B&G Foods Inc (BGS) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the B&G Foods First Quarter 2018 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 today includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to the company's most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The company will also be making references on today's call to the non-GAAP financial measures, adjusted EBITDA, adjusted net income, adjusted diluted earnings per share and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release.

Bruce Wacha, the company's CFO, 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, selected business highlights and his thoughts concerning the outlook for the remainder of 2018; and Ken Romanzi, the company's Chief Operating Officer, will make some remarks.

I would now like to turn the conference over to Bruce.

Good afternoon. Thank you for joining us for our first quarter 2018 earnings call. Our first quarter results were generally in line with our expectations and supportive to our full year guidance that we communicated earlier this year. During the quarter, we generated approximately $432 million in net sales, an increase of 4.7% compared to $412 million in the first quarter of last year.

Performance remains on track for our recent acquisition of Back to Nature, and this business contributed approximately $20 million for the quarter, which was in line with our expectations. Our base business net sales increased by approximately $1.1 million for the quarter, driven by pricing, which is supportive of our full year target of a $15 million to $20 million benefit for pricing for 2018.

We generated $89.4 million of adjusted EBITDA, which, as a percentage of net sales, was 20.7%, $36.4 million in adjusted net income and $0.55 in adjusted diluted earnings per share for the quarter, all in line with our budget.

We generated $73.7 million in net cash from operations, finishing the quarter with $118.1 million in cash and net debt of $2 billion.

We made voluntary prepayments on our term loan facility of $125 million for the quarter, reducing the balance to $525 million compared to $650 million at the end of fiscal 2017. We made an additional $25 million voluntary prepayment on our term loan facility at the end of the quarter, further reducing our term loan balance to $500 million. We also paid $30.9 million in dividends to our shareholders during the quarter.

Our inventory reduction plan is ahead of schedule for the first quarter of 2018, and we have been able to successfully reduce inventory by $46.5 million to $455.4 million at the end of the first quarter compared to $501.8 million at the end of fiscal 2017. We expect to continue to reduce our inventory throughout the remainder of the year and expect to achieve the high end of our $75 million to $100 million inventory reduction plan by the end of the year.

Now I will walk you through some of the key drivers of net sales performance. We have come to expect big things out of our Green Giant frozen business, and this quarter is no different. Net sales of Green Giant frozen products were $94.9 million, an increase of 12.8% compared to $84.1 million in the year-ago period. Green Giant frozen products benefited from a strong launch of our new Green Giant Veggie Spirals as well as our Green Giant Riced Veggies, Green Giant Veggie Tots and our Green Giant Mashed Cauliflower, which were all launched throughout 2016 to 2017.

We had a very strong turnaround in the first quarter from Ortega. Ortega generated net sales of $37.9 million in the first quarter, an increase of 4.1% compared to $36.3 million in the first quarter of last year.

Cream of Wheat had another stellar quarter, with net sales of $18.4 million, an increase of 11.2% from $16.6 million. Victoria continued its strong momentum since acquisition, generating $11.8 million net sales for the quarter, an increase of 11% from $10.6 million.

Our portfolio of spices & seasonings brand, inclusive of the 2016 acquisition, and other brands such as Mrs. Dash was essentially flat, with sales in aggregate of approximately $86 million for the quarter compared to $87 million for the first quarter of last year.

Pirate Brands generated net sales of $21 million, down $4.6 million from the prior year first quarter. However, the decline was largely due to the timing of promotional activities, and in fact, we had a very strong April for Pirate Brands, where we made up for the Q1 shortfall. We saw some of these same timing issues last year when Pirate's had very strong performance in the first, third and fourth quarters but a soft Q2.

We are also encouraged by the consumption data, which showed an increase of scanner sales at retail of 7.4% over the 13 weeks ended March 31, 2018.

We had a series of pluses and minuses across the rest of our portfolio, ultimately contributing to base business net sales of $411.1 million or as mentioned earlier, an increase of $1.1 million compared to the first quarter of last year. And as I've mentioned earlier, on the call, Back to Nature continues to perform as expected. The business contributed approximately $20 million to net sales for the quarter, and we remain confident in our target of delivering $80 million net sales and $17 million in adjusted EBITDA for the business for the full year 2018.

We are also pleased to note that we added several key professionals in the B&G Foods family through this acquisition. In fact, these executives are not only playing important roles in the integration of the acquired business, but they are also taking on incremental responsibilities and adding value across the overall business.

First quarter gross profit, as a percentage of net sales, decreased from 29.4% in 2017 to 23.9% in 2018. Excluding the negative impact of $16.1 million of nonrecurring expenses, including the noncash accounting impact of our inventory reduction plan and acquisition-related expenses, including Back to Nature integration expenses, gross profit, as a percentage of net sales, was 27.7% for the quarter. The noncash accounting charges from our inventory reduction plan are driven by the allocation of certain fixed manufacturing, warehouse and other corporate overhead costs associated with inventory that had been purchased and converted to finished goods in 2017 and then sold in 2018.

We expect to see an additional $15 million of noncash charges or about $30 million in total for the year that will be incurred as part of the $100 million inventory reduction plan. The remaining 170 basis point decrease in gross profit percentage was attributable to industry-wide and anticipated increases in freight expenses, which were partially offset by procurement savings and a decrease in warehousing expenses, and an increase in net pricing. While freight costs are expected to remain high throughout the year, we have plans in place to offset these costs through our freighting strategy as well as other cost savings initiatives that Bob and Ken will touch on later in the call.

SG&A expenses decreased $5.9 million to $42.6 million in the first quarter of 2018 compared to $48.5 million in the first quarter of 2017. The quarter benefited from a decrease in acquisition-related and nonrecurring expenses of $5.4 million, reduced customer marketing expenses of $1.8 million and reduced warehousing expenses of $0.7 million, partially offset by increases in all other expenses of $2 million.

Expressed as a percentage of net sales, our SG&A expenses improved by 190 basis points to 9.9% for the first quarter of 2018 from 11.8% in the first quarter of 2017.

