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Edited Transcript of BGS earnings conference call or presentation 2-May-19 8:30pm GMT

Q1 2019 B&G Foods Inc Earnings Call

PARSIPPANY May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of B&G Foods Inc earnings conference call or presentation Thursday, May 2, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce C. Wacha

B&G Foods, Inc. - CFO & Executive VP of Finance

* Kenneth G. Romanzi

B&G Foods, Inc. - President, CEO & Director

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Conference Call Participants

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* Bryan Cecil Hunt

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Carla Casella

JP Morgan Chase & Co, Research Division - MD & Senior Analyst

* Cornell R. Burnette

Citigroup Inc, Research Division - VP and Analyst

* Eric Jon Larson

The Buckingham Research Group Incorporated - Analyst

* Hale Holden

Barclays Bank PLC, Research Division - MD

* Jon Robert Andersen

William Blair & Company L.L.C., Research Division - Partner

* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Kenneth Bryan Zaslow

BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the B&G Foods First Quarter 2019 Earnings Conference Call. Today's call is being recorded. You can access detailed financial information on the quarter in the company's earnings release issued today, which is available in the Investor Relations section of bgfoods.com.

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

Bruce Wacha, the company's Chief Financial Officer will begin the call with opening remarks and then discuss the company's financial results for the quarter as well as its guidance for 2019.

After that, Ken Romanzi, the company's President and Chief Executive Officer, will discuss various factors that affected the company's results, selected business highlights and his thoughts concerning the outlook of the remainder of 2019 and beyond. I would now like to turn our conference over to Bruce.

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [2]

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Good afternoon. Thank you for joining us today for our first quarter 2019 earnings call. During the quarter, we generated $412.7 million in net sales, $75.8 million in adjusted EBITDA and $0.44 per share in adjusted diluted earnings per share. Adjusted EBITDA as a percentage of net sales was 18.4% for the quarter. The $19 million decrease in net sales was primarily attributable to our divestiture of Pirate Brands during the third quarter of 2018.

Pirate Brands had generated net sales of $21 million in the first quarter of 2018. The negative impact on net sales from the Pirate Brands divestiture was partially offset by an incremental $3.3 million of net sales from McCann’s, which was acquired during the third quarter of 2018 and therefore not part of our results during the first quarter of 2018.

Base business net sales, which exclude the impact of M&A and discontinued brands, was $409.5 million, essentially flat for the first quarter of 2019 compared to $409.3 million in the prior year quarter. Our base business net sales benefited from $7.3 million in net pricing, which included the impact of our spring 2018 list price increase as well as improved trade spend utilization. We expect to start seeing additional pricing benefits from our 2019 price increase in the second quarter as well as the third and fourth quarters.

Base business volumes were down by $7.1 million in the first quarter, largely driven by a drag from the negative elasticity effects of our price increase. Our base business net sales also had a small negative impact from the shift of Easter to late April and from a limited voluntary recall of certain Victoria products. Green Giant has been a wonderful net sales growth engine for the past couple of years for B&G Foods helping to drive growth in net sales quarter after quarter. First quarter 2019 was no different with net sales of all Green Giant products in the aggregate, including Le Sueur, increasing by $6.9 million or 5.4% versus the year-ago quarter. The growth in net sales was driven by a second consecutive quarter of growth for both our frozen and our shelf-stable Green Giant products.

The rest of our portfolio had a series of pluses and minuses with regards to net sales for the first quarter of 2019 compared to the first quarter of 2018. For example, net sales of New York Style increased by $1.3 million or 16.4%, Maple Grove Farms increased by $.0.9 million or 5.5%, net sales of the company's spices & seasonings businesses increased by nearly 1% or $0.7 million for the quarter. Net sales of Back to Nature decreased by $3.3 million as we are cycling the lost distribution of certain noncore items. Victoria decreased by $1.4 million or 11.2% due in part to the recall. Cream of Wheat decreased by $1 million or 5.5% as a result of a warmer winter. Ortega decreased by $0.6 million or 1.6%, and net sales of all other brands decreased by $3.3 million or 4.1% for the first quarter of 2019.

We generated $75.8 million in adjusted EBITDA for the quarter, which is down $13.6 million from the year-ago quarter and slightly short of our guidance range. The primary driver for the decrease in adjusted EBITDA was the divestiture of Pirate Brands, which accounted for approximately $8 million of lost EBITDA for the quarter, inclusive of overhead under-absorption. We remained comfortable with our full year estimate of a negative adjusted EBITDA impact of $21 million from the divestiture of Pirate Brands, but the negative impact was approximately $1 million greater for the first quarter than we had anticipated. We also estimate that the Victoria recall negatively impacted adjusted EBITDA by approximately $1 million for the quarter. Another factor affecting comparability includes the first quarter of 2018 benefit of approximately $2 million from a Mexican peso currency gain.

We saw net cost increase in our COGS during the first quarter of approximately $7 million, inclusive of procurement, mix, freight and warehousing, a portion of which is due to the timing of when certain costs and cost savings flow through our P&L. We expect to see these benefits to begin to show in our second quarter results and the remainder of the year. Our pricing strategy, inclusive of the wraparound benefit of the spring 2018 price increase and improved trade spend utilization, benefited adjusted EBITDA by $7.3 million, which helped to offset the COGS increases. This benefit was partially offset by a decrease in base business volumes of $7.1 million resulting in lost profits of approximately $2.7 million largely driven by price elasticity.

