B&G Foods, Inc.

Good day and welcome to the B&G Foods third quarter 2019 earnings call. Today's call is being recorded. You can access detailed financial information on the quarter and the company's earnings release issued today, which is available at 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 also be making reference on today's call to the non-GAAP financial measures, adjusted EBITDA, adjusted net income, adjusted diluted earnings per share, and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided on today's earnings release. Ken Romanti, the company's president and chief executive officer, will begin the call with opening remarks and discuss various factors that affected the company's results, selected business highlights, and his thoughts concerning the outlook for the remainder of 2019 and beyond. Bruce Walker, the company's chief financial officer, will then discuss the company's financial results for the quarter as well as its guidance for 2019. I would now like to turn the conference over to Ken.

Good afternoon. Thank you all for joining us today for our third quarter earnings call. This afternoon I'd like to provide you a perspective on our third quarter results before I turn the call over to Bruce. provide more detail of our financial performance. Over many years, B&G Foods has had a strong track record of increasing sales, profitability, and cash flow through organic growth, disciplined acquisitions of complementary branded businesses, and new product development. Unfortunately, we have not lived up to our track record over the past two years. But I believe that our results this quarter show that we're making the necessary improvements to our business and that we're beginning to return our company to a path that will allow us to achieve our short and long-term goals. Highlights of the third quarter, which I'll discuss more fully in a few minutes, include, first, the ongoing integration of Collabagirl, which is proceeding very well. Second, the successful completion of the largest debt refinancing in company history at very attractive interest rates. Third, continued success of our new product innovation. Fourth, achievement of price increases in a typical marketplace. Through the first three quarters of 2019, we've generated approximately $16 million in price increases, which is trending at the high end of our expected range. Fifth, increasing momentum behind our cost savings initiatives, projected to be $20 million for the year, primarily in logistics costs. And sixth, continued strengthening of our organizational capability, including organizational redesign, personnel enhancements, and system improvements, such as our new Oracle JEE ERP system and trade spend management system. In the third quarter of this year, Net sales and adjusted EBITDA declined primarily due to the divestiture of pirate brands in the fourth quarter of 2018. Excluding that divestiture, our net sales increased 2.6%, mostly driven by the acquisition of Cloud Girl, which is performing very well in line with our acquisition model. The integration of Cloud Girl continued to proceed smoothly during the third quarter of As we began transitioning Clabber Girl to our sales team, we expect to fully integrate Clabber Girl's sales and distribution in January of 2020. Base business net sales, which excludes the impact of the Pirate brand's investor, the Clabber Girl acquisition, and an extra two weeks of McCann's Irish oatmeal, declined 2.5%, mostly due to Green Giant and our spices and seasonings business. While much of this was planned, sales performance for the quarter was at the low end of our expectations. Our spices and seasoning business declined 3% versus last third quarter, primarily driven by promotional timing, modest price declines in our commodity spice business, particularly garlic and pepper, and some lost distribution of low-margin private label business. Green giant net sales declined 4.9% versus the third quarter of 2018, primarily due to the implementation of our trade promotion optimization strategy that increased the promotional price point of our bag-in-a-box product line. Much of this was planned, although in certain customers, the promotional volume sensitivity was greater than we expected. However, we will continue this strategy in non-holiday timeframes as it contributes to our overall net price realization and we believe will help improve our margins for these products. We also experienced supply shortages of our frozen corn on the cob products from the poor crop in 2018. We believed we could stretch the limited supply we had on hand, but it just didn't last until the new crop came in. We're now back in full inventory position to fill in customer orders from the 2019 harvest. And lastly, Canadian Thanksgiving was later this year, which negatively impacted the third quarter but should positively impact the fourth quarter. We recognize this is the first time in seven quarters, dating back to 2017, that Green Giant hasn't shown growth, but we're confident that it will return to growth in the fourth quarter, the kind of growth we've come to expect from Green Giant. In the fourth quarter, we're executing our traditional holiday promotional practices on our bag-in-a-box line, so that should not be a drain than it was in the third quarter. In addition, as I mentioned earlier, we expect Green Giant to benefit from the later Canadian Thanksgiving. However, we believe the real driver of expected Green Giant growth in the fourth quarter will come from our 2020 innovation product launches that have already begun shipping to customers that represent about a third of the ACV. We're very excited about these products. They include Green Giant pizza