Adjusted EBITDA, although down from previous year as we managed through industry-wide increases in freight costs, finished at $89.4 million, generally in line with our expectations. Adjusted EBITDA, as a percentage of net sales, was 20.7%, which is in line with our full year estimate of 20% to 21%.

Moving quickly through the balance sheet. We finished the quarter with leverage at approximately 5.8x net debt to pro forma adjusted EBITDA, with approximately $118 million in cash. As I mentioned earlier, we generated $73.7 million in cash provided by operating activities, and we prepaid $125 million in term loans during the quarter. We reduced inventory by $46.5 million and finished the quarter with $455.4 million in inventory compared to $501.8 million at the end of fiscal 2017.

We remain firmly committed to maintaining our dividend policy. At $1.86 per share, our current dividend yield is more than 8% based on today's stock price. We paid $30.9 million in dividends to our shareholders during Q1 and another $31 million earlier this week.

Now I'll walk through our guidance for the remainder of the year before turning the call over to Bob, so he can provide a little more color on some of the key drivers of quarterly performance and the remainder of the year. We are reaffirming our net sales guidance. We continue to expect net sales for 2018 to be in the range of $1.72 billion to $1.755 billion, which includes the full year impact of the new FASB revenue recognition standard. We are reaffirming our 2018 adjusted EBITDA guidance of $347.5 million to $365 million, and we are reaffirming our 2018 adjusted diluted earnings per share guidance of $2.05 to $2.25. In addition, for those managing your own models, we project 2018 net interest expense of $110.5 million to $115.5 million, including cash interest of $105 million to $110 million and interest amortization of $6 million. We project 2018 depreciation expense of approximately $36 million and amortization expense of approximately $18.5 million.

We updated our expectations for the impacts of the tax reform legislation, which we believe will have a greater than originally expected benefit to our business. We continue to expect an effective tax rate of approximately 25% in 2018, and we now expect our cash taxes for 2018 to be less than $15 million. We continue to expect approximately $50 million to $55 million in CapEx during 2018.

Based on the midpoint of our adjusted EBITDA guidance, we expect that our adjusted EBITDA, less CapEx, cash taxes and cash interests, will be approximately $175 million. In addition, we expect our inventory reduction plan to positively impact cash by an additional $75 million to $100 million before dividends.

And now I'd like to turn the call over to Bob Cantwell, our President and Chief Executive Officer.

Thank you, Bruce. And thank you to the audience for joining our call today. As a reminder, when we laid out our vision for 2018 earlier this year, we expressed our belief that during 2018, we would return to the modest growth, stable margins and the strong free cash flow generation model that the investment community has come to expect from us ever since we became a public company in 2004. We know that freight costs have increased for every company that puts anything on a truck, and we were -- we are expecting these costs to remain elevated throughout the year. This is how we built our budget for the year. We hope that we were -- are wrong and that these freight costs come down sooner. And we also hope to be more efficient than our competitors. But we have planned for these costs to be with us for some time, and we have various levers at our disposal to help us deal with these costs.

The first lever is pricing. As we told you last quarter, we have communicated price increases across the majority of our portfolio to all of our customers. These are not large increases, and they are not just focused on a couple of unique categories. Instead, we have elected to go with a broader approach. In general, our strategy does not appear to be different than the majority of our competitors, who are also wrestling with costs.

Whether these competitors are selling frozen vegetables, canned vegetables or jars of salsa, they appear to be raising prices for their products in some form or fashion. We communicated our list and trade promotional pricing to our customers in February, and we began to see benefits of these pricing actions in March. We expect to see these benefits begin to ramp up in the second quarter and expect to see the majority of the benefits in the back half of the year. We anticipate the full year 2018 benefit from lifts in trade promotional pricing to be a positive $15 million to $20 million.

The second lever at our disposal is on the cost side. Ken will walk you through some of our cost savings initiatives in a few minutes, but we already identified and have begun to implement several opportunities to reduce costs. Some of these include procurement savings on raw materials and other purchasing efficiencies as well as other opportunities to reduce costs by reducing our inventory, by optimizing warehousing and distribution centers and finally, by taking a better look at the way we go about managing our freight and logistics network. We believe that there are real opportunities for us here, and we are already seeing some of the benefits from these cost savings plans.

We expect the combination of our modest price increases and our cost-cutting efforts to offset the increased costs from freight that are impacting us and the entire food industry.

Now before I ask Ken to walk you through some of these initiatives. I would like to provide a little more color to our performance for the quarter and discuss some of the key business highlights that we are so excited about.

We grew our net sales in the quarter by 4.7%, which was in line with our forecast for 4% to 6.5% growth for the year. The majority of the increase was due to the successful integration of our newest acquisition, Back to Nature. But our base business also performed well and was positive for the quarter, with a slight benefit from our price increase implementation. In fact, based on Nielsen, consumption data for the quarter showed a 3.4% increase in dollar sales and a 1.8% increase in units, which is the result, in part, of our ability to shift our portfolio over time to one that can drive modest growth. Over the last 52 weeks, consumption data for our portfolio was up 2.4% in dollar sales and 1.1% in units when compared to the prior 52-week period.

Bruce mentioned earlier that we had another strong quarter for Green Giant frozen, our largest brand. This is an understatement. Net sales of our Green Giant frozen products increased by 12.8% in Q1 2018, marking our fourth consecutive quarter of double-digit increases in net sales of Green Giant frozen products. Scanner data for the same time period actually shows an even higher number, up 17.2% at retail for the quarter. Our efforts are helping to grow the category, with frozen vegetables continuing to be one of the hottest areas in the grocery store and category consumption being up 7.7% in the quarter.

As a brand leader, we outperformed the category and added 1.2 points of market share in March versus the year-ago period. We have now grown market share for 15 consecutive months. Based on Nielsen's scanner data, Green Giant frozen remains one of the 2 fastest-growing brands in the frozen aisle. As noted in the May 2018 issue of Consumer Reports, Green Giant Riced Veggies SKUs received the top 4 score in Consumer Reports' ranking of top frozen vegetables.