While we continue to see inflationary pressures in our input costs and our freight expense, the increases have been more manageable this year, and we are actively addressing them. After a strong first quarter of pricing with nearly $7.5 million of benefit, we expect to continue to see pricing benefits throughout the year. Earlier this year, we communicated another round of price increases to our customers, and we should begin to see the benefit of those price increases during the second quarter. We therefore remain confident in our ability to achieve our full year target of $15 million to $20 million in pricing, consistent with our previous guidance.

Our cost-savings initiatives, which Ken will address in more detail in a few minutes, are also on track. And we expect to see these benefits accelerate throughout the year as they begin to impact our P&L. On freight, for example, as a result of the realignment of our dry and frozen distribution centers, we are already seeing favorable costs in our P&L from our customary delivery costs versus the prior year. Some of the freight benefit, however, was muted and our inbound freight and our transfer costs, which are also coming down year-over-year due to our efficiency efforts, impact our P&L on a roughly one quarter lag, and so we will realize these benefits beginning in the second and third quarters of the year. Our G&A rationalization has also been implemented. However, due to the timing of the restructuring, we only saw the [benefits] for little less than 1 month of the quarter. As a result of these efforts, we are also confident that our cost cutting will deliver a full year $15 million to $20 million in cost-savings benefits.

We generated $0.44 in adjusted diluted earnings per share in the first quarter of 2019 compared to $0.55 per share in the first quarter of 2018 with the decline largely driven by lower adjusted EBITDA in the quarter, as we just discussed, offset in part by a reductions in net interest expense of approximately $5.2 million for the quarter due to reducing our long-term debt by approximately $460 million over the past year.

Under our prior stock purchase authorization, we repurchased and retired, from March 15, 2018, through March 15, 2019, approximately 1.4 million shares of common stock at an average price per share excluding fees and commissions of $26.41 or $36.9 million in the aggregate. This includes 407,000 shares of common stock at an average price per share, excluding fees and commissions, of $24.55 or $10 million in the aggregate during the first quarter of 2019.

In March 2019, our Board of Directors authorized an extension of the stock repurchase program through March 15, 2020. In extending the repurchase program, the Board also reset the repurchase authority up to $50 million.

Our balance sheet remains strong with just $1.6 billion in net debt at the end of the first quarter 2019 compared to $2 billion in net debt at the end of the first quarter 2018. We also continue to manage our inventory more effectively. We further reduced our inventory to $375.4 million at the end of the first quarter 2019 compared to $401.4 million at the end of the fourth quarter 2018 and $455.4 million at the end of the first quarter 2018.

We generated more than $50 million in net cash provided by operating activities in the first quarter of 2019, and we spent a little bit more than $8.5 million in capital expenditures during the quarter, more than ample to support our current business and to better position us to pursue our growth through acquisition strategy.

Based on the midpoint of our 2019 financial guidance that I will outline in a moment, we expect to be approximately 5.2x net debt to pro forma adjusted EBITDA at the end of the year.

Now as we mentioned a little a while ago in our earnings release, we are reaffirming our full year 2019 guidance. As a reminder, our 2018 results included a little bit more than 3 quarters of Pirate Brands net sales of $74.9 million.

For 2019, we expect net sales to be in the range of $1.635 billion to $1.665 billion or in line with our 0% to 2% long-term top line growth model. We expect adjusted EBITDA of $305 million to $320 million; adjusted earnings per share of $1.85 to $2; net interest expense of $87.5 million to $91.5 million, including cash interest expense of $84 million to $88 million; and interest amortization expense of $3.5 million; depreciation expense of approximately $40 million; amortization expense of approximately $18 million; an effective tax rate of approximately 24% to 25.5%; cash taxes, excluding the tax effects from the gain on sale of Pirate Brands, to be approximately $5 million or less for the year; and finally, we anticipate CapEx to be approximately $45 million to $50 million for 2019, which is in line with last year.

Based on the midpoint of our adjusted EBITDA guidance range, we expect that our adjusted EBITDA less CapEx, cash taxes, including tax effects from the gain of the sale of Pirates, and cash interest will be approximately $175 million to $180 million. The Pirate Brands divestiture resulted in a pretax gain on sale of $176.4 million during the fourth quarter of 2018. A large majority of the tax payments resulting from that gain on sale will be made during the second quarter 2019.

Finally, from a quarterly modeling perspective, I remind folks that the second and third quarters of this year will have a similar drag from the divestiture of Pirate Brands of about $6 to $7 million of adjusted EBITDA per quarter and a limited impact during the fourth quarter given that we only have owned the business for about a month during that period.

We expect input costs to remain elevated as inflation certainly appears to be here to stay. But we also expect to see more benefits from our pricing initiatives throughout the remainder of the year with a small benefit in the back half of the second quarter and a more full benefit in the third and the fourth quarter. These benefits will be coupled with continued activity on the cost-cutting front.

And now, I'd turn the call over to Ken. Ken?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [3]

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Thank you, Bruce. And thanks to all of you for joining us on the call today with special thanks to the dedicated team of B&G Foods who are working so hard in a challenging operating environment to generate these results. I'm pleased that our first quarter net sales were on the higher side of our expectations, and while we had some discreet timing events negatively impacting our adjusted EBITDA, we're on a track to meet our full year financial plan.

And while historically, we've grown through acquisitions, the optics of selling a business are sometimes less favorable on the P&L. However, as we have previously stated the sale of Pirate Brands has left us much better positioned to continue to grow through acquisitions, a strategy that has worked so well for our company and our shareholders over the years.

