B&G Foods, Inc.

Good day and welcome to the B&G Foods first quarter 2019 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 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 Walker, 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.

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 44 cents per share in adjusted diluting 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 prior plans 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. Face Business Net Sales which excluded the impact of M&A and discontinued brands with $409.5 million, essentially flat on the first quarter of 2019 compared to $409.3 million in a 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 span 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 the store, increasing by $6.9 million, a 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 of 5.5%. Net sales of the company's spices and seasonings businesses increased by nearly 1% or $0.7 million from the quarter. Net sales of Back to Nature decreased by $3.3 million as we are cycling loss distribution of certain non-core 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 warmer winter. Ortega decreased by $5.6 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 tire brands, which accounted for approximately $8 million of lost EBITDA for the quarter, inclusive of overhead under absorption. We remain comfortable with our full-year estimate of an negative adjusted EBITDA impact of $21 million from the divestiture of higher 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 facet of approximately $2 million from a Mexican peso currency gain. We saw a net cost increase in our POGs 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 span utilization, benefited adjusted EBITDA by $7.3 million, which helped offset the COGS increase. 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're 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 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 needed as our inbound freight and our transfer costs, which are also coming down year over year due to our efficiency efforts, impact our P&L in a roughly one-quarter lag until 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 felt that that fits for a little less than one month of the quarter. As a result of these efforts, we are also confident that our cost cutting will deliver the full year $15 to $20 million in cost savings benefits. We generated 44 cents in adjusted diluted earnings per share in the first quarter of 2019, compared to 55 cents per share in the first quarter of 2018, with the decline largely driven by lower adjusted EBITDA on the quarter, as we just discussed, offset in part by a reduction 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 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 of 2019 compared to $2 billion in net debt at the end of the first quarter of 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 of 2019 compared to $401.4 million at the end of the fourth quarter of 2018 and $455.4 million at the end of the first quarter of 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 5.2 times net debt to pro forma justitiva da at the end of the year. Now, as we mentioned a little 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 three-quarters of Pyrobrand's net sales of $74.9 million. For 2019, we expect net sales to be in the range of $1.635 to $1.665 billion, or in line with our 0 to 2% long-term offline growth model. We expect adjusted EBITDA of $305 to $320 million. Adjusted earnings per share of $1.85 to $2. Net interest expense of $87.5 to $91.5 million, including cash interest expense of $84 to $88 million. An 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 25 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 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 plus CapEx, cash taxes, including tax effects from the gain on sale of pirates, and cash interest will be approximately $175 to $180 million. The Pirate Grand Sylvester resulted in a pre-tax 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 of 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 info 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 fourth quarters. These benefits will be coupled with continued activity on the cost-cutting front. And now I turn the call over to Ken. Ken?

Thank you, Bruce. And thanks to all of you for joining us on the call today, with special thanks to the dedicated team at B&G Foods, for 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 discrete timing events negatively impacting our adjusted EBITDA, we're on 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 positions 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 show traction in all three of these pillars of our 2019 plan. So today, I'd 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 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 two 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 disruptions. 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-based 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 a 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 efforts. 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 for the category that coincided with our purchase of Green Giant. Green Giant frozen continues its strong momentum behind our vision of 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 crusts, green giant protein bowls, and little green sprouts organics. And we are very much looking forward to announcing 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 right-sizing 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 remain solid in both the specialty food channel and several mainstream supermarket retailers. And now that our product line is cleaning up of non-core 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 during the product recall, the brand has performed well over the past two 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 sizable 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 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, mainly right-sizing several of our grain giant frozen products. All in, we're on track to deliver our 2019 plan of $15 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 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 creative acquisitions. That is what built this great company and that strategy will continue to fuel our growth in the future. In addition, we'll 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?

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, I have star one if you would like to ask a question. And today, our first question is coming from Cornell Burnett with City Research. Please go ahead.

Great. Good evening, guys. Hey, Cornell. How are you? Pretty good. Pretty good. My first question is really just centered around the full year guidance. You know, so you missed the first quarter by, you know, $2 million or $3 million in EBITDA for the bottom of your range, and EPS is also lower than the bottom of the range. So I just want to know, you know, what kind of gives you – why do you keep the four-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?

No, we don't think so. We think that the impact should be modest, but calling out what 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 pirates. 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's really those two issues where we get a lot of confidence as we truly are seeing, as Ken mentioned, a lot of the cost savings initiatives that we're working on, the ability and the desire to lower those break-offs. We're truly seeing them, but we're 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.

And, I mean, I guess it's important. So, you know, looking at 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 the remaining three quarters. So I think, you know, 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 put some numbers around, you know, A, you know, how many call savings came through in the quarter, and then going forward, you know, kind of what's the residual that's left over the remaining three quarters. I would suspect that it has to be a pretty big number and that you didn't get much growth in this quarter, kind of given the way margins played out?

Yeah, when you really think about it from a timing standpoint, we did benefit on the delivery portion of our freight cost, but not the inbound freight, because that'll 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 benefit, and 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.