with cauliflower crust, green giant cauliflower and spinach gnocchi, green giant vegetable hash browns, building off the terrific success of our green giant veggie tots, and green giant marinated and grilled vegetables. As part of our continuing mission to make green giant the plant-based food brand of the future, these innovative new products will expand green giant's reach into areas of the frozen food case beyond vegetables, including frozen potatoes, frozen pizzas, and frozen pasta. And in 2020, we expect Green Giant will continue to expand its reach both in the frozen food case and the dry grocery area of the store. So the outlook for Green Giant continues to be a very bright green. Year-to-date, our total company sales have increased 1.7%, excluding pirate brands, driven by Green Giant, Maple Grove Farms, Ortega, McCann's, Las Palmas, and New York Style. partially offset by Back to Nature, Snackwells, Mama Mary's, and Bear Creek, another brand in which we're raising promotional price points to improve margins. Excluding the impact of the divestiture of pirate brands, we estimate that our adjusted EBITDA for the third quarter increased by approximately 2% to 3% versus last year. Driven by the continuation of price realization of $5 million, and the success of our cost savings initiatives totaling nearly $8 million for the quarter. Year-to-date, we estimate that our adjusted EBITDA, excluding the impact of pirate brands, was relatively flat to 2018 as our plan to take pricing and implement cost savings to ward off inflation has been fully implemented. In fact, we expect to deliver both pricing and cost savings at the top end of each expected range of $15 to $20 million for the year. However, our earnings were hampered a bit in the third quarter and will continue to be in the fourth quarter by higher costs than anticipated. Therefore, despite delivering the high end of our budgeted pricing and cost savings, we're lowering our full-year adjusted EBITDA guidance to $295 to $310 million. This reduction is primarily driven by two factors. One, higher grain giant 2019 vegetable pack costs and the acceleration of the use of the new more expensive pack due to last year's short vegetable crop that did not last as far into the calendar year as it normally does. And two, higher import tariffs, particularly garlic, and the effect of steel tariffs on domestic steel pricing. While we had increases in those for the year budgeted, The increases are coming in higher. I do not like lowering our earnings projections and disappointing our investors. But when I took this role, I promised as much transparency as possible as early as possible. And I believe you should know our business expectations as soon as we do. But despite these newly identified costs, we have even more conviction in our plans moving forward. Our expectations moving forward remain to drive 0% to 2% base business growth, deliver pricing and cost savings to ward off inflation and improve margins, and add accreted acquisitions to our business. In addition to the reasons for optimism highlighted at the beginning of my discussion, we believe this is achievable for the following reasons. One, we compete in growing categories. A substantial majority of the categories in which we compete are healthy and growing. Two, we have strong brands. A B&G Foods brand is in over 80% of U.S. households, and many of our brands have the number one or two national or regional market share in the categories in which we compete. Three, we have geographic distribution expansion opportunities. Many of our brands have relatively low geographic distribution, around the 50% mark. Brands like McCann's, Victoria, Mama Mary's, and Back to Nature. have solid growth potential by expanding geographic retail distribution. And lastly, we have a robust innovation pipeline. We have a very strong track record of new product innovation and a great pipeline of new products hitting the shelves over the next 12 to 24 months that we're excited about, particularly on Green Giant. And we've extended much of the innovation approach from Green Giant to several of our other brands, which we're also very excited about. On the cost of manufacturing, we've made great progress reducing our logistics costs. Going forward, we plan to step up our asset rationalization and repatriation of products in and out of our manufacturing facilities for the best low-cost solution. We plan to continue to reduce product and packaging costs wherever possible and expect to continue to drive trade spend optimization as we implement a new go-to-market trade program and systems to manage it in 2020. Regarding our capital structure, we were very pleased with the successful refinancing of $1 billion of our long-term debt, securing our balance sheet for the foreseeable future. This was our largest debt refinancing in company history. Our new senior notes were issued at one of the lowest interest rates in our company history. We secured an attractive 4.8% blended cost of new debt and the refinancing eliminated all near-term maturities. Furthermore, we remain committed to returning cash to our stockholders. Yesterday, we paid our 60th consecutive quarterly dividend, and two days ago, our Board of Directors declared our 61st quarterly dividend, which will be paid in January 2020. During the third quarter, we also returned cash to our stockholders through our repurchase of approximately 1.3 million shares of common stock at an average price of $18.55 or $24.7 million in the aggregate. And lastly, as always, we remain very active in evaluating acquisition opportunities. So now I'd like to call the turnover to Bruce to discuss the details of our third quarter financial performance.