As I stated in our February call, our 2019 plan is rooted in sales growth consistent with our stated long-term objective of 0% to 2% growth, a broader and more reliable pricing strategy and the ramp-up of our multi-year cost-savings program. Our first quarter results showed traction in all 3 of these pillars of our 2019 plan. So today, I would like to share key highlights from the first quarter.

First and foremost, our new executive leadership team is fully in place, totally aligned and committed to our company's strategy and is working extremely well together. It's a strong, complementary combination of fresh blood and long-term B&G veterans. Also I'm very pleased to report, after more than 2 years of effort, we successfully went live with our new Oracle JD Edwards enterprise resource planning system just last weekend and I'm pleased to report that we are fulfilling customer orders and shipping through the system with minimal disruption. We are very much looking forward to taking advantage of the many benefits of the system, which is expected to streamline operations, drive efficiencies to our finance and accounting processes and improve our operational planning and financial forecasting. Our first quarter base business net sales were basically flat to last year, which was encouraging given Easter shifted later into April this year. Consumption across the entire B&G foods portfolio grew 1% for the quarter and that included a decline of 1.7% in March due to the Easter timing shift. January through February consumption grew a solid 2.7% versus year ago.

Our sales performance, as Bruce mentioned, was again led by our largest brand, Green Giant. It's a testament to our team's effort that we are reporting the second consecutive quarter of net sales growth for both frozen and shelf-stable Green Giant. Shelf-stable is now benefiting from new distribution growth after a challenging period in the category that coincided with our purchase of Green Giant. Green Giant frozen continues its strong momentum behind our vision of a making Green Giant the plant-based vegetable food brand of the future fueled by continued success of our new product introductions.

Our vision is to not only introduce new vegetable products in the traditional frozen vegetable category but to help people get more vegetables in their diet by introducing new products made with vegetables. We are very encouraged by the successful launch of the latest generation of innovation, such as Green Giant cauliflower pizza crust, Green Giant protein bowls and Little Green Sprout's Organics. And we are very much looking forward to enhancing our next wave of Green Giant frozen innovation later this year as we continue to facilitate America's healthy eating habits.

Now, while not every brand in our portfolio is positioned for the same innovation-led growth that we're driving with Green Giant, we believe there are many exciting things that we can do to drive growth across the portfolio. We're excited about our snacking businesses, namely New York Style bagel chips and Back to Nature. New York Style showed strong growth in the quarter with net sales up almost 16.5% driven by unique merchandising in the deli perimeter of the grocery store. And while we're still rightsizing the product portfolio distribution of Back to Nature, we're enthusiastic about its potential for geographic expansion.

Consumption in Back to Nature's core product categories of better-for-you cookies, crackers, granola and nuts remains solid in both the specialty food channel and several mainstream supermarket retailers. And now that our product line is cleaned up of noncore products, our plan is to expand this brand to a greater array of customers.

We're also excited about the potential of Victoria pasta sauce. Despite a soft Q1 due to the product recall, the brand has performed well over the past 2 years, and we are enthusiastic about the prospects for Victoria as we look to take this leader in premium specialty pasta sauce national to build upon its successful position in the Northeast United States and throughout the club channel nationally.

Our most recent acquisition, McCann's, is performing as expected. And although it's on the smaller side for us, it is exactly what we strive for when considering potential acquisitions. McCann's margins are strong, and it has proven additive to our cash flows. And we believe this little brand has the potential to be a bigger part of our portfolio over time. It holds a leadership position in the premium oatmeal category segment, and we are excited about the potential to drive new distribution growth as we fill in the still sizeable distribution gaps and work to take this on-trend better-for-you brand national over time.

As Bruce mentioned, we realized nearly $7.5 million in improved pricing during the quarter driven by last year's actions, and we successfully sold into our customers a new round of pricing that is beginning to be implemented during the second quarter. As a reminder, this pricing action is based on more list pricing rather than trade promotion efficiencies on more brands and in more geography than we took last year. As a result, we believe we're on track to deliver the $15 million to $20 million in pricing we planned for 2019.

Our cost-savings initiatives also started to deliver benefits in Q1. We implemented our G&A restructuring program, and the new leaner team is intently focused on delivering our 2019 plan. Additionally, we continue the work we began in 2018 to realign our dry and frozen distribution networks. These efforts are paying off today and helping us to better manage transportation costs in an inflationary environment. During Q1, as our new dry warehouse configuration was completely in place, we reduced our total freight miles during the quarter by approximately 20% below last year's levels, helping to offset higher transportation rates.

We also continued to shift more freight to contract versus higher spot rates. And going forward, we will begin to see the added benefits of reconfiguring our frozen distribution network, which will take place throughout the second quarter. Further, our procurement group has finished contract negotiations for the year, and we secured better pricing than we originally forecasted for raw materials. While input costs are still elevated versus last year, our procurement team is doing a great job lessening the impact. And lastly, we're on track implementing the product and package weight reductions we discussed in February to secure our savings budget, namely rightsizing several of our Green Giant frozen products.

All in, we're on track to deliver our 2019 plan of $15 million to $20 million in cost savings throughout our procurement, logistics, manufacturing, packaging and SG&A spending, which we expect will continue to deliver another $20 million to $25 million in savings in 2020.