The key driver for our growth in frozen vegetables is the special launch and adoption of our new innovation products, which now include Green Giant Veggie Spirals, Green Giant Riced Veggies, Green Giant Veggie Tots and Green Giant Mashed Cauliflower. Green Giant is offering consumers new ways to consume vegetables at home, and they are responding positively to our products. It is still early days for Green Giant Veggie Spirals, our newest innovation launch, but we are very excited by the response from consumers and the enthusiasm by our retail partners in carrying these products so far this year.

Looking across the rest of our portfolio, we now have a spice & seasonings business, that in the aggregate, including our legacy brands and the spices & seasonings business we acquired in late 2016, generated nearly $90 million of net sales across a number of brands for the first quarter, which is in line with last year's first quarter and we believe is on pace to generate approximately $350 million in net sales for the year.

We are also very excited about the turnaround in Ortega thus far in 2018, with net sales up 4.1% in the first quarter, and we remain very optimistic for the rest of the year.

Pirate Brands was down for the quarter in net sales, is showing nice mid- to high single-digit gains in consumption data at retail and is off to a strong start in the second quarter. Additionally, we are excited about an upcoming Disney marketing tie-in around the new Incredibles 2 movie, which we expect to positively impact Pirate Brands' performance this summer. And as Bruce said earlier, we had a series of puts and calls across the rest of the portfolio that generally balanced outperformance.

As we think through the rest of our financials, we are pleased to note that the quarter came together as planned with adjusted EBITDA, adjusted EBITDA as a percentage of net sales and adjusted diluted EPS all in line with our budget in support of our full year guidance. And we are very excited by the progress we have made with our inventory reduction plan.

We set a target to reduce inventory by $75 million to $100 million this year and stated in our last earnings call that we expect to begin to achieve these goals starting with Q1. And we successfully executed on this goal, reducing inventory by more than $45 million in the quarter.

We also generated net cash provided by operating activities of nearly $75 million, which is more than 2.5x our dividend payment for the quarter.

As we said on the last call, we are very much in a deleveraging mode. We have already voluntarily prepaid $150 million of term loans this year and expect to continue the use of cash we generate to repay debt throughout the remainder of the year. We also remain committed to our long-standing dividend policy of returning a substantial portion of our excess cash to our shareholders.

Additionally, as previously announced, our Board of Directors authorized a $50 million share repurchase program at our last quarterly board meeting. Due to the timing of the quarterly board meeting, we received the authorization just as we were entering our quarterly blackout period and therefore have not yet purchased any shares under the repurchase program.

But we are always looking to optimize our capital structure. And with our stock at these levels and a more than 8% dividend yield, repurchasing our stock is a very compelling proposition.

Before we go to Q&A, I would like to ask Ken to briefly describe some of the cost-saving initiatives that we are beginning to execute on. Ken?

Thanks, Bob. As Bob mentioned earlier, we're very excited about our portfolio, driven by the brands and product categories that we added to our business over the last few years. These brands had given us a much better top line trajectory than we've had in the past. And quite frankly, our top line trajectory is better than some folks in the industry think we have today. And while growth is tough to achieve for any food company in today's environment, we think we're moving the product line in the right direction.

However, there are other ways for us to add value to our company in addition to sales growth, and we're spending a lot of time and effort on the cost side of the business doing just that.

Over the near term, we're looking to see 2 percentage points in our $1.2 billion of cost of goods sold or approximately $25 million annually. And we've already identified 7 projects that are beginning to generate results. Our inventory reduction plan is a great place to start. There were valid reasons for the increase in inventory last year, but we had moved cash to this need now. We are fortunate to have been able to build a team that focused on streamlining our operations so that we can reduce our inventory level without negatively impacting our ability to service our customers. This reduction has a couple of benefits. Not only are we freeing up cash to optimize our capital structure, but we are also saving money. The inventory reduction is enabling us to consolidate our warehousing footprint and eliminate outside temporary storage facilities. As a result, we expect our full year warehouse savings to approach $5 million this year alone, and we're starting to see some of these benefits in the first quarter.

Separately, although freight costs are up industry-wide, we are aggressively identifying ways to save money on freight. Some of this is just being smarter about how we ship. For example, better utilization of trucks, using rail when appropriate and utilizing customer pickups to reduce our reliance on going outside our contracts and into the very expensive spot marketplace. But we're also realigning our distribution network to better match our new customer footprint. This one involved opening new distribution center in California in the fourth quarter this year that will move our inventory closer to our West Coast and Southwest customer warehouses, reducing mileage and costs of that most costly last mile while also providing better customer service. This is an option that just didn't exist for B&G a few years ago when we were more of a regional business. But now with $1.7 billion in sales and a robust national footprint, we're better able to take advantage of opportunities such as this. We believe we will begin to realize benefits from this new distribution center realignment in the fourth quarter this year and will ultimately deliver another $5 million in savings annually.

So as Bob said earlier, we moved quickly to protect our margins, with a modest price increase, smarter procurement strategies, to offset a portion of the cost increases we're seeing with freight. But we're also happy to report that we're working against many other levers to become more efficient.

I'd like to now turn the call back over to Bob for his closing remarks.

Thanks, Ken, and thanks, Bruce. As I said earlier, it's a pleasure to sit here today and report a solid first quarter to our investors. We were able to grow net sales and largely maintain our profitability in a challenging environment. More importantly, we had very strong cash flow performance, which is supportive of our efforts to generate returns to our shareholders through our commitment to a healthy dividend as we simultaneously delever our balance sheet. We look forward to executing on our stock repurchase program, and we continue to actively monitor the M&A markets, searching for the right opportunities to further develop our portfolio.

With that, I would like to begin the Q&A portion of our call. Operator?

(Operator Instructions) And your first question will come from Brian Holland with Consumer Edge Research.