Thank you, Ken. Good afternoon, everyone. As Ken just outlined, we had solid performance in the third quarter as we reported net sales of $406.3 million and adjusted EBITDA of $86.2 million. Adjusted EBITDA as a percentage of net sales was 21.2% for the quarter. After adjusting for approximately $26.6 million in net sales for Pyrogrants in the third quarter of 2018, net sales increased by $10.3 million, year's third quarter. Net sales benefited in the quarter by $20.1 million, resulting from the acquisition of Clever Girl in May of 2019. Base business net sales decreased by $90.8 million, or 2.5%, largely driven by declines in Green Giant and our spices and seasonings business. Outside of Green Giant and the spices and seasonings business, nearly 60% of our brands were up for the quarter. Third quarter net sales benefited from approximately $5 million of price increases, which were largely driven by our list price increases as well as improved trade spend optimization, particularly for Green Giant. Unit volumes exclusive of the sale of higher brands and including our acquisition of Clever Girl increased by $5.3 million. As Ken mentioned earlier, Green Giant had a softer quarter than anticipated, with net sales down $6.1 million, or 4.9%, as the brand was negatively impacted by a couple of discrete events, including a trade optimization program that is designed to improve profitability on a recently remapped bag-in-a-box line, temporary out-of-stocks on corn on the cob following a second short crop, and the timing of the Canadian Thanksgiving, which shifted from the third quarter a year ago to the fourth quarter of this year. Each of these events cost us about $2 million in reduced Green Giant net sales for the quarter. On a year-to-date basis, performance remains strong for Green Giant, and net sales is up $9.1 million, a 2.5% increase year-to-date versus 2018. And we are very excited about the brand's prospects in the fourth quarter as we are introducing 11 new frozen innovation products which we expect to generate approximately $5 to $10 million in incremental net sales versus the year-ago fourth quarter. The new innovation launches include green giant cauliflower veggie hash browns, cauliflower and broccoli veggie hash browns, cauliflower gnocchi, spinach gnocchi, marinated mushrooms, eggplant, peppers, and zucchini marinated veggies, zucchini grilled veggies, cauliflower cheese and bacon veggie tops, margarita pizza, four-cheese pizza, and a 24-ounce value size of zucchini spirals. These new innovation products are also expected to positively impact green giant net sales in 2020. We expect 2020 to further benefit from another round of new innovation products that we plan to launch in the first half of 2020 and that we expect will further cement green giants as the preeminent plant-based brand in the frozen food aisle. Among our other large brands, net sales of maple grow farms increased by approximately $1.3 million, or 8.1%. Net sales of Ortega increased by approximately $1.1 million, or 3.2%. And net sales of New York style increased by $300,000, or 3.2%. Net sales of cream of wheat were down $200,000 at 1%. Net sales of our entire spices and seasonings business were down $2.5 million, or 3%, largely driven by lower pricing of some commodity spices, as well as a result of decreases in commodity input costs, primarily garlic and black pepper, and some losses in certain low-margin private label contracts. Profits in our spices and seasoning business remain strong, and net sales of our legacy spices and seasoning brands, including Accent, Mrs. Dash, and Sasson, were up 5.6%, 5.6%, and 1.7% for the quarter, respectively. Growth profit was $108.8 million for the third quarter of 2019, or 26.8% of net sales. Excluding the impact of $1.5 million of acquisition divestiture-related and non-recurring expenses during the third quarter of 2019, our gross profit would have been $110.3 million, or 27.2% of net sales. Gross profit was $115 million for the third quarter of 2018, or 27.2% of net sales. Excluding the negative impact of $3.2 million of acquisition-related and non-recurring charges during the third quarter of 2018, our gross profit would have been 118.2 or 28% of net sales. Our plan this year was to increase pricing and implement cost savings initiatives to offset inflation in order to maintain gross profit margins. And for the most part, that is exactly what is happening. For the third quarter of 2019, gross profit benefited from an increase in net pricing of $5 million bringing the year-to-date net pricing benefit to $16.2 million. Cost savings are also benefiting our margins, as our cost-cutting initiatives have helped to offset inflationary pressures that we are seeing across the industry. Our cost savings initiatives include the realignment of our dry and frozen distribution networks, improved procurement and packaging, and the G&A rationalization that we implemented earlier this year. These initiatives, in addition to the pirate brand's divestiture, helped to lower our cost of goods sold, inclusive of the cost of materials, labor, overhead, freight, and warehousing, from $307.6 million in the third quarter of 2018 to $297.5 million in this year's third quarter. Cost of goods sold as a percentage of net sales was 73.2% in the third quarter of 2019, compared to 72.8% in the third quarter of 2018. as increased input costs, particularly driven by a second consecutive short agricultural crop, negatively impacted green giant margins and offset these gains. Selling general and administrative expenses of $38.1 million were favorable by $1.9 million, or 4.7%, compared to $40 million for the third quarter of 2019. The favorability was driven by decreases in selling expenses of $1.6 million, warehousing of $0.8 million, and consumer marketing expense of $0.5 million. These improvements were offset in part by an increase in other general administrative costs of $0.8 million and acquisition divestiture-related and non-recurring expenses of $0.2 million. Expressed as a percentage of net sales, selling general and administrative expenses improved by 0.1 percentage points, to 9.4% for the third quarter of 2019, compared to 9.5% for the third quarter of 2018. We generated $86.2 million in adjusted EBITDA in the third quarter of 2019, compared to $91.9 million in the prior year quarter, which represents an increase of approximately $2 million after adjusting for the lost contribution following last year's divestiture of Pirate Brand. which we estimate contributed approximately $7.7 million in the year-ago quarter. Adjusted EBITDA benefited from improved pricing, trade optimization, product waitouts, packaging, and freight efficiencies driven by our distribution realignment plan, which has now been fully implemented in both our dry and frozen distribution networks. Net sales of our newly acquired CleverGirl provided