And that's another thing that was on my mind. So it's about $7 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 pricing of $15 to $20 million. If that holds true, then I would just say that you've got $8 to $13 million of pricing over the remaining three quarters, which is what you got in Q1, despite the fact that you've got more pricing coming in sometime in 2Q. I think the intention is to be a little bit more efficient on the trade spending. Just wanted to know kind of how that lays out and if ultimately there's just upside on the pricing numbers given the way 1Q has played out.

Yes. As we stated in the very call, we counted in our model the 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 pricing increase, there may be a little upside. But the first quarter, we were 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 trade spend efficiencies and get the price list right through the way we planned, there could be upside to the pricing.

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

Probably. Probably. And then also, if you build your model, I would make sure you keep in mind that there will be some negative drag from pirates, which is making more full-year guidance.

Okay. I'll pass it along. Thank you.

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

Please go ahead, sir.

Hi, guys. This is Mike. I'm for Bill. Just a few questions here. First, can you talk about if the price increases have affected your sheriff's shelf and if retailers are shifting more towards private label products? And second, can you confirm your leverage target and if you guys have made any changes to your capital allocation strategy? Thanks.

Okay. I'll take the first question. I think if I heard you correctly, it was a little bit low. You're asking if the price increase caused us to lose any sheriff's 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 had just, 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, which had been so long since we had taken pricing and had data to read and market. So this new round is fresh off of last year's experience.

And then the second half of your question, no change from our stated leverage targets, which is 4.5 to 5.5 times net debt to EBITDA. As far as changing capital allocation strategy, no, we remain committed to the dividend. We also are focused on returning cash to shareholders through our share buyback program, which, 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.

Great. Thanks so much, guys.

And as a reminder, that is star one.

If you would like to ask a question, our next question comes from Karu Martin with Jefferies. Please go ahead.

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

You know, 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, you know, we're seeing elevated pricing, particularly in the canned vegetable business. That's seeing some improved pricing. But, you know, we haven't seen any outsized changes or oversized reactions to our price increases.

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'd 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 new realism in there in terms of what the pricing will be and it's not a race to the bottom?

Well, I think there's two things. They're two separate businesses almost in the same brand, but the frozen segment has been very different than the canned segment. The frozen segment... 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 fairly close, you know, copies of our products. So, innovation is really driving the growth in the frozen vegetable category. On the can 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 can 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 that positive on the on the shelf stable side. We're also we've gained some distribution in other retailers. So the new distribution is what's helping our can business plus being more competitive every day at the shelf and the distribution we're in. So it's really a tale of two cities, same brand name, two different sections of the store and two different dynamics in those sub segments of the vegetable category.

And just lastly, given that success that you've had in Green Giant Frozen, do you use it as a platform for acquisitions, or where do you see adding businesses to further the growth of the company?

Well, acquisitions are, you know, we're always open to creative acquisitions that we can buy with the disciplined purchasing approach that B&G takes. But on the frozen side, and particularly with frozen vegetables and green giant, we have an internal pipeline that we see for quite some time that we're very excited about. So, the internal pipeline is 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 even be better applied, we will absolutely look at that. So, you know, frozen businesses in general, you know, we look to places where there are these synergies, but really, It would 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.

Thank you very much, guys.

Appreciate it. Thanks, sir.

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

Please go ahead, sir.

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

I think it very much depends on the acquisition. We haven't typically gone over six times leverage. earlier on the call, estimated net debt to EBITDA based on the middle of our guidance is $305 million of EBITDA out of 320, gets us to 5.2 times 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.

Great. Next, when you look 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 CPG's are going to wreck with their own brands, the consumers. You know, do you see an opportunity to capture one of those three opportunities and kind of where do you stand?

We are racing quickly to get e-commerce ready. The place we're really starting, which is the top two food retailers in Walmart and Kroger in particular. I mean, they're very large and we do a lot of business with them and other supermarket retailers. So we're making sure that we're e-commerce 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 ourselves. And as we get more e-commerce ready for the 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.

Got you.

That was it for me. My other question has been answered. Thank you for your time. Thank you.

And our next question is coming from Ken Zaslau with Bank of Montreal. Please go ahead.

Hey, good afternoon, everyone. 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?

Well, that could be a very long answer. We have 50 brands. You know, there's lots of price elasticity in more price sensitive brands. Brands, and it's not just brands, it's product segments. So, for instance, let's take Ortega. There's a 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. Accent, 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, Accent defines the category of flavor enhancers. And so that's a business where we've seen very little less 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, you know, if you're not there at two for a dollar, you're probably not going to get 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 10 or 20 cents more or 10. 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, you know, 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 timeframes. 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.

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

Well, and that's what we've done. I mean, well, you know, 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. You know, if you line extend a small brand, you're going to have a small business. If you line extend a larger brand, you're going to 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, you know, separate from pricing, innovation is clearly a lever that we'll be pulling in and certainly will apply to some of our other brands.

Okay. My last question is, when was the last time you've taken a brand, 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, I mean, there's examples over the last 15, 20 years that I've seen. It can actually be a real home run, but what is your experience and how comfortable are you and how quickly will we see a change on that?