In summary, we remain confident in our 2019 guidance that relies on 0% to 2% top line growth while maintaining flat adjusted EBITDA margins of approximately 18.5%, despite being in an inflationary input cost environment. Our guidance assumes successful implementation of our price increase as well as our cost/productivity initiatives, both of which are on track through the completion of the first quarter. Beyond that, we remain committed and ready to add to our business through accretive acquisitions. That is what built this great company and that strategy will continue to fuel our growth in the future.

In addition, we will also look to opportunistically repurchase shares of our common stock from time to time as another means, in addition to our quarterly dividend, to return cash to our shareholders. This concludes our remarks today, and now we'd like to begin the Q&A portion of our call. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today, our first question is coming from Cornell Burnette of Citi Research.

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Cornell R. Burnette, Citigroup Inc, Research Division - VP and Analyst [2]

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My first question is really just centered around the full year guidance. So you missed the first quarter by $2 million or $3 million in EBITDA and -- from the bottom of your range and EPS is also lower than the bottom of the range. So I just want to know what kind of gives you -- why did you keep the full year guidance the same? I know you talked about Victoria having a recall, but wouldn't there be some residual issues from that, perhaps, as you go forward in the year?

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [3]

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No, we don't think so. We think the impact should be modest, but calling out with the impact was in the quarter was about $1 million that was not factored into our plan. And then the other part, when you think about just missing at the bottom of the range is the divestiture of Pirate's. So still think the impact is about $21 million in terms of the loss in EBITDA for the full year, but just from a timing standpoint, about $8 million impacted us in the first quarter. And so it was really those 2 issues. Where we get a lot of confidence is we truly are seeing, as Ken mentioned, a lot of the cost-savings initiatives that we're working on, the ability and desire to lower those freight costs, we're truly seeing them, but we're are seeing some of the benefit in our P&L this quarter, and we'll continue to see the remainder throughout the rest of the year.

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Cornell R. Burnette, Citigroup Inc, Research Division - VP and Analyst [4]

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And then, I mean, I guess this is important, so looking that EPS being down pretty substantially in the quarter, I think to get to the bottom end of your range would imply something like 9% EPS growth over remaining 3 quarters, so I'm thinking a lot has to change on the margin side. I think, maybe what you could do for us which would be helpful is if you could just some put numbers around, a, how much of -- how many cost savings came through in the quarter; and then going forward, kind of what's the residual that's left over the remaining 3 quarters. I would suspect that it has to be a pretty big number, and that you didn't get much in this quarter kind of given the way margins played out.

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [5]

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Yes, when you really think about it from a timing standpoint, we did benefit on the delivery portion of our freight costs but not the inbound freight because that will come through when we sell the products. And as far as the G&A restructuring that we took, really only about a month of that benefited, so that flows throughout the rest of the year. Additionally, as we said, we did get a nice benefit from pricing in the first quarter, but a significant amount of that pricing activity will follow through in the remainder of the year as we're implementing another round of price increases.

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Cornell R. Burnette, Citigroup Inc, Research Division - VP and Analyst [6]

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And that's another thing that was on my mind. So it's about $7 million to $7.5 million of pricing that you got in the quarter, yet I think the guidance hasn't changed for the full year at like pricing of $15 million to $20 million. If that holds true, then I would just say that you've got $8 million to $13 million of pricing over the remaining 3 quarters, which is kind of what you got in Q1, despite the fact that you've got more pricing coming in sometime in 2Q, and I think you're going to be -- the intention is to be a little bit more efficient on the trade spending. So just wanted to know kind of how that lays out and if ultimately this is upside on the pricing numbers given the way 1Q's played out.

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [7]

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Yes, as we stated in the February call, we counted in our model the prices -- the list price increases, but we didn't count in our model trade spend efficiencies because that's elusive -- they're elusive to get, but we did see in the first quarter some trade efficiencies. So as we stated in February, if we can get our trade spend efficiencies on top of the price increase, there may be a little upside. But the first quarter, when we are overlapping some very large spends on a couple of our brands last year so we saw that. So it was nice to see.

But as we stated, if we can continue to see the trade spend efficiencies and get the list price through the way we plan, there could be upside to the pricing.

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Cornell R. Burnette, Citigroup Inc, Research Division - VP and Analyst [8]

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And then, the last question from me would just be if you could possibly just talk a little bit maybe about Q2? This was very helpful the last time you gave us guidance on Q1. Just assuming that some of the pricing that you're seeing really doesn't come in till later in 2Q. Is it going to be another -- how do the margins stack up in Q2? Was it going to be kind of a similar story as to Q1 given that some of the pricing is later in the quarter?

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [9]

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Probably.

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [10]

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And then also as you build your model, I would make sure you keep in mind that there'll be some negative drag from Pirate's, which is baked into our full year guidance.

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Operator [11]

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And our next question is coming from William Reuter with Bank of America.

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Unidentified Analyst, [12]

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This is Mike on for Bill. Just a few questions here. First, can you talk about if the pricing increases have affected your share of shelf and if retailers are shifting more towards private-label products? And second, can you confirm your leverage target and, if any -- and if you guys have made any changes to your capital allocation strategy?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [13]

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Okay. I'll take the first question. I think, if heard you correctly, it was little bit low, you were asking if the price increase caused us to lose any share of shelf and anything -- any bigger shift to private label. We haven't experienced any of that. There's many retailers who are focused on private label. Our price increase hasn't shown an acceleration or deceleration of that at all.