some benefits, which also helped to offset declines in Green Giant and certain of our other legacy brands, as well as modest inflow cost inflation across the portfolio. Adopted EBITDA as a percentage of net sales was 21.2%, which was in line with the prior year third quarter and represents an increase from the 18.7% generated over the course of the first two quarters. Year-to-date adjusted EBITDA as a percentage of net sales is now 19.6%. We generated 54 cents in adjusted diluted earnings per share in the third quarter of 2019 compared to 57 cents per share in the third quarter of 2018. The decrease of 3 cents per share was primarily driven by the lost contribution resulting from the sale of private brands. Separately, While interest expense of $24.9 million was lower than the $27.9 million in interest expense in 3Q 2018, net interest expense was negatively impacted by approximately $1 million as a result of increased borrowings to fund the acquisition of Power Girl. Adjusted W earnings per share is also beginning to benefit from the recent share repurchases under our $50 million share repurchase authorizations. approved by our Board of Directors earlier this year. During the third quarter of this year, we repurchased approximately 1.3 million shares of common stock at an average price of $18.55, or $24.7 million in the aggregate. These share repurchases are in addition to the $36.9 million, or 1.4 million shares that we repurchased under our previous share repurchases authorization at an average price of $26. that were executed between March 2018 and March 2019. Now I would like to review our guidance for the remainder of the year. First, we are reaffirming our top line guidance range of $1.665 million to $1.7 billion, which updated last quarter after the announcement of the acquisition of Power Girl. As I mentioned earlier on the call, We have generated $233 million of adjusted EBITDA through the first three quarters of 2019. This is essentially flat to last year's adjusted EBITDA, $255.7 million, less the estimated $22.7 million in contribution that left the organization due to the sale of higher grants. We are currently trending at about $292 million in trailing 12-month adjusted EBITDA for the end of the third quarter of 2019, or essentially flat in 2018, just even that, after removing the contribution of higher grants. As we outlined earlier this year, we expect to see benefits for an increased pricing and cost savings initiatives that would offset increases in costs. We have executed on this plan, and we expect to continue to do so in the fourth quarter. Through three quarters, we have realized approximately $16 million in benefits from pricing, and so we expect to finish at the high end of our expected range of $15 to $20 million of pricing. We have also realized more than $20 million in logistics cost savings, year-to-date, largely driven by our dry and frozen distribution realignments, which have offset modest increases in rate. We are also on pace to achieve at least $5 million in and additional cost savings from other initiatives such as procurement, waitouts, and improved packaging. These benefits should have pushed us higher into our initial expected cost savings range. However, while we have executed our cost savings and price increases on the high side of our plan to offset inflation, we have experienced higher than expected costs in a couple of areas this year, including higher than anticipated vegetable costs, driven by a second straight short crop for vegetables, greater than anticipated increases in tariffs, and increases in our can prices, resulting from greater than anticipated steel and aluminum prices. As a result, we are revising our adjusted EBITDA guidance for the full year and tightening that guidance to $295 million at the low end of the range, with just a hair above our current LTN adjusted EBITDA. And we are tightening the high end of the range to $310 million in adjusted EBITDA, which would represent an increase of a little bit more than 5% to our 2018 adjusted EBITDA, excluding the estimated product contribution that we lost as a result of the higher grants investor. We are also updating our adjusted daily earnings per share guidance to $65 to $80, which reflects the change to adjusted EBITDA, as well as the incremental interest expense associated with the acquisition of CyberGrowth, our share repurchases, and our recent refinancing. I would also like to quickly walk through the rest of our P&L functions from the full year of 2018, which include net interest expense of 95.5 to 99.5 million dollars, including cash interest expense of 92 to 95 million dollars, and interest amortization expense of 3.5 to 4.5 million dollars. The increase in interest expense versus our original forecast is largely driven by $82 million of borrowings to finance the private girl acquisition, approximately $35 million spent on share repurchases, fees and expenses associated with our refinancing, and the partial double count of interest for a two-week period between the issuance of our new five-and-a-quarter senior notes and the redemption of our four-and-five-eighths. We also expect depreciation of expense of approximately $41 million, amortization expense of approximately $18.5 million, an effective tax rate of approximately 25.5 to 26 percent, cash taxes excluding the negative tax impact from the gain on sale of pirate brands to be $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. As a reminder, the higher brand semester resulted in a pre-tax gain on sale of approximately $176.4 million during the fourth quarter of 2018. The gain on sale negatively impacted our income taxes for 2019 by approximately $71.8 million. which included the cash tax payment that we made during the second quarter of 2019 of $43.2 million, and a cash tax refund we otherwise would have expected to receive of approximately $28.6 million. Excluding the negative tax impact of the gain on sale, our net cash provided by operating activities for the first three quarters of 2019 would have been approximately $73.1 million. As a reminder, the third quarter tends to be our softest from a net cash provided by operating activities perspective, as we typically build inventory during the large vegetable tax season. We then typically increase cash during our fourth and first quarters as we sell down inventory. Due to the timing of the pack this year, we had a slightly greater outlay in the third quarter than typical. And as a result, we expect to have a larger reduction in the fourth quarter, which will benefit fourth quarter cash from operations. Our fourth quarter typically generates the largest cash from operating activities. This concludes our prepared remarks, and now we would like to begin the Q&A portion of the call. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Karu Martinson with Jefferies. Please go ahead.

