B&G Foods, Inc.

Good day and welcome to the B&G Foods fourth quarter and fiscal 2019 earnings call. Today's call is being recorded. You can access detailed financial information on the quarter and full year in 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, under due reliance should not be placed upon them. We refer you to the company's most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The company will also be making references on today's call to the non-GAAP financial measures and 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 measures are provided in today's earnings release. Ken Romanzi, 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 fiscal 2020 and beyond. Bruce Wacca, the company's chief financial officer, will then discuss the company's financial results for the fourth quarter and fiscal 2019, as well as the guidance for 2020. I would now like to turn the call over to Ken.

Good afternoon. Thank you all for joining us today for our fourth quarter and full year 2019 earnings call. Today I'd like to cover three topics. First, I'll provide a quick recap of fourth quarter and full year 2019 performance. Second, I'd like to share my perspective on B&G Foods' performance in 2019 against the plan we developed as a new management team as of April of this past year and how I view this in the context of our stock performance over the past year And third, I'll provide an outlook of where we expect to go in 2020 and beyond. First, a quick recap of our fourth quarter and fiscal 2019 results. During the quarter, we reported net sales of $470.2 million, an increase of 2.6% versus last year, leading to full-year net sales of $1,660,400, a decrease of 2.4% versus prior year, primarily driven by the sale of pirate brands. Excluding that sale, full-year net sales increased 2.1%. Adjusted EBITDA was $69.5 million for the quarter, an increase of 18.8% versus the year-ago quarter. This resulted in full-year adjusted EBITDA of $302.5 million, a decrease of 3.7% versus last year, also primarily driven by the sale of pirate brands. and was at the midpoint of our latest guidance. Excluding pirate brands, adjusted EBITDA grew 2.8% versus full year 2018. So all in all, we delivered stable, expected performance. I view this as very important because after many years of industry-leading performance, our earnings stumbled in 2017 and 2018 with fourth quarter earnings surprises, even while growing sales. So delivering what was expected in 2019 was critical for our new leadership team. Our plan in 2019 was to deliver modest sales growth and cover inflationary input costs with pricing and cost savings initiatives. And that's exactly what we did. While we needed some help from the addition of Clabber Girl, we grew net sales 2.1%, excluding the pirate brand's divestiture, while we also reduced low-margin trade promotion activity and SKUs. we delivered pricing of $20.3 million on the high side of our planned range of $15 to $20 million. We did this through a combination of list pricing earlier in the year and the removal of very low-margin trade deals in the second half of the year. And while we saw consumption declines in the third and fourth quarter, much of that was planned, and we did not significantly hurt our bottom line. While taking price is never easy to achieve, particularly in today's competitive environment, I believe our efforts over the past two years demonstrate our ability to take price when needed to help offset input cost inflation. On the cost savings front, we delivered $20 million, again at the high side of our planned target of $15 to $20 million for the year, primarily driven by terrific work in our logistics infrastructure plus some other areas. In 2020, we'll dig deeper into our cost structure and expect to drive another $15, $20 million in cost savings and should be in a position to provide more detail on those opportunities in the coming months. Key highlights and accomplishments from 2019 include in April of this year, last year, we realigned our executive leadership team with new heads of sales, marketing, and supply chain. It's a terrific complementary combination of new team members and and B&G Veterans. We completed the successful implementation of our new Oracle JD Edwards ERP system, and I'm pleased to report that the system is up and running with minimal disruption. We're looking forward to taking advantage of the many benefits of the system, which we expect will help us streamline operations, drive efficiencies in our finance and accounting processes, and improve our operational planning and financial forecasting. the Green Giant brand continued to march against its vision to be the plant-based veggie brand of the future by delivering its mission to get people to eat more vegetables with continued growth of category reinventing innovation. While Green Giant's growth slowed in 2019, primarily due to the reduction of low-margin trade deals on legacy product lines and less innovation than in 2018, new products launched under Green Giant since P&G Foods acquired the brand in 2015 are now at an annual run rate of more than $200 million in retail sales, while delivering more than $1.5 billion cumulatively over that time period. In addition, Green Giant has almost single-handedly revolutionized the frozen vegetable category, and we've only just begun. In 