So we, quite frankly, were pretty encouraged by the elasticities that we saw off of the brands last year and -- which gave us some confidence to come back again this year. And we adjust -- since we hadn't taken pricing in quite some time, we adjusted our pricing increase this year versus last year and took a little bit more on brands that proved to be fairly inelastic and took a little bit less on brands that were elastic. So we think we're smarter through this pricing action than we were last year because it had been so long since we had taken pricing and had data to read in markets. So this new round is fresh off of last year's experience.

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [14]

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And then, the second half of your question, no change from our standard leverage targets, which is 4.5 to 5x net debt to EBITDA. As far as changing capital allocation strategy, no, we remained committed to dividend. We also are focused on returning cash to shareholders through our share buyback program, which is, as you noted, we recently got reauthorization for, and we have been active rebuying shares. And then finally, from an M&A standpoint, as Ken said, we built this company through M&A, and we continue to view that as an opportunity to create value for shareholders.

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Operator [15]

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(Operator Instructions) Our next question comes from Karru Martin (sic) [Martinson] with Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [16]

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How have your competitors reacted to the pricing that you took here through the first quarter and the follow-up pricings?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [17]

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We have so many different competitors, right, because of the different categories we're in, we haven't seen any drastic reaction. Many people are increasing pricing. In some cases, we're seeing elevated pricing, particularly in the canned vegetable business. That's seeing some improved pricing. But we haven't seen any outsized changes or oversized reactions to our price increases.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [18]

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And the traction that you're getting in Green Giant on the canned side as well as the frozen, it seems sort of a reversal from what we had been seeing for quite some time. Has that market changed? Or is it just that we've bottomed out? Or is there some sort of a new realism in there in terms of what the pricing will be, and that it's not a race to the bottom?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [19]

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Well, I think there's 2 things. They're 2 separate businesses, almost, in the same brand, but the frozen segment has been very different than the canned segment. The frozen segment has truly been reawakened by B&G's efforts to reawaken the Green Giant, and that's all been driven by added-value innovation. So innovation is what's driving the frozen Green Giant business as well as many of the competitors now who have followed us with innovation in that area, many of them have fairly close copies of our products.

So innovation is really driving the growth in the frozen vegetable category. On the canned side, our own experience that you might be referring to is, we lost distribution in a major retailer, so that was a big drag on our canned business for quite some time. But in the fourth quarter of last year, we overlapped that lost distribution and the business turned around because, outside of that one retailer, we were actually up in consumption. And now, on top of our consumption still being fairly good, the positive on the shelf-stable side, we are also -- we've gained some distribution in other retailers.

So the new distribution is what's helping our canned business plus being more competitive every day at the shelf in the distribution we're in. So it's really a tale of 2 cities, same brand name, 2 different sections of the store and 2 different dynamics in those subsegments in the vegetable category.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [20]

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And just lastly, given that success that you've had at Green Giant frozen, I mean, do you view that as a platform for acquisitions? Or where do you see adding businesses to further the growth of the company?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [21]

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Well, acquisitions are -- we're always got -- we're always open to accretive acquisitions that we can buy with the disciplined purchasing approach that B&G takes. But on the frozen side and particularly with frozen vegetables in Green Giant, we have an internal pipeline that we see for quite some time that we're very, very excited about. So the internal pipeline is a very robust to maintain Green Giant.

However, if there are other kind of vegetable-forward businesses out there that we think we can buy in a disciplined manner to add to our business and perhaps the Green Giant brand name on that package might be even be better applied, we will absolutely look at that. So frozen businesses, in general, we'd look to places where there would be synergies, but really it'd have to be a vegetable business that we can make to capture manufacturing synergies. If there's something that fits a vegetable-forward approach, we would certainly be interested in that to bring into the Green Giant family.

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Operator [22]

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And our next question will come from Bryan Hunt with Wells Fargo Securities.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [23]

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Continuing on the M&A discussion, the current leverage on the balance sheet exceeds kind of your stated range of $4.5 million to $5.5 million. So if you were to make an acquisition, how far above that range are you willing to take the balance sheet in terms of leverage and for how long?

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [24]

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I think it very much depends on the acquisition. We haven't typically gone over 6x leverage if you go back in history. But like I said earlier, on the call, estimated net debt-to-EBITDA based on the middle of our guidance is $305 million of EBITDA, and $320 million gets us to 5.2x net debt-to-EBITDA, so in that range. Would we go higher? We would consider it, but we'd have to really like the transaction to do so.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [25]

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Great. Next, when you're looking at other challenges in the business in terms of the switch to click and collect and/or Amazon type of retail, how are you positioned to -- in your opinion, capture the click and collect and/or the online retail or even some CPGs are going direct with their own brands to consumers. Do see an opportunity to capture one of those 3 opportunities? And kind of where do you stand?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [26]

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We are racing quickly to get ecommerce ready. The place we're really starting which is -- are the top 2 food retailers in Walmart and Kroger, in particular. I mean, they're very large, and we do a lot of business with them and others supermarket retailers. So we're making sure that we're ecommerce ready to do business because we believe that going through our retailers is going to be a much more effective and efficient way than for us to go on our -- by ourselves.

And as we get more ecommerce ready for our retailers, we do a lot of business on, we believe we can then transfer that learning to Amazon. We do very little business through Amazon now, and a little bit in our supermarket customers. But as their business grows through online, we will absolutely be ready to grow with them.