Good afternoon. With the new Green Giant introduction, What are the slotting fees and the profitability of those products? Are they in line with the existing, or how should we think about that as it flows into 2020?

The routine we are now on is that we are now launching, for the second year in a row, the following year's innovation to about a third of the ECV that doesn't require slotting. So the items we're launching will have no slotting attached to it. For customers that require slotting, they will be able to get that starting in January. So no slotting associated with these products, and the margins are, you know, as good or better than the kind of average of what we've been introducing.

Okay. And as you guys pulled back promotion, you know, was it just, you know, broad-based slowdown in the Green Giant volumes. I think there's just concerns that this is something that you're not able to pull back on promotions.

There's several, many segments of the Green Giant frozen business. There were two segments that hurt us. One was the promotional pullback, and we still believe it's the right thing to do in the non-holiday timeframes. And the second was we were out of stock on corn on the cob. Those will be past that in the fourth quarter. Our innovation items that we've been launching have been doing very, very well. And so there's no issue with how the innovations perform.

Okay. And just lastly, you talked about the distribution gain opportunities for the acquisitions that you've done. and you're only in 50% of the geographic areas. What does it take to broaden that distribution that seems to be a low-hanging fruit for you guys?

Well, some of the brands are relatively new to our portfolio. So, for instance, McCann's, which we just bought last year, we've been growing that. I think that was up in a quarter, like 30% or 40%. Now, we're up a low pace, but we've We've been out presenting all year long to customers that, hey, this is a new brand we have. It's a terrific heritage Irish oatmeal. That was well below 50%. I think we purchased that brand at something like a quarter of the ACV, and now we're ramping that up. Victoria Pasta Sauce, which we bought a couple of years ago, again, an East Coast brand. So it will take slotting dollars, and it will take some shopper marketing and some consumer support in those customers. And some of it will take innovation. Some of our brands, some of our legacy brands like Mama Mary's and the now three-year ownership of Back to Nature is going to take some re-emphasis in terms of building out not only strengthening the business in the current customers but gaining new customers. So we're totally relaunching Back to Nature. After a couple years of soft sales as we've been cleaning up the product line, we are totally revamping Back to Nature with new graphics, new products and the cookie and the cracker and the granola line of the portfolio, which will not only help current distribution, but is giving us now kind of a resurgence in ability to talk to customers that don't have it in distribution.

Thank you very much, guys. Appreciate it.

Next question comes from Brian Hunt with Wells Fargo. Please go ahead.

Yes. I was wondering if you could, you know, go back over. You talked about a couple of hits. to sales throughout the quarter, you know, corn on the cob and a couple of other things, and I think you enumerated the sales miss. Could you repeat that for me, associated with those shortfalls?

For great guidance? Yeah. Three things we highlighted for great guidance was the trade optimization program, the short on corn on the cob, and the third one was the timing of Thanksgiving in Canada. Each one of these... I know that we're approximately $2 million. The Canada one is tiny, obviously.

So you'll get $6 million in total, and you'll get $2 million of that back in Q4, more or less.

And we won't have the drag from the promotional, because we're not executing the higher price points in the holiday timeframe. And we're back in stock on the corner of the house, so that won't be a drag.

Gotcha.

My second question is, you know, when you look at all the new products that you announced, you said I think $5 to $10 million of incremental sales in Q4. You know, can you talk about are your retailers just bumping out other brands? Are any of these things potentially cannibalizing your own? Because I buy your cauliflower pizza, but now I've got a chance to buy crust. Now I've got a chance to buy the whole pizza. You know, one, is there a potential for cannibalization? And two, you know, who are you buffing out?