A question for you on the top line. I guess this is going back 1 quarter to the commentary you gave around the guidance. I guess I want to confirm that we're still thinking about the composition of organic growth in 2018 as being a balance of modest volume and price growth. And if that's the case -- and obviously, you're sort of on that trajectory in Q1. In Q2 is when I think we talked about actually starting to see more of that pricing come through. I guess just in this environment, thinking about the historical relationship between price and volume in your own business and then the complexities here, just if you could walk us through, again, the components of that and what would give you the confidence in getting both. And I understand albeit modest pricing, but pricing and organic volume growth.

Okay. So as we've talked about and maybe a little bit here, the plan for the year was approximately a 1% volume increase, that's the 15 -- 1% pricing increase, that's the $15 million to $20 million we talked about in the script, and approximately, a 1% increase on the base business volume. So we have plans in place, and we have brands led by Green Giant, Pirate's Booty and brands like Ortega, among others, that will be the drivers of that volume growth. And certainly, you saw from the first quarter what Green Giant was able to do versus prior year, up substantially in frozen. So -- and again, the pricing between list price and changing some trade programs is really not moving price on shelf, for most of our items, more than $0.10 at retail. So these are very minor price increases to generate $15 million to $20 million. So we don't see volume concerns against that. And we just have strong movers in key brands and a key part of our portfolio that we expect to achieve, that 1% organic growth, as we head through the rest of the year.

Okay. And just a follow-up there, just a semi-related question. You talked a bit -- I appreciate the color around Pirate Brands. But the volatility there, where a couple of quarters ago, we were growing high teens and now we're kind of declining high teens, and I get the nature of the category. But do we get to a point where those bumps smooth out, and how do we get comfortable with kind of what the sustained sort of base-level sustainable growth is sort of for that brand? And then just a separate housekeeping one and then I'll turn the call over is I noticed that you had the inventory reduction, which we talked about during the call, and you took it out of the GAAP -- or you took it out of the non-GAAP results. So I'm just curious why that was, just understanding the mechanics behind that, and how long or how much more we can expect for you to incur there over the course of the year. Any color you could give would be appreciated.

Okay. So first, on Pirate's. Pirate's did about $90 million last year in sales. You certainly have seen consumption trends continue to rise. The only issue you have with bumps is there is a key customer or 2 that drive a lot of snack volume in this country, and you run programs and you tend to not get programs every quarter with those customers. And depending on the quarter you're getting it, it really changes the sales from 1 quarter to the next. So we had this issue last year with that customer, where our program was moved from the second quarter that was done in 2016, to the third quarter in 2017. So we only had a shortfall in the second quarter and a great third quarter and just a great year for a brand that's going to continue to grow for us. And really, what you saw in here is the same thing. First quarter of last year, we had a program that we did not repeat this year, that has all come back to us here already in the second quarter. And Pirate's, as a brand, through kind of April here, is now up year-to-date for us. So there is a little bump just because of the nature of a key customer or 2, who really drives tremendous volumes in snacks, and that just doesn't go away too soon. I mean, you're going to continue to see that, and if we happen to have programs year-over-year in the exact same quarters, you won't see the bump. But negotiations with the retailer sometimes moves those programs. But Pirate's is a rock-solid brand that we expect to continue to see the growth that we've seen in the last few years. On the inventory...

Well, I could, Bob.

Sure.

This is Ken. We're very bullish on Pirate's. Bob's comments are right on. I mean, you have to look at Pirate's on an annual basis because it shows terrific growth year in, year out. We are very bullish because, number one, it's in a very healthy part of the snack category, better-for-you snacking. The Pirate's Brand we're in distribution is the fastest-turning better-for-you snack brand. And that's the upside potential because we believe we have a lot of upside potential in distribution. When you look at the top 4 items, we have far less the national distribution on our top 4 items. So gaining new distribution across that, the top-selling items of Pirate's Booty, a very unique products in the marketplace, is why we're so bullish. So everywhere we put it, it turns very well, better than the competition. And it's just -- it's not as ubiquitous as you might expect from a large snack brand. So that's why we're so bullish on that business.

And in answer to your second question, we finished the year with $500 million in inventory last year, at the high end of our expectation tier, and we're heading towards that. We're looking to reduce inventory $100 million this year. That's 20% of that value. In that value, you have fixed cost items such as fixed warehousing costs, fixed manufacturing costs, fixed corporate overhead costs, that are rolling out of that inventory as a onetime event. And there was about $15 million in the first quarter, when we kind of got halfway to our goals, reducing our inventory to $46 million. We expect that number to be another $12 million to $15 million, most of that happening in the second quarter because we expect another large decrease in inventory in the second quarter and then a little dribs and drabs maybe in the third and fourth quarter. But pretty much all of this onetime charge flows through the P&L by the end of the second quarter, truly a onetime event as we really restructure our business and kind of take a 20% chunk out of our overall inventory and take that cash to the balance sheet.

And moving on, we'll hear from Bryan Hunt of Wells Fargo Securities.

I was wondering, you've had so much success with Green Giant frozen, and retailers, a lot of the larger ones, are doing resets, kind of as we speak. Is that part of your bullish thesis behind growth in that brand for the upcoming year? Or just can you talk about maybe where you're gaining shelf on resets that you've seen so far this year?

On Pirate's?

Yes -- no on Green Giant...

I think that was Green Giant.

Or across the board.

So the specific question was...

And resets that have been done year-to-date. Looking at your portfolio, can you talk about significant incremental gains that you're seeing anywhere?

Well, Green Giants -- every time we come out with new innovation, we're netting out with more shelf space. So if you look at the product line over time, every new product from late 2016 introductions to 2017 introductions, we saw a new shelf space, and we're seeing new shelf space now with Veggie Spirals. So we've had unique acceptance, and that's not fully launched yet. We have some customers that launched it in January, all through the first quarter, and we still have a bunch of customers that are continuing to launch new -- their new levels of distribution in April and May. So I think by full -- by the half year through, we should have most of our new distribution on Green Giant, and that's why we're bullish on Green Giant trends going forward.

Right. And the other thing, just to kind of add to that, and we didn't talk about it in the script, Veggie Spirals are rolling out, as Ken said, and will be in full distribution here over the next few months but has added tremendous distribution as we speak. But we also have more to come. There's more innovation coming in the second half of the year, just like we've done now in the last 2 years that we've talked to retailers about some, and they are waiting and anxious for our new items. So...