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Operator [27]

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And our next question is coming from Ken Zaslow with Bank of Montreal.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [28]

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Just a couple of clarity questions. One is, can you talk about the price elasticity, where you've seen the greatest price elasticity and where you've seen the least amount of price elasticity across your portfolio?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [29]

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Well, that could be a very long answer. We have 50 brands. There's lots of price elasticity in more price sensitive brands, and it's not just brands, it's product segments. So for instance, let's take Ortega. There's is lot of price elasticity in taco shells but not a lot of price elasticity in taco sauce. So we might take a little bit more on taco sauce and a little bit less on taco shells. And we've got to make sure that we're still at good promotional price points on taco shells because that seems like a business where people kind of stock up on promotion. Ac'cent, for instance, we haven't seen any price elasticity, and we've actually crossed over some key price points like $3 for a unit of our smaller size.

So that's a business that we're going to lean into because we haven't seen much. I mean, Ac'cent defines the category of flavor enhancers, and so that's a business where we've seen very little price elasticity and a little bit more. Green Giant cans, canned vegetable, highly elastic. Customers want to promote that at key holidays for 2 for $1. And if you're not there for 2 for $1, you're probably not going to get -- you're not going the front-page ad support, you're not going to get secondary displays. So the customer actually decides your elasticity even before the consumer gets a chance to decide whether or not they want to pay $0.10 or $0.20 more a can. It's really how our customers want to feature, and we want to still maintain the key features with our customers for key holiday periods. For non-holiday periods, we think we can be a little bit more forward on pricing because it's not like we're looking for front-page ads and big displays, and that we can have the base price float up on shelf, which wouldn't affect volume all that much. You're not talking about the highest volume time of the year anyway, but you can raise price on shelf a little bit but come back and make sure you're very, very competitive at the key promotional time frames.

So it is a full range and we've adjusted our pricing, both base shelf pricing as well as promotional pricing, accordingly, depending on the brand and the product promotion group.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [30]

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Is there a way for you to think about getting more pricing in certain categories that you've kind of realized, like Ac'cent is -- would be one, where you would able to do that? And are there other categories that have more price elasticity that you would think that you may need do something with innovation to curtail the price elasticity?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [31]

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And that's what we've done. I mean, pricing is separate from innovation. Obviously, we're going to innovate where it makes sense. We have a list of brands that we've prioritized for innovation, mainly because of size of brand. If you line extend a small brand, you're going to have a small business. If you line extend a larger brand, you'll have a larger new product. But pricing, we have adjusted based on the different elasticities we've experienced in the different products and packaging promotional groups.

And then of course, separate from pricing, innovation is clearly a lever that we'll be pulling and certainly we'll apply to some of our other brands.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [32]

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Okay. My last question is, when was the last time you've taken a local brand and gone national? And what experience do you have to be able to do that with Victoria? Because I like the idea of this, and I think I've seen it with other companies, I think it was New England Clam Chowder have done it. I mean, there's examples over the last 15, 20 years that I've seen, and it can actually be a real home run. But what is your experience and how comfortable are you and how quickly will we see any change on that?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [33]

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I think we'd have to go back in our history, but I believe New York Style bagel chips is probably a good example of a brand that has expanded distribution over time. I don't know the numbers off the top of my head in terms where it started and where it is today, but that's up. Interestingly, about Victoria, it already kind of is national, actually it's actually North American-wide because we have full distribution in the club channel, both in U.S. and Canada. We also have full distribution in mass merchandisers. We're talking about building out geographic supermarket distribution, and we're gaining distribution every day, but there's still -- there's a fair amount of white space, and we may not get to 100%, but every 5 or 10 points worth of distribution growth is nice sales growth.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [34]

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How much does 5% to 10% add, did you say?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [35]

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I'm sorry?

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [36]

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How much did you say that every year 500 to 1,000 basis points of incremental distribution add to your top line?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [37]

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Oh, I didn't say a number. I don't know that number off the top of my head, but certainly any distribution growth will certainly add to profitable sales growth.

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Kenneth Bryan Zaslow, BMO Capital Markets Equity Research - MD of Food & Agribusiness Research and Food & Beverage Analyst [38]

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I guess, are there other brands that you can do that with?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [39]

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There's several brands that we think have expansion capabilities. One -- back to -- Victoria is one, McCann's certainly is one and Back To Nature is another one that, again, has strong presence in the specialty food channel nationally. It has strong presence in a regional retailer and a semi-national retailer. But beyond that, it doesn't have a lot of mainstream supermarket presence. So we're going to be looking to expand the presence. And that's less of an example of a regional brand and more that just has more customer penetration opportunities because it already kind of spans the country, it just doesn't expand in all retailers.

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Operator [40]

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And our next question comes from Carla Casella from JPMorgan.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [41]

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You have been proactive in the past at refinancing your debt. I'm just wondering your thoughts or if you've started thinking about the 2021 bond maturity now that they're callable?

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [42]

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We're watching the market, but obviously, we have a fair amount of time, and we like the coupon that we have right now. So expect us to continue to watch and potentially be opportunistic when we see the right time.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [43]

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Okay. Great. And then, Brian asked a little bit about the industry trends. I'm wondering if there are any specific changes of trends in slotting -- slotting trends in the industry just given the changes we've seen in players on both the wholesale and retail side? And your thoughts there on slotting for going -- for last year versus going forward?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [44]

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Well, the slotting still exists. It's still a cost of doing business. Yet, we do see more and more retailers willing to take that and putting it into promotional support. And not just pay an entry into the shelf. And there are a handful of customers that don't take it at all, and that's the once we prioritize in terms of a rolling early innovation, particularly on the frozen Green Giant front. So there's a handful of customers that will, again, launch innovation -- will launch early 2020 innovation in the fourth quarter of this year because, without a slotting investment, we can afford to launch products late in the year and have it be positive to our P&L rather than negative to our P&L.