The retailers are always adding in the leading items across the portfolio, not just ours, but across the whole range of items. And it's their real estate, so they decide. But what we're encouraged about with these items is we're going outside the vegetable set. So as we continue to launch new vegetable items, we always – We'll lose some while we gain some. We always look to have a net gain. But we don't believe we'll lose items in the vegetable set when we're going after sets that we're not really present in. So we're not very present in potatoes. We're not very present in pizza. We're not very present in pasta. So while our new product development strategy is very consumer-focused by bringing plant-based alternatives, particularly carb replacement alternatives, to the consumer is also going to expand our footprint and get net facings of the Green Giant brand beyond just traditional vegetables. We already know in some of our customers who merchandise our veggie tops in potatoes, frozen potatoes, not in frozen vegetables, which is a whole different section and a very large section. And while we do very well when we're merchandising in frozen vegetables, the veggie tops move even better when it's next to the carbohydrate field alternative, which is a lot of different areas.

And also, we would very strongly recommend that you continue to buy both the cross-spendable pieces.

I am carb-light. And then lastly, you know, when I think about packed vegetables and then steel costs and some of the other kind of inflationary items that were unexpected, you Can you talk about what maybe that carryover cost will be for 2020 and your ability to either price or create additional cost savings to offset those costs?

We're still developing our 2020 plan, but just to either remind or for the first time educate people on what happens. In the Midwest, the harvest only happens once a year. So vegetables, both in our canned business as well as some supply of our frozen vegetables, So that harvest happens throughout the summer. The packing of those products are just racked up in October. So when we put together a plan for 2019, we don't even know what the 2019 pack is going to be. Normally, most of that is for the 2020 P&L. But because we were so short on vegetables this year, we started getting into this year's packs. much earlier than we usually do because last year's pack was so short. This year's pack was also short in the Midwest, but we had to go outside the Midwest and other suppliers, which cost us more to make sure we have enough product for the full year, but at a slightly higher cost. So we'll have some elevated costs with vegetables next year, but as part of, you know, inflation that we would expect, and we would continue to have our pricing and cost savings, at least our early plans for 2020, pricing and cost savings to offset that again.

Very good. I will hand it off to somebody else, and thanks for your time.

Next question comes from Michael Lavery with Piper Jaffray. Please go ahead.

Thank you. I just would love a little bit of color on some of the retail trends we see in the scanner data and just how to think about turning the tide there. If you look at from July through mid-late October, there's pretty significant declines, especially in the two largest categories, which are 12 or 15 points worse than the trends in July. Can you just give us a little bit of diagnosis? It's prepared vegetables and spices. It's not corn on the cob because that comes through in our data as plain frozen. Just Tell them maybe what's happening there and how you plan to turn that around.

Well, again, on frozen green giant, our bag-in-a-box line is a very, very large segment of our total frozen business. It accounts for about $140 million or $130 million out of our 400, almost $400 million of frozen vegetables. So that promotional strategy did cost a lot of volume, and that's the main drag on our frozen businesses. we don't expect that to be happening in the fourth quarter because we're not implementing that promotional strategy in that time frame. On the spice and seasoning business, while we have some softness in consumption, we have a lot of business in spice and seasoning that are not recorded by Nielsen. So as Bruce mentioned, our spice and seasoning business in total was only off about 3%. And some of it's promotional timing in certain periods. Some of it is distribution, you know, some distribution loss is on some small SKUs, but nothing major that we're concerned about.

I guess maybe if you look at the total company, I recognize there's unmeasured channels, of course, and some are very important, but certainly the channels this data covers are significant and important as well. And the total company... For example, it's gone from kind of a down one and a half to like a down seven. I mean, I guess I'm a little surprised that there's – I wonder if – I mean, what sort of sense of urgency do you have about trying to sort of turn this around? Certainly, even on the spices side, I think that's important, and it's your largest measured category. You know, is there a little more sense of how you might be able to expect some improvement, or – Are we just going to cycle through these kind of declines into next year?

No, we don't expect that. I'm not sure. By our measure and the way we, our Nielsen measure, our total 13-week consumption was down 2.5% for the full company. And Spices was down 2.4%. And our frozen trends really hurt us. But like I said, we fully expect frozen trends to turn around. Spice friends should also turn around based on programming that's going in the marketplace. And back to nature, especially next year in our snacks business, will be a big turnaround given the relaunch of that business with new products and expanded distribution. So there's lots of activity. We're not certainly satisfied with that, but we understand what the consumption was. And on a quarter-to-quarter basis, there can be swings. But we wouldn't project out, at least by our trackings, Two to three percent consumption.

Okay. Thank you very much. Thank you.

Next question comes from Carla Casella with J.P. Morgan. Please go ahead.

