 22% is where we'll finish is where we've been tracking all year and our gross profit margin of right around the 30% is where we've been tracking all year. So really, no change in anything that's happened. It's just kind of the year-over-year comparison, and we're finally over the year-over-year comparison as we go forward.

Just plugging into numbers. I think you said that fourth quarter gross margin would be around the same 26.5%. If I plug that in...

That's last year.

Pardon me?

Yes. That's last year, yes.

Okay. If I plug that in, I get to a 29% margin for your year, not 30%. And 30%...

Correct. And that's what Bruce had said, between 29% and 30%. And when you plug that kind of a number, then you get into the low 29% range. Yes, that's correct.

We're going to hear again from Eric Larson with Buckingham Research Group.

Just a quick follow-up question for Bob and Bruce. If I take the mid-part of your EBITDA guidance for the year, just take the mid-part, maybe you got to move a little bit to the higher part, take out some -- take out your cash interest expense, maybe some cash taxes, your CapEx and dividends, it seems like -- and given your ratio that you like to pay out for cash dividends to shareholders, it looks like, Bob, maybe you could go to the board at the end of the year and maybe recommend that you have a small raise in your cash dividends. Is that -- are my calculations wrong? Or how would you respond to that?

Well, no. Well, your calculation is -- our cash generation after kind of our current dividend, give or take, $124 million is about $75 million after that. Yes, so there is money to -- so there's plenty of money to support our current dividend. At every board meeting, we talk about what we should do with the dividend. The board is committed to sharing cash with investors, but it's a board conversation. I think the most important part of your point is there's plenty of cash flow here to support our current dividend and any future raises we might want to do.

That will conclude the question-and-answer session. I'll turn it back over to Bob Cantwell for any additional or closing remarks.

Okay. Again, thank you for joining the call today, and thank you for all your support over the years. We certainly look to have a very strong finish to 2017 and a great start and a great year in 2018. Thank you very much.

And again, this does conclude today's call. Thank you all for your participation.