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Operator [45]

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And our next question is from Eric Larson with Buckingham Research Group.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [46]

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My first question is, when I look at your adjusted gross margins for the quarter, I think the comparison adjusted year-over-year was like 24.5% this quarter versus 27.7% a year ago. How much of that decline was kind of a mechanical calculation for Pirate's being divested? And what would be the other major differences in that first quarter drop in gross profit margin?

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [47]

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Don't have those splits in front of me, but you're right, there is a mechanical portion of that, and like I said, we are still -- we're still selling product under the cost structure from the fourth quarter as we continue to benefit organizationally from some of our cost-cutting initiatives. The benefits of those will continue to roll out throughout the remainder of the year along with the benefits from the pricing.

And so it's a little bit of both.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [48]

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Okay. Okay. And then I noticed, in your SG&A expenses, and this is maybe what I thought might be a partial explanation for your gross margin decline partially, obviously, the mechanical issues was Pirate. But your consumer marketing was down fairly sharply in the quarter, down $3.3 million. So did you see a shift in how we spent your money in the quarter? Did you have a higher degree of promotional spend on a relative basis that maybe accounted for the decline in consumer marketing spend?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [49]

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We tightened up marketing spend, quite frankly, to keep our powder dry for the rest of the year because I do have a new head of all of our marketing, and he wanted to go through and peel through every budget. So we held in a lot of areas to be able to reapply for the rest of the year and apply under a new direction of a new leader, so something I applauded when he took over the reins. And it certainly helped a little bit, but it's not the way we want -- that's not really the way we want to make our long-term numbers. We want to be driving the business and -- but this is, right now, more of a shift than anything else.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [50]

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Okay. And then just a final question. I think, we're all a little -- we're scratching our head a little bit on your elasticity issues, a $7.3 million increase of pricing, but elasticity offsets that, $7.1 million. The question I have is, every quarter, some of your product lines have seasonality to them where you'll have a higher percentage -- like canned vegetables is a big fourth quarter item, and you need to promote heavily in the fourth quarter.

Was there a product line that has maybe a Q1 cadence to it, where you may not have been as competitive on promotion, and that's why your elasticity was so high in the quarter? Or is it a timing issue? I guess, we really want to figure out how that works.

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [51]

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Yes. So that volume in the base business that you're talking about -- I mean, first of all, the big driver of the volume decrease is the divestiture of Pirate's, and so that just comes off right off the start. As far the base business, keep in mind there's some elasticity in there, but really, what drove a lot of that volume decline has to do with the shift in Easter was a little bit, Victoria was a little bit, and then also, you have something like a Cream of Wheat, where a warmer season -- those drove some of that volume drop as well. And so I don't think you just can simply say pricing up $7 million, volume down $7 million, therefore $7 million of elasticity.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [52]

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Okay. All right. And I noticed that Back to Nature was particularly weak in the quarter. I think you've fully anniversary-ed that acquisition, I believe you have. I'd have to go look that up myself?

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [53]

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Yes. You don't have to, we have.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [54]

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Okay. So that would have been part of that base business volume loss then in the quarter as well, correct?

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [55]

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Correct.

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [56]

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And quite frankly, some of it-- a lot of that is self -- I wouldn't even say inflicted, self-directed because Back to Nature core categories are cookies and crackers and then granola and nuts, I would say, are secondary core. But the prior owners got into things like soup and juices and cereals and stuff and really didn't have any strength or strongholds. And when we took the business over, we identified those as questionable categories to be in as well as our retailers. So we literally are cleaning up and getting out of those categories, which will depress sales, and to focus on the core snacking categories. So it's down, but it's down for the reasons we understand and self-directed and cleaning up the product line and being more focused on the snack part of the business going forward, which is where the brand has shown proven ability over time is what we're most intrigued with going forward.

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Eric Jon Larson, The Buckingham Research Group Incorporated - Analyst [57]

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Okay. No, that's very helpful comments on the Back to Nature business. So will you have sort of negative lack -- or I guess, SKU, I guess, just SKU rationalization, will that be a negative comp in Back to Nature for the next quarter or 2 then? Or how should we view this?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [58]

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It will be a drag over the next couple of quarters. But we started losing -- we started cleaning up and losing distribution in the second quarter last year. So it will be continue, but it should alleviate over the next couple of quarters. And by the fourth quarter, we think we're pretty much pretty clean and not material and starting to offset that with growth on the remaining pieces of the business.

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Operator [59]

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And our next question is coming from Hale Holden with Barclays.

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Hale Holden, Barclays Bank PLC, Research Division - MD [60]

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Ken, you mentioned maybe some potential work on the frozen distribution side, and I was wondering if that was baked into your full year guidance for savings or if that would be in addition?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [61]

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It is. it was announced as part of our savings last year. We just didn't implement it until this quarter. So just like we moved the warehouse on dry and moved much closer to our customers, we're moving a warehouse, actually, this is much closer to the supply of products for Mexico and plus closer to customers, so we're going to get benefits on both inbound freight on that warehouse and outbound freight. But that's been taking place in the first part of this year, but it was planned for this year.

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Hale Holden, Barclays Bank PLC, Research Division - MD [62]

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Got it. And the second one is on a -- as a follow-up to some of the M&A discussion. When you think about M&A, are you still willing to consider sort of more creative options like Reverse Morris Trusts? Or should we think that there's a ceiling to what you might buy?