Yes, there's a lot of our portfolio that you might expect don't have a lot of distribution upside, but there's a lot of our portfolio that does. So Victoria is another one. Victoria's got tremendous opportunity. The premium pasta sauce category is growing; again, very small footprint mostly in the northeast on Victoria, but we are gaining distribution in that business as well. So -- the Pirate's Booty, as I mentioned. And all the reset -- and it's tough to tell you what quarter that will hit because all the categories reset in different quarters, and they're all over the map. So we're in a constant focus of distribution on the items that performed well in their home markets and looking to expand distribution. In some cases, people might say, for instance, Victoria is a regional brand, but it does have national distribution with some of our major customers. So there's a lot of white space to fill in on these brands that have a lot of growth potential.

And the next I mean, if I went back to the script from last quarter, you all said that seasonings and spices was a little over $300 million and now you're discussing a $350 million business for this year. That's a good solid 15% growth. Can you talk about what's driving that?

Yes, so just to be clear, when we're talking about a business with $350 million of sales, that is the combination of the business that we acquired in late 2016 as well as the brands that we already had in our portfolio, such as Mrs. Dash. Good growth. Unfortunately, this is not 15% every single quarter.

Right. So our spice expectations, great category to play in, the category we want to play in and hopefully to continue to acquire other acquisitions in that category. But it's a category that is growing 1%, 2%, 3%. We're going to grow with the category, hopefully outperform in certain areas. So this $350 million is all -- we had a substantial spice business in our portfolio in addition to what we bought. That's just the total of what we really have today and with growth kind of a couple of percent.

And then my last question is, Bob, when you look at M&A opportunities out there, I mean, if you look at your own stock and it trades at 10x EBITDA and you eliminate the dividend as well when you buy back your own stock on those shares. So when you think about buying back, making an acquisition or buying back your own stock, kind of where would you in the current valuation environment put those opportunities?

Oh, no, I get the point. I mean, certainly, the math on buying back stock is extremely appealing today. So I hear that, and it is a -- we don't want our stock at this price. We think this -- the stock has been driven down. We didn't have the greatest results in '17, but where the stock is trading today is just not where it should be. And our performance, as the quarters go on, will hopefully change that as people see consistent B&G-like performance. But we're still -- we're about acquisitions. We're about absorbing acquisitions into this organization. We're extremely good at that. So we're going to look at both and understand -- understanding from a balance sheet perspective today, it certainly makes sense to buy back stock. Hopefully, our price starts going up in the right direction. But we want -- we're going to keep looking, and we're certainly going to pay the way B&G pays for acquisitions, if something comes along that makes sense for us. I think we've been very disciplined forever on that. And we understand as hopefully everybody else who looks out in the industry, as their multiples have traded down a little bit here, that prices that should be paid for things need to get closer to how B&G has bought things in the past. So I think tuck-in acquisitions that fit B&G, if one comes available, we strongly have to consider that. But in the meantime, we're going to look at our balance sheet in the right way and certainly, repurchasing stock is something we have to consider at this point.

From Bank of Montréal, Ken Zaslow.

So I have 2 questions. One is -- can we just review the cash flow and your dividend? Where -- the last question is your thinking about acquisitions. But clearly, there are concerns about you and your ability to pay your dividend. So is there -- what is -- what do you think is the risk that you're paying your dividend over the next year? It also sounded like your cash taxes is actually going to be lower. Does that provided another -- how much does that provide in terms of additional cash? And can you just give us a totality of your cash picture and how much...

Sure. Yes, sorry. I mean, sure, and Bruce talked about it in the script. If you take the midpoint of our EBITDA guidance less cash interest, CapEx and cash taxes, we generate $175 million there. On top of that, we're looking at an inventory reduction plan of upwards, at the high end, $100 million. And we really expect to achieve that at this point. It's about $100 million on top of that. So we're going to generate upwards of $275 million this year, and our cash dividends of about $125 million. So plenty of room. There's no risk to the dividend. It is, from a board perspective, a very important part of our model. And we are focused on cash flow here and cash flow to drive balance sheet to allow us to continue to do the right thing with our balance sheet, whether that's an M&A or buying back stock, et cetera, or continuing to pay down debt, but also to have that cash available at all times to pay dividends. And we've certainly -- we -- internally, it's not a question that even comes up because we know that there's no issue with us paying cash dividend. I get confuse sometimes with the external concerns on our cash dividend. We're a major cash generator, and the dividend is a small piece of our net cash generation. Bruce also mentioned cash taxes. We expected cash taxes to be $15 million this year. Actually, that number is going to be lower. It can only go to 0, and so it's got to be somewhere between 0 and $15 million. So we're going to be paying mid- to high single digits in tax this year. So it's a really low number. As you think about midpoint of our guidance of $352 million of EBITDA or so in the 350s, we're going to be paying cash taxes of well less than $15 million. So that's all good.

And there's no option of you needing to raise equity to do any sort of payment for your dividend in any way. Is that fair?

I don't know how you can structure that math, no.

Yes, so no issue with dividends. Most -- from our debt side, our debt -- the majority of our debt is fixed. We have $500 million left on our term B loan. There's no payments due on that until the end. But in reality, based on our cash generation, we probably continue to pay some of that down, too. So plenty of cash, no issue, and honestly, a conversation that doesn't come up internally here or at the board. I mean, it doesn't take the board more than a couple of seconds to approve the dividend because that's part of our model and it's part of the expectation of management here and our entire board.

And I just have one follow-up on the business. Ken, can you talk about your savings program? But how much will be net savings versus just gross savings? And how much is -- basically, how much is going to fall down to the bottom line, if that helps us?

I think it's premature now to talk about our long-term program and how much [will actually] fall. Some of the cost savings obviously has to offset other inflationary factors, like wage increases and the transportation issues. So I just outlined for you our short-term focus of what we're trying to do. And when I say short term, I mean, over the next year or so. But what -- we'll be looking for a formal program to reduce cost of goods, some of which will fall to the bottom line, some of which will be used to offset the inflationary pressures like every company has.