2020, we're launching a range of innovation across both the frozen food and dry grocery aisles. More on that a bit later. We acquired Klabergirl, fully integrating the business into our sales and distribution network. We are very pleased with the results of this acquisition to date and Klabergirl's dedicated employees who have joined the B&G Foods family. I'd also like to thank the B&G integration team for their tremendous efforts to make the transition as smooth as possible. We completed a successful $1 billion debt refinancing, the largest in our company's history and at very attractive interest rates. that included the second lowest coupon in company history of 5.25%. We returned $123.7 million of cash to our shareholders in the form of dividends during fiscal 2019, which is consistent with our longstanding dividend policy that has served our shareholders very well since our IPO back in 2004. And our board management remained committed to returning cash to our shareholders. We also returned an additional $34.7 million to our shareholders in the form of share repurchases during fiscal 2019. While share repurchases have not historically been a primary piece of our capital allocation strategy, management and our board of directors both recognize that our share price is undervalued, and people should not be surprised to see us step into the market to buy back our shares from time to time. So stepping back, the elephant in the room and the question everybody asking is, why is our stock so low? Well, in my first year as CEO, I have listened to many investors, debt holders, bankers, and advisors, and there are clearly three large issues depressing our stock over the last year. First, there's been concern that after two years of disappointing investors with fourth quarter earnings results, we would disappoint again in 2019. given the large increase we needed in Q4 to hit our guidance. And more recently, our stock has been under greater pressure due to concerns over fourth quarter Nielsen consumption trends. Second, there's investor fear that we'll cut our dividend driven by our high yield and concern that we don't generate enough free cash flow to cover it. And third, our leverage is too high at 6.1 times pro forma adjusted EBITDA before share-based compensation to net debt. hampering our ability to continue our long-term successful strategy of growth through accretive acquisitions. So I'd like to address each and every one of these issues. First, I hope our fourth quarter and full year 2019 earnings announcement shows we can get back to growth through accretive acquisitions and deliver what we say we will deliver. And while our volumes were on the low side of our expectations in fourth quarter, pricing was on the high side. This is always a delicate balance, and we'll continue to balance these two important levers as we move forward. So while we are not declaring victory yet, we see 2019 as the first year of many in improved expected performance. Second, we have no plans to cut the dividend under our current operating model and assumptions. We continue to believe in the dividend because that is the vehicle upon which this company was built. We also believe that under normal operating conditions, we generate enough cash flow to cover the dividend. However, as you'll see from our net cash from operations in 2019, and as Bruce will discuss in more detail, we had several one-time uses of cash in 2019, including a very sizable tax bill related to a gain on sale from the sale of private brands, share repurchases, and investments in working capital that increased our debt. But we do not see these same uses of cash continuing in 2020. And Bruce will share our cash flow plan that should give you the confidence in our dividend as we. Lastly, we understand investor concern over our debt leverage. We're committed to create excess cash flow to help reduce leverage. Later, Bruce will share our plan to get our leverage below six times in our 2020 plan. In addition, we do not believe we're shut out of acquiring more businesses. The M&A pipeline is active, and we believe opportunities remain to acquire businesses without increasing leverage, and that in some cases may actually help reduce leverage. So in summary, we realize we have to deliver consistent results to gain investor confidence in B&G Foods. The B&G model has worked for a very long time, and we believe it can continue to work for a long time to come. We see 2019 as the start of a new era here at B&G. So now on to 2020. For 2020, our long-term strategic imperatives remain the same. Drive organic growth of 0% to 2%, improve margins, make accretive acquisitions, and building a winning workplace. We plan to drive organic growth through key brands like Green Giant, Ortega, Mrs. Dash, and McCann, amongst others, while maintaining a large portfolio of stable brands and managing our remaining brands for cash flow. In 2020, we expect our net sales to grow about 1% as we drive growth on several of our key brands, but our growth will be tampered down a bit as we continue to reduce low-margin trade promotion and SKUs and overlap the loss of some low-margin private label spice businesses. We expect Green Giant to lead the charge again in 2020 through the introduction of a range of innovation across frozen food categories outside of frozen vegetables, including