Hi. This is Sarah on for Carla. Can you talk a little bit more about your process of placing your new plant-based proteins in retail? Given all the hype in this space, how are grocers approaching this shelf market? space placement differently and any color that you can give on that.

Well, customers have enthusiastically accepted our products. There's lots of activity going on. We've presented all these 11 new items that we've shared with you to our customers a while ago. They've had enthusiastic acceptance. They are struggling. Where are they going to put them all? and there is a lot of activity going on. We are seeing or hearing that actually some of the innovation in frozen is going to move to the fresh space, particularly in the protein alternatives. So we actually see that as an opportunity that might free up more opportunity in the frozen food case as some of the recent entries are focused more on the fresh food case. But it is a battle for real estate. It's not simple. I mean, and the product that, the strongest brand and the product that do the best stay on the shelf. And the weaker brands and the products that aren't turning well enough come off the shelf. And our green giant frozen business, not what's been in this last quarter because it has nothing to do with innovation, our green giant innovation products continue to be among the fastest turning items in the category. Our vegetable rice business, which really started cauliflower rice business, which started this revolution there to save the frozen food case from extinction, is still growing. And we're now, what, three years into, you know, two and a half years into distributing that product. So, cauliflower rice and all of its permutations that we offer is still growing very well. And it's the oldest of our innovation, but it still has very, very low household penetration. If you look at the penetration of cauliflower rice versus just frozen cauliflower in general, or even all cauliflower, there's a lot of room to grow. And while these items continue to do well, they'll continue to deserve space on the shelf.

Got it. That makes sense. And then just one more. We talked a little bit about Canadian Thanksgiving, but does the shorter period between U.S. Thanksgiving and Christmas impact you at all?

No. Thanksgiving basically shifts a week, so it's kind of filled in our and it's still basically in most of the sales in November, particularly since Thanksgiving week is a short week for shipments, so we usually don't ship five days out of that short week. So it's still within the quarter, and most of it's even within the month of November.

Got it. Thank you. All for me.

Thanks.

Next question comes from Eric Larson with Buckingham Research Group. Please go ahead.

Yeah, good morning. Good afternoon, everybody. Thanks for taking the question. A couple things.

Your pricing, your volume losses still are sort of exceeding your net sales gain.

So, you know, is it you pull back on promotion, but are you still promoting some things in that mix? And then so you're getting – the negative impact of positive pricing plus some slippage from promotional spending. Could you walk through that a little bit? Well, you know, it's not just a net sale. You know, we have taken a net sales hit in some of these promotional, but this isn't a net sales management move. This is about improving margins. So it's really to make better net margin on the business that we go back on. But it's not a strategy that can keep doing it forever. We've pulled it back, and that's over, and now we're going to get back to normal promotional tactics in the fourth quarter. We might have one more quarter of this to go, because there's one more quarter that is really not having a promoted time frame, and that could be the first quarter of next year. But then we'll be, at least on Green and Giant, we'll be done with most of the heavy promotional strategy shifts. And when we look at our sales softness due to that versus our EBITDA, our EBITDA has hung in there, X Byron's Booty, X all the other factors. When you think about the volume loss, we really haven't lost a lot of EBITDA from these soft volume. And while we don't want soft volume forever, these were the right moves to do for the total business or the total P&L. Okay. Okay. So when you look at consumption, when you look at consumption, public consumption data, when would you then expect to start seeing maybe at least in near-term four-week data? When do you start thinking you would see a positive cadence on those numbers? October data should be better, and the fourth quarter clearly. And the frozen business, because of the factors we talked about, that won't be repeated. in the fourth quarter like it was in the third quarter. Okay. Okay. Then just one other follow-up here. So in the fourth quarter, we're back to normal promotions on Frozen, and we're launching the new products on Frozen. And while you won't see the Canadian Thanksgiving and the consumption numbers in the U.S., that will also help the fourth quarter in our net sales. Got it. Okay. And so just my final question, my final question is on cash flow. So your net debt is just under $1.9 billion. And if I use the midpoint of your EBITDA guidance, it's at $302.5. So that puts up a 6.2 times leverage ratio on you folks. And I think you want to kind of get that closer to five. So you know, how are you going to try to get 100 basis points off that leverage ratio? Sure.

I mean, we're very confident in our cash flow model. It will take time to generate enough cash to bring it down a full turn, but we are committed to doing so. And as a reminder, you are calculating ratios off our third quarter numbers, which tend to be our seasonal highest from an inventory, from a net debt standpoint, and lowest from a cash generative standpoint. Got it. Yeah.