And the other thing I just want to say on that is as other companies are talking about inflationary pressures, our inflationary pressures are really coming from what Ken mentioned: freight and certainly wage and benefits. We're not seeing inflationary pressures from our net of commodities and packaging, et cetera. So because of just -- because of the diversity of what we're in here, we don't have that pressure that other people have, and we have actually a net positive on that. So our cost structure is getting hit by freight, get hit by a little bit from wages and things like that, but we feel very comfortable with everything we got in place with more than offsetting that.

Okay. And my last question is once you get to 2018 numbers, can you talk about what your growth algorithm will be thereafter? As you now know freight -- you know all the cost structures. I don't think anything is going to change [this early]. Can you just lay out the 2019, 2020 type of plan of how one should think about it and long term growth. I'll leave it there.

Certainly hard to give that guidance today. But I think as we've always said, we expect because of the mix of our products, and we've got some growth engines now in that mix, that we can generate 1%, 2% organic growth top line. That doesn't generate a whole bunch of bottom line. A 20% EBITDA margin, 21% EBITDA margin, that's what would drop to the bottom line. I think from the cost side, we'll have much better visibility as the quarters go on as to where that goes. And I hope you're right that the freight cost we're experiencing this year doesn't compound on itself and grow out further in 2019. So I hesitate on that yet because I don't think we -- we totally know that that's not the case yet. But certainly, we do know what it is this year. We haven't been surprised. We know what it's -- we know what to expect for the rest of the year. But we have some real good cost-savings initiatives that hopefully can drive some better bottom line performance organically as we go forward, and we'll talk about that more as the year goes on. It's just little too early as we're putting some of those cost initiatives together on where that's going to come from and the timing of that.

Next, we'll hear from Cornell Burnette with Citi Investment Research.

Just wanted to go back to the cost side a bit. You did highlight on the call that there's about 2% of COGS or $25 million of kind of annual cost savings that you see in the near term. Just wanted to get your take on basically how much of those gross savings should we expect in 2018. It sounds like you get some of them but not all of them, but I wanted to make sure.

So in 2018, I think what you clearly should expect is the warehousing that we articulated of $5 million. And as we get to the back, probably, quarter of the year, we'll begin to see some benefits from the realignment of our distribution centers and building out a California distribution center. Those are the big drivers probably in 2018, and we'll start to see some of the rest 2019 and beyond.

So I would think about kind of '18 kind of cost savings somewhere in that $6 million to $7 million range. And then in '19, I should think about kind of getting the whole $25 million. Is that what you're saying?

Yes. I don't know that I'd say the whole $25 million in 2019, but I think it's a medium to near term. And then as we think about 2018, we felt very comfortable with the 20%, 21% area EBITDA margin that we discussed. And certainly, some of those cost savings are a part of that number.

Yes, I think kind of what we're trying to get to here is we believe longer term, we can start improving kind of the EBITDA margin from where we are today, assuming no other major cost increases come at us in a big way like freight did to this industry in kind of the last 1.5 years. So we'll have much better kind of trajectory on that latter part of this year as we talk about how these cost savings can come in over the next few years and how that can drive margin improvement overall.

And then into near term, I think, in terms of input cost pressures, I believe in the last quarter you identified about $20 million of input cost inflation this year. First off, is that still the case?

Yes, and truly, that input cost inflation, right around that, that is kind of that freight costs. I mean, that's really the majority of that input cost inflation.

And so to kind of get comfortable on kind of meeting the EBITDA margin targets for the year, are we just saying that, look, you're looking for basically $15 million to $20 million from pricing. So pricing, if you get at the high end of it, in and of itself should be enough to offset inflation, and then kind of layered on top of that, you have these incremental cost-savings opportunities that you didn't have in the past. And so I'm just trying to figure out here, is that kind of what gets you comfortable that you can indeed kind of see flattish margin this year when all is said and done?

Yes, to be clear, we're looking at cost savings this year to offset that inflation for margin-neutral outcome.

Yes, so we're very comfortable that in our guidance of what we talked about and what we performed at in the first quarter is what you should see kind of for the full year, in that 20%, 21% EBITDA margin range.

Okay. And lastly, you spoke a little bit earlier about kind of what the top line looks like this year between price and volume, and I think you said think about like 2 points of organic top line, got a point of price, maybe a point of volume. But just kind of the -- if you look at the range on where numbers are at in terms of the EPS range, would it be safe to say that kind of cadence of that 2-point type of organic growth is really what's required to get to the top end, and then at the bottom end, it's more of kind of like flat organic growth where perhaps there's a point of price, but at the same time, volume is down kind of a point? So what I'm getting here is to get kind of within the range, even if you see a point of volume down for each point of pricing you get, net-net, that, that can still get you to where you need to be within the range that you've outlined for this year.

Yes, Cornell, that's exactly right. The 4% to 6.5% top line range is 4, 4.5 points of Back to Nature and then a point of volume and price to get to the high end of the range.

From RBC, David Palmer.

If we could maybe touch on the fundamental stuff, the sales and EBITDA drivers and how we will net through the year, just trying to roughly gauge how these things will flow. You mentioned the pricing, $15 million to $20 million worth, and I think you said $1 million of that happened in the first quarter. I don't know if I caught that right, but a de minimis amount. Is that correct?

Yes, there was $1.1 million in the first quarter, and that was just some freight efficiencies and part of that pricing is changing some trade programs. So it was not list price changes yet. That happened in the second quarter.

And then it sounds like Pirate's Booty promotion shifted out of the first quarter perhaps into the second quarter, but I would imagine some Easter-related sales moved up into the first quarter on other parts of the business. How should we think about that?

So the only large Easter-related piece of our business is kind of what Green Giant more than anything else, and a lot of that relates to the Green Giant canned business, some frozen, but more for the Green Giant canned business because we're not the bigger commodity vegetable frozen guy. So buying cans of peas and corn certainly helped us in March. So that did move a little bit. Outside of that, there's not a lot of our businesses. There's a little bit there on corn and jam and jelly business, but there's not much movement in the -- for Easter that's really meaningful.