cauliflower hash browns, cauliflower crust pizza, cauliflower gnocchi, and cauliflower breadsticks, frozen breadsticks made with 40% cauliflower. And we're not stopping there. Building on the tremendous success of Green Giant Rice Veggies in the frozen aisle, which is now an $80 million business annually, we are launching Green Giant Rice Veggies in the shelf-stable rice aisle. Shelf-stable rice is a large $3 billion category with little innovation. Our shelf-stable Green Giant Rice Veggies are made from 100% veggies featuring blends of legumes and veggies like cauliflower, peas, lentils, and chickpeas. Green giant rice veggies taste and perform like regular rice, but are chock full of vegetables with less carbohydrates and more protein. We expect green giant growth to be driven even further by the acquisition of FarmWise, which we just announced last Wednesday. FarmWise is a small but very prolific, forward-thinking frozen veggie brand that will allow us to quickly commercialize products from their innovation pipeline and and introduced them under the Green Giant brand in the traditional food channel and under the FarmWise name in the natural channel, where the Green Giant brand isn't a good fit. We are very excited about this small acquisition with quick scale-up capability and a good example of what I meant when I said it's a new era at B&G. All in all, we expect $20 million in new sales from Green Giant Innovation in 2020. But Green Giant won't have to carry the load alone. Our second largest brand, Ortega, has grown steadily under B&G Foods' ownership since 2003, and we remain very bullish on the Mexican food category. As leaders in veggie-forward, plant-based innovation, we are bringing some of the magic of Green Giant to Ortega through the introduction of Ortega Cauliflower Taco Shells and Ortega Cauliflower Tortillas. made with over 25% cauliflower. Now Ortega can help people get more vegetables in their diet while they enjoy Taco Tuesdays. In addition, we'll launch a line of Ortega Street taco sauces, each with a unique and contemporary flavor, capitalizing on the current food truck craze. We expect further growth to be driven by the continued distribution expansion of McCann's Irish Oatmeal, the small acquisition we made in 2018. We've been expanding McCann's in both the U.S. and Canada throughout 2019 and are receiving terrific retailer acceptance. McCann's consumption accelerated to 6.5% in the latest quarter. Our second strategic imperative is focused on improving margins. And while inflation appears to be more modest in 2020 than it has been over the last two years, we still expect to see increased costs, whether it be for inputs, tariffs, or labor. To help offset these continued pressures and to work toward improving our margins, we have extended our cost reduction program beyond our original goal of $50 million. To date, we have taken out approximately $25 million in costs since 2017 when we set our goal, and our goal going forward is to reduce costs by $15 to $20 million per year over the next three years. We expect to do this by continuing to optimize our logistics network, reducing product impacting costs, and stepping up the efforts to optimize our manufacturing network. We plan to announce several initiatives in this area throughout 2020. As far as pricing goes, we have achieved significant pricing over the past two years and should continue to benefit from some pricing overlap in 2020. We'll continue to refine the delicate trade promotion plans to optimize price-volume mix And for 2020, we expect pricing to be $3 to $5 million. Our third imperative is continue our strategy of accretive acquisitions. Acquiring integrating businesses has been a part of the B&G strategy since the beginning, and we expect that to continue well into the future. We are always on the lookout for branded food products with defensible market positions and center store opportunities with high, stable margins and good cash flow. We also focused on acquiring like products to facilitate sales, manufacturing, distribution, and G&A synergies, and importantly, acquiring brands at accretive multiples. We were able to achieve this in 2019 with Clavigirls, and an active M&A market in the industry should give us the opportunity to acquire businesses without pressure on our leverage. And last but not least, B&G wouldn't be B&G without the incredible team members we have. our focus remains on building a winning workplace to make sure we're always operating at our best. We've been investing a lot in people, process, and systems to improve our execution. We strengthened our organization in 2019, including an organization redesign, talent enhancements, and systems improvements, such as our new ERP systems integration. In 2020, we'll begin to reap the benefits of the new system through better financial planning and forecasting and inventory management. In addition, this year, we're implementing a new trade promotion management system that should allow us to better manage our large trade promotion spend. So in closing, 2019 was a year to get B&G Foods back on track, and we're confident that we will continue to make progress in 2020 against improved sustainable performance. Now I'd like to turn the call over to Bruce to discuss the details of our fourth quarter and full year financial performance. Bruce?