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 of 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 of mass merchandisers. We're talking about building out geographic supermarket distribution. And we're gaining distribution every day, but there's still a fair amount of white space. And we may not get the 100%, but every five or ten points worth of distribution growth, it's nice sales growth.

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

I'm sorry?

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

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.

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

There's several brands that we think have expansion capabilities. 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 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.

Great.

Thank you very much.

And our next question comes from Carla Casella with J.P. Morgan. Please go ahead.

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

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.

Okay, great. And then Brian asked a little bit about the industry trends. I'm wondering if there are any specific changes or 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 last year versus going forward.

Well, you know, the slotting still exists. It's still a – It's still a cost of doing business, yet we do see more and more retailers willing to take that and put it into promotional support and not just, you know, paying an entry into the shelf. And there are a handful of customers that don't take it at all, you know, and that's the ones we prioritize in terms of 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.

Okay, great. Thank you.

Thank you.

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

Yeah, good afternoon, everyone. Excuse me, I'm sorry, coughing here. My first question is, when I look at your adjusted growth 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 pirates being divested? And what would be the other major differences in that first quarter drop in gross profit margin?

Don't have those splits in front of me, but you're right. There's 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 pricing. And so it's a little bit of both.

Okay. Okay. And then, you know, I noticed in your SGMA expense here, and this is maybe what I thought might be a partial explanation for your gross margin decline, partially, obviously the mechanical issues with pirates, but your consumer marketing was down fairly sharply in the quarter, down 3.3 million. So did you see a shift in how you spent your money in the quarter? Did you have a higher degree of of promotional spend on a relative basis that may be a comment for the decline in marketing and consumer marketing spend?

We tightened up Marty's spend quite frankly to keep our powder dry for the rest of the year because we, you know, I do have a new head of all of our marketing and we, you know, 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 that I applauded when he took over the reins. And it certainly helped a little bit, but that's not really the way we want to make our long-term numbers. We want to be driving the business. But this is right now more of a shift than anything else.

Okay. And just a final question. I think we're all a little – We're scratching our head a little bit on your elasticity issues, you know, 7.3 million increase of pricing, but, you know, elasticity offset is 7.1 million. The question I have is, you know, every quarter some of your product lines have seasonality to them where you'll have, you know, 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're just trying to figure out how that works.

Yeah, 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 pirates. And so that just comes off right off the start. As far as 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 eastern 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 could just simply say pricing up $7. volume down seven, therefore $7 million of elasticity.

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'll have to go look that up myself. Yes. You don't have to. We have. Okay. So that would have been part of that base business volume loss then in the quarter as well, correct? Correct.

Yeah, and quite frankly, 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, 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. We're literally 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.

Okay, no, that's very helpful comments on the back to nature business. So, will you have sort of negative lack of, I guess, SKU, I guess, you know, just SKU rationalization, will that be a negative comp and back to nature for the next quarter or two then?

It will be a drag over the next couple of quarters, but we started cleaning up and losing distribution in the second quarter last year. So, It'll 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.

Got it. Okay. Very helpful.

Thank you. Take care.

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

Please go ahead.

Thanks for fitting me in. 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 an addition.

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 a warehouse on dry and moved much closer to our customers, we're moving a warehouse – Actually, this is much closer to the supply of product from 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.

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

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.

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

No worries.

And our final question is coming from John Anderson with William Blair. Please go ahead, sir.

Yeah, hi. Thanks for the questions. 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. You know, where are you with respect to kind of people, process, systems, you know, the things that can help you steward the business effectively and also, you know, 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. Thanks.

Okay. Well, let's just talk about people, process, and People, systems, and process, right? So first off, from a people standpoint, you know, we just implemented our new leadership team. I would say new leadership team, some people new, some people that have been around for a long time with new responsibilities and everywhere in between. So that's pretty well said. I would say from a capability standpoint, you mentioned like supply chain or you indicated supply chain. You know, 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 whole supply and demand planning organization here that didn't exist two and a half years ago. And 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 of the inventory but increase customer service levels. So, I would say that, you know, our EVP of operations, Bill Herby, did a terrific job hiring best-in-class people to bring a process that never existed at B&G before. 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 this to the rest of the business? And after he gulped, he said, well, I probably can do it within the next four or five 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. 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. E-commerce 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 alarm up a little bit. But I think the biggest breakthrough just happened last weekend, and it's been two years in coming. We now have a new system, and, you know, it's not a panacea, but it certainly is a tool to get much better at planning 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 BMG 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 it, there's trade promotion efficiencies that we believe are there. They're just hard to get at without the system to be able to manage it.

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, you know, the multi-year program, 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, you know, 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 it just that too far out at this point? Thanks.

No. Well, we originally stated a goal and a 50 million, and we think that that's kind of over three 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, you know, 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 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 in the plants we 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 certainly a lot of wind in our sails for this year and next year to offset inflationary costs.

Great. Thanks a lot for all the callers.

Appreciate it.

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.

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

Thank you.

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