Also, Easter was in mid-April last year and April 1 this year. So there wasn't that big of shift since most of our shipments occur a week or 2 before the holiday. So there was not much of a shift in Easter shipments.

I mean, so net-net, your -- it's not like there was a major shipment or promotion mismatch between 1Q and 2Q that would shock one quarter and the other as you see it?

Yes, not much, really just Green Giant canned business that showed really pretty good performance here, only down less than $2 million for the quarter. Some of that was a little bit of a benefit of the Easter shift. Outside of Green Giant canned, there's nothing really of any magnitude here that kind of moved the needle in any real way, yes.

And then going through rest of the year, obviously, we've had a cross current in your Green Giant business between canned and frozen. And this year, I would imagine you're going to have the benefit of some of these spiralized frozen veggies. However, you're going to be lapping some of the success that you had in veggie rice and tots. So how should we think about the net of those things? And of course, I guess, you're going to have some -- the canned business coming up on some seriously easier comparisons coming fourth quarter. Perhaps, give us a sense on all that.

Well, certainly from the canned side, we really have been, basically now April through September, dealing with tough comparisons. But it's performing pretty well in the customers that still exist. But certainly, losing a very large customer hurts those comparisons here from now and through the end of September. You're absolutely right. Once we get past September, those comparisons, except for just general -- we should just see the canned business move with general consumption trends and really not from any lost distribution movement. So that's real positive. We're super positive on everything going on, on Green Giant. Yes, we do start lapping some of the first part of innovation, but we still have distribution gains on some of that innovation, filling out shelf on all of the items at all customers even though it's pretty much at all customers. All customers might not have all items, and we're getting that filled up. Spirals should be totally on top, and then there's more coming. You'll see another launch of new innovation we're real excited about here coming in the latter part of the summer. So we'll get some benefit of that in the fourth quarter just like we've gotten benefit from innovation in the last 2 years in the fourth quarter. So we expect a really big year on Green Giant frozen. Really, Green Giant frozen has really -- has turned the corner, certainly we turned the corner last year. But this is the year where it really starts -- pure dollars sales start really moving up.

And total will be better because we won't have as big a drag on our shelf stable. So the brand, in total, will be growing [up nicely] year.

And next question will come from Farha Aslam with Stephens.

Yes, the first question is on Ortega. That brand is large and very profitable and struggled last year and it's turned in the first quarter. Could you share with us what's caused the turn? And you seem confident about the rest of the year. What gives you that confidence?

There's a couple of things about Ortega. Number one, last year we missed on some key promotional price points. So we just sharpened up our promotional calendar and got more competitive, and the brand really respond in some of those more sensitive categories like shells. But we also had some nice innovation in the shells area and in taco sauce. We're a leader in taco sauce. So we gained new distribution on those, and they're performing well. We also have -- we're launching what is probably the biggest innovation in this category in a long time. We're launching a bowl kit so people can actually very quickly heat up a tortilla in the shape of a bowl and use the tortilla for salad or any type of Mexican entrée they want to develop. So a restaurant-style experience in the home, probably the biggest innovation in the category since taco shells themselves, and that's gotten tremendous reception from our customers. So pretty bullish on both innovation and being able to be more competitive and just overlapping some poor promotion performance last year.

That's helpful. And as a follow-up, you guys talked about your stock being at an attractive price. Would you consider an accelerated buyback or a 10b filing so that you wouldn't have to be blacked out during certain periods?

I think we're looking at all options. And I guess the one thing you can say is I don't consider it an attractive price. It's the wrong price right now. It might be attractive for a buyback, but it's not attractive for where we think we should trade at. So I think the first part is, yes, we're looking -- I think we've been historically -- I think anybody who's invested in B&G knows we are excellent stewards of capital and we're going to make the right balance sheet decisions here. And certainly, retiring an 8% dividend is something you have to consider. So...

From Jefferies, we'll hear from Karru Martinson.

Just in terms of the cash flow generation. You guys met your debt reduction goal. Can you talk in kind of (inaudible) certainly could be more additional payments on debt. Kind of talk to us just why the focus on the term loan versus the bonds here in the open market.

I think a couple things, just with the term loan being prepayable as well as tied to LIBOR if REIT's going up, and we've got the bond with a nice fixed cost of debt. So we're obviously looking at everything.

Yes, I mean, the other thing I would just add to that is we're certainly an acquirer, and we expect to be acquiring things as the years go on here. We have a lot of fixed capital with very good rates. Yes, the math works to buy some of that back now. But we're happy with our fixed capital because we know as we do acquisitions down the road, we need to borrow more money. And it just doesn't make -- even though the math might work today, the long term is that I'd rather leave fixed capital out there at the rates it is and as we borrow, we'll be borrowing more in the variable rate market if we were doing an acquisition today.

That addresses actually my second question, which was building capacity for M&A. So I appreciate that.

And we'll hear from Eric Larson with Buckingham Research Group.

Just a couple questions. I know we've probably beaten revenue issues to death, but -- and I know a 1% kind of on average price increase isn't substantial. But is there any elasticity risk with that? I would assume with your guidance you're probably not assuming a lot. But what has been kind of your history, Bob, on sort of elasticity with your pricing?