Yeah. So your third quarter, it tends to be a significant cash user because you're packing the vegetable crop. And so I understand that maybe the near-term side of it uses a lot of cash. So you would start seeing that come down as early as fourth quarter here now then, Bruce? Correct. That is usually our steepest drop in inventory, from the third quarter high to the fourth quarter. Because we go from coming out of the vegetable pack, which drives everything up, to a very, very high seasonal period of consumption, the holidays, for our frozen and canned vegetables. So it does come down. But to answer your question, when we share our 2020 plans, while we'll have modest growth, we really believe that... that we can generate even further excess cash by even better and tighter working capital management. Last year, we had a big reduction in inventory. This year, our inventories are up a little bit, but we believe that between this year and next year, we can even generate more of a cash increase than even our EBITDA growth will generate because of better reductions in inventory. Not nearly the huge reduction we had in 2018, but we do see the opportunities to tighten up on inventories from where we are today to generate more cash.

And as a reminder, last year's third quarter to last year's fourth quarter included an unwind of that seasonal inventory of something like $87 million. Right, right, right.

Okay. Yeah, thank you.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from David Palmer with Evercore. Please go ahead.

Hey, David. Hey, Bruce. Just to follow up on that last thing you just said about the third quarter inventory. Yep. Because it does look like the operating cash flow has been lower year to date, and a big reason for that would be the third quarter in terms of operating cash flow. So I'm sure people are going to have questions about that. Is this going to be a bigger than average – Fourth quarter, when it comes to that metric, what sort of operating cash flow should we be thinking about for your full year 2019?

Yeah, so last year's fourth quarter, we generated something like $70 to $75 million in cash from operations. And so realistic to expect something greater than that this year's fourth quarter.

Okay, so north of $70 to $75 million. I mean, I would imagine you would want it to be higher – you know, significantly higher than that on an average here, is that why, you know, let's just say it comes in at 80, that why that 80 would be that low. I mean, obviously, you want to have more to prove to the naysayers that you could pay the dividend on an annual basis than that. So what are some things that that 80 would be held back for when you look at the year in total?

It will come down to just the working capital cycle. And like I said, expectations are we reduce inventory something similar this year between the third and the fourth quarter as last year, and that we likely have very much greater than last year's four-quarter cash from operations number.

Okay. Which is very much in line with what we've done historically. Okay. And then you'd probably – would you imagine that your inventory levels would be similar at year end to last year?

They'll be a little bit higher, maybe a little bit higher in the base business. And when we acquired Clever Girl, it came with a little bit more than $10 million of inventory, so that's obviously an impact as well. But it shouldn't be – It should be significantly less than where it is right now.

Also, while we'd love to reduce inventory, we are higher at this point because, as we mentioned, we did run out of some product from the last year's vegetable pack, which means we packed more this year so we don't run out next year, which unfortunately gives us a little bit of a higher inventory profile. But it's to make sure we don't run out of any product by the end of next season before the new pack hits in 2020. Okay.

Got it. Thank you. And then when you talked about the consumption data, you know, we were seeing that, too, how late in the third quarter it looked like some of this data was falling off in green giant in your spices business, and you talked about some of the off out of the non-channel or non-measured channel stuff with spices, but also it should get better. But I'm wondering, you know – How much of a delta between your non-measured and measured do you think we should see on a sort of medium-term basis for your business? Do you expect your non-measured or your total channel to be outperforming the measured data?

Total channel is definitely outperforming the measured data, but at least our measured spices, the way we the way we track all of our spice and seasoning businesses, for the 13 weeks ending September 28th, was down 2.5%. But that doesn't include a very large food service business that's doing very well. It doesn't include some measured items in a very large customer, one of our big, large club customers. So our sales typically outperforms consumption.

Okay. Okay. And thank you for that. Do you think the timing of items, you know, promotions and whatnot, would have stolen a certain immeasurable amount of consumption percentage points from third quarter and push them into fourth quarter?

We do believe we have more promotional activity going on in the fourth quarter than third quarter, so we do expect consumption trends to improve on spices.

Okay. All right. Well, thank you very much.

Obviously, that will be up to the consumer voting with our pocketbook, but we will have the inventory out in stores. We have shipper display programs, got holiday spice programs, you know, with baking and the like. So lots of activity will be in the marketplace.

Great. Thank you.

I would like to turn the floor over to Ken for closing comments.

Well, we appreciate your attention and questions today. Like I said, We don't like the lower earnings projections. We do believe with a quarter to go, we can tighten the range for you. We do believe that everything we set out to do this year, we're actually doing. While we wish that sales could always be a little higher, we'd like that. We do believe that we battled the cost inflation with the pricing and cost savings initiatives, saved a little bit of uncontrollables in the area of Mother Nature handing us another bad vegetable back, and then of course, the effect of tariffs. But save the things that are not in our control. We're very pleased with our progress in executing the things we can control. So we really appreciate it and look forward to updating you on our year-end results in the new year. Thank you.

This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.