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [63]

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I think unfair for us to comment on that other than we're actively looking for M&A ideas as we always have in our past, and we evaluate each one individually and, at the end of the day, the math has to work.

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Hale Holden, Barclays Bank PLC, Research Division - MD [64]

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Great. It was worth a try, Bruce. I appreciate it.

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [65]

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No worries.

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Operator [66]

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And our final question is coming from Jon Andersen with William Blair.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [67]

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I was wondering if you could talk a little bit about the organizational enhancements that you've made over the past 12 months or so. Where are you with respect to kind of people, process, systems, the things that can help you steward the business effectively and also kind of execute the blocking and tackling like demand and production planning, inventory management? Just trying to get a sense for where you think you are in terms of having those pieces together and, presumably, that would give you also a better kind of overall visibility into the business.

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [68]

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Well, let's talk about people, processes -- people, systems and process, right? So first off, from a people standpoint, we just implemented our new leadership team. I would say new leadership team, some people new, some people that have been around for long term with new responsibilities and everywhere in between. So that's pretty well set. I would say, from a capability standpoint, you mentioned like supply chain or you indicated supply chain, versus a couple of years ago, a few years ago, when the company took over Green Giant, that was a big change for us. And we have now got a hold demand -- supply and demand planning organization that didn't exist 2.5 years ago. And that -- we didn't just miraculously take down inventory by $100 million last year. It was absolutely driven by a new team of people that were bringing in a very, very solid sales and ops planning process that was allowing, basically, the demand side of the house to get together with the supply side of the house and being able to reduce $100 million worth of inventory but increase customer service levels. So I would say that our EVP of operations, Bill Herbes, has done a terrific job hiring best-in-class people to bring a process that never existed at B&G before. So in fact, when I first came here in December of 2017, I saw that process and that team working on Green Giant, and they were doing a great job. And I asked the leader of that group, how fast can you get through the rest of the business. And after he gulped, he said, "Well, I probably can do it within the next 4 or 5 months." I said, "Well, we need to do this." And by mid-last year, we had it on every single one of our businesses, which is allowing us to improve our customer service while we're reducing inventory. In terms of -- so the people part, there's still some areas we want to round out, but I wouldn't say there's any big gaping hole. Ecommerce is an area we want to beef up, sales and category management is an area we want to beef up because we do have people that are carrying 51 brands in their bag, and we're going to add to that in the future when we do more M&A. So we're going to want to beef that execution arm up a little bit. But I think, the biggest breakthrough just happened last weekend, and it's been 2 years in coming, we now have our new system, and it's not a panacea, but it certainly is a tool to get much better at planning of our business, executing our business, analyzing our business and forecasting our business.

And our people are very excited about it. It's been a long time coming, but it clearly gets B&G up to the executional snuff it needs to be by handling a business that's a lot more complicated than it was just a few years ago. We're not only larger, we're more complicated. And this system will allow us to manage the business. Quite frankly, the people that have been here a long time welcome it. And the people that are here new in the last few years, they know how to use this system because they come from best-in-class companies that have had systems very similar. So whether it's a manufacturing person or a finance person or a financial planning and analysis person, they're all very excited about it. The one system we're going to also implement as an add-on to this system over the next year will be a trade promotion management system. That's one area that was not done in the initial Oracle JD Edwards area. It is a very large spend, and you need a system to better manage it. So we'll be putting in a typical trade management system that exists in many of our peer group companies, I'm sure, or things like it to be able to manage that very, very large spend to get at those trade promotion efficiencies that we believe are there. They're just hard to get at without the system to be able to manage it.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [69]

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That's very helpful. I appreciate it. It makes a lot of sense. One quick follow-up. When you talk about the productivity cost-saving program in the multi-year program, have you -- can you put some guardrails around the duration and the magnitude, kind of the cumulative impact that you expect at least from what you've kind of game planned or planned out at this point. I know you said $15 million to $20 million this year, I think, an incremental $20 million to $25 million next year. Have you thought beyond that? Or is that just the too far out at this point?

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [70]

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No. Well, we originally stated a goal and -- of $50 million, and we think that that's kind of over 3 years. But I do also have a new Executive Vice President of Supply Chain, who I've worked with many times before, and he's got a much larger list than I even initiated. I learned a lot of my operational savvy from him over the years. So $50 million is kind of our first stop, and we're going to be looking to see if we can add to that. It's too early to say now. But we've only start -- just started some of the -- I wouldn't say it's low-hanging fruit. We started things that are not structural. I mean, I would say changing a warehouse is somewhat structural but not that structural. But we have to get much more efficient and the plants run as well as perhaps reconsider what we're making where, and that gets to a little bit more structural change.

And we have to put some more pen to paper on what that might be worth. But we feel good about the initial goal of $50 million, and there's certainly a lot of wind in our sails for this year and next year to offset inflationary costs.

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Operator [71]

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That concludes today's question-and-answer session. Mr. Romanzi, at this time, I will turn the conference back to you for any additional or closing remarks.

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Kenneth G. Romanzi, B&G Foods, Inc. - President, CEO & Director [72]

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No big remarks other than thanking everyone for joining us today. And look forward to posting you on our second quarter results later on in the year. Thank you.

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Operator [73]

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And this does conclude today's call. Thank you for your participation. You may now disconnect.

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Bruce C. Wacha, B&G Foods, Inc. - CFO & Executive VP of Finance [74]

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Thank you.