Well, for most of what we think here -- and we've done that. We look brand by brand on what that would be and put that into account. And we built in some elasticity, and whether that actually happens or not, we'll see. And I think part of the belief is if there is some elasticity, it's early on in the price increase. And once you get past 3 to 6 months, the consumer comes back to buying it anyway or maybe just took the shock for onetime there in the store and comes back the next time. So yes, I think just from -- as we look at a 1% volume growth, it's truly -- there's a lot of puts and takes on a lot of our pieces of the business, but it truly drives in a big way from a few key brands and certainly led by the most -- the exciting growth brand we have today in Green Giant frozen, which is just a huge part of that 1% volume growth for us this year. And then certainly, we got some wonderful kind of news on Ortega and Pirates, among others; Cream of Wheat having a tremendous year. It's good to have longer, colder winters in the northeast. It certainly helps those kind of businesses. So we're pretty comfortable, and we have to judge it. But I think at the end of the day, just like growing 2% doesn't drive tremendous dollars to the bottom line, if that falls a little short, because that's the high end of our guidance. That's not the midpoint of our guidance, and -- but we still think we can hopefully achieve that, at the end of the day, it doesn't really generate that much less an EBITDA. 20% (inaudible). So it's not big movements either way on the volume side of it. Certainly, pricing dropped right to the bottom line, so that's a very important part of our model for this year is achieving that price increase itself.

Okay. Yes, that makes sense. And then I know that we've chatted about this before. Obviously, the canned business is still kind of a rough business. Is there any way, strategically, that you can make -- either make the business smaller by maybe contracting less acreage or something to take down in particular growing year and gradually trim that down? Or is there a certain volume level that's important to be whatever in that business? Is there any strategic thought on what the canned business could do as a smaller piece of your company?

Well, certainly, it is smaller than it was when we bought it because we lost distribution and consumption trends aren't good. But where we are today, it's actually performing very well. And when we kind of look at how that's affecting our inventory and reduction plan, when you look at us looking at saving $100 million or so in the inventory, $50 million of that is coming from less canned vegetables. Part of that is planned reduction in inventory. That's very important; tightening the inventory number of weeks on hand. Part of that is we've lost the volume. It is down through 2017. So it has -- it is a business that's much lower. We were only a little -- on Green Giant canned, which is we have 2 pieces of business: Green Giant canned vegetables and a brand called Le Sueur. Le Sueur is mid-30s to $40 million in sales, rock solid, really well-performing business and has consistently performed well for us. We've been hurt on the Green Giant canned commodity vegetable business, cans of corn and peas and things like that. Yes, we're rolling over against that lost distribution. We have another -- well, now we're down to 5 months because it's May, but we have that roll over through September. The good news is canned vegetable season is really fourth quarter when you sell a lot, and we took a big hit last year. We won't take a hit this year because we don't have that lost distribution. It will be comparative, and then certainly, Easter, which we've now gone through. So April through September, not the biggest canned vegetable times, so volume is less. So even the losses year-over-year will be less in total just because of the nature of the timing of the business. So it is smaller for us. The customers that we have it in today, we still want to support wholly. And we see some upside in some of those customers still. So it's a good business. We've lost a lot of ground. It's profitable business, and we just have to manage what we have left today.

Yes, no, that makes sense, and that connected a number of questions together with your inventory reduction as well.

From Crédit Suisse, Robert Moskow.

I think one of the reasons why the stock has kind of fallen this year is that there's a lack of confidence in the visibility of the business model, Bob. There's been such a high degree of volatility even on a quarter-to-quarter basis, so it's great to see the first quarter coming in largely as planned. But can you give us a sense of what kind of IT tools you've developed or processes you've developed so that you and Bruce and Ken have at least better visibility as to when the problems are occurring and where they are occurring? And is that part of the solution? Or is it -- am I -- is that really not what is really the big driver for improving visibility?

Very fair question. Part of -- so to be very open. Part of our growth from -- in '17 over the last few years was doubling the size of this business really in kind of a 2-year time frame from Green Giant in late 2015 to everything we did in '16 and then not so much Back to Nature in '17. And that was a doubling of a business, doubling of the size of the business, doubling the size of our organization and also changing our IT systems. And part of this -- so part of what we saw there was all of that as we grew up through 2017. We came out of 2017 very confident that B&G is the company it is going forward that was before, just twice the size. So we have all that visibility. As -- we even go back and look at the 2017 fourth quarter, one of the big hits we took, and we don't want to go back into this again, is we took a hit of incremental freight of over $12 million as, really, freight costs rocketed up on us more than expected and more than totally understood in this industry, I believe, by a lot of people. We understood that coming into '18. We understand what that looks like through the first 4 months. It's tracking to our budget. We don't love that costs are up, but we know what that is. We have full visibility. We really changed from the level of the team that's here, the growth of this company, the growth of IT systems. We're on Oracle JD Edwards. That's our system today. All of that is in place for us to go forward in a bigger way. So we have full visibility to everything. The only thing we're truly dealing with this year but we feel very covered on is, just like everybody else, we're dealing with the freight issue in this industry. That's not going to go away. So we're all getting through that, and that's why we have things in place to deliver our EBITDA. And what you should see is the cadence of EBITDA that we no longer have that big Green Giant switch of marketing and timing that we were all counting on in the fourth quarter. This is normal cadence that will look like 2017 in our spending, in our sales, expect sales to be over those numbers each quarter, but look and feel like '17 growing a few percent on the top line and kind of dropping to the bottom. And really, the only other real change is us adding Back to Nature in those numbers in the first 9 months.

Okay. So does that mean EBITDA grows every quarter, second, third and fourth, for the rest of the year?

Yes. A little larger in the second half as pricing is full. And so we're seeing pricing kind of kicked in, in March. We'll certainly see more in the second quarter, but a good chunk of that pricing comes in the back half of the year. Outside of that, you should see kind of growth growing based on the sales number moving.

And from JPMorgan, Carla Casella.

This is [May Nin] on for Carla Casella. We just have a quick question about your -- you mentioned that you should be able to pass on the cost increases through pricing. Are there any categories in particular where this is available to you?

So the pricing initiative is, generally speaking, across the portfolio, and the way we're designing it is very small increases that probably are not noticed by consumers, but it's across-the-board. And to be quite frank, we're seeing other competitors that sell similar products, in some form or fashion, creating pricing as well. Not all in every category, but we're seeing it.

Ladies and gentlemen, that does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to management for any additional or concluding remarks.

Okay. Just want to thank everyone for joining the call and feel very good about our first quarter and the outlook on the rest of the year and look forward to talking to you as the year progresses. Bye now.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation, and you may now disconnect.