Thank you, Ken. Good afternoon, everyone. As Ken just outlined, we had a strong finish to 2019 with a solid fourth quarter that continued the momentum that we saw in the business in both the second and third quarters of our fiscal year. We reported net sales of $470.2 million and adjusted even to $69.5 million in the fourth quarter, leading to full-year net sales of $1.66 billion and and adjusted EBITDA of $302.5 million for 2019. Adjusted EBITDA as a percentage of net sales was 14.8% for the quarter, which represents a 200 basis point improvement over the prior year period. And separately, we generated adjusted EBITDA as a percentage of net sales of 18.2% for full fiscal year 2019, which was in line with our expectations. After adjusting for approximately $74.9 million in net sales for Pyro Brands in fiscal 2018, our fiscal 2019 net sales represented an increase of $34.5 million, or 2.1% over last year. The acquisition of Clabber Girl in May 2019 benefited the company and contributed approximately $53.6 million to fiscal 2019 net sales. Base business net sales which excludes the impact of M&A, decreased by $22.2 million, or 1.4%. Fiscal 2019 net sales benefited from approximately $20.3 million in pricing, inclusive of our spring 2019 list price increase and our trade spend optimization program. These pricing benefits were offset by approximately $42.4 million from reduced volumes in our base business that were driven in part by our trade optimization program, as well as an active effort to reduce unprofitable and lower margin skews. Among our larger brands, Green Giant was up $7.8 million, or 1.5%, with a strong first half of the year that was driven by both our new 2019 innovations, as well as continued growth by previous year innovations like Green Giant Rice Veggies, and Green Giant veggie spirals, plus distribution gains in the dollar channel for our shelf-stable Green Giant products. These gains were offset in part by reduced volumes of our frozen bag and our frozen bag-in-a-box products in the second half of the year as we altered some of our key trade programs during the non-holiday portion of the year. As we have stated previously, Green Giant saw just one wave of innovation launches in 2019, compared to two in 2018. We also believe the reception of our 2020 launches will be more in line with some of the other successful Frozen Innovation launches. We think we have some big ideas in store for 2020. Among our other larger brands, New York Style had another successful year, and net sales increased by 2.1 million, or 5.7%. Maple Grove farms increased by 2.6 million or 3.7%. Ortega and Victoria were essentially flat or down by 0.6% and 0.7% respectively. Cream of Wheat, following a strong 2018 performance that was driven by a cold winter, was off by 2.6 million or 4.2%, driven in part by a much more mild winter season. Net sales for our spices and seasonings business, inclusive of Accent, Mrs. Dash, Sassone, and the business that we acquired in 2016, was down $4.6 million, or 1.4%. Both Accent and Mrs. Dash were up modestly, while the rest of the business was negatively impacted by lower pricing of some commodity spices as a result of decreases in commodity input costs, primarily garlic and black pepper, as well as some losses in certain low-profit private label contracts. Despite the lower sales, profits in our spices and seasonings business remain strong and have outperformed our original M&A model. Our recently acquired brands also performed well in 2019, with Clover Girl, which was acquired in May 2019, generating some $53.6 million in net sales, slightly ahead of plan, and McCann's Irish Oatmeal, which was acquired in July 2018, generating approximately $12.1 million in net sales in 2019. McCann's had generated approximately $5.3 million in net sales during the period that we owned the business in 2018. While we have spent a lot of time discussing CollaborGirl's performance in 2019, McCann's has also done well as we continue to expand distribution and net sales for the brand. McCann's net sales were up 7.5% in the fourth quarter of 2019 when compared to our first full quarter of ownership for the business in fourth quarter 2018. Gross profit was $383.1 million for fiscal 2019, or 23.1% of net sales, excluding the negative impact of approximately $22 million of acquisition to investor-related and non-recurring expenses during fiscal 2019, the company's gross profit would have been $405.1 million, or 24.4% of net sales. Gross profit was $349.5 million for fiscal 2018, or 20.5% of net sales. Excluding the negative impact of $76.3 million of acquisition divestiture-related and other non-recurring expenses during fiscal 2018, the company's gross profit would have been $425.8 million, or 25% of net sales. Our plan in 2019 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 happened. For full year 2019, gross profit benefited from an increase in net pricing of $20.3 million, just ahead of our full year target, of $15 to $20 million. Likewise, our cost savings initiatives also came in at the high end of our $15 to $20 million plan for the year, with approximately $20 million of cost savings realized in 2019. The successful realignment of our dry and frozen distribution networks was the largest contributor of the savings as we took more than 19 million miles out of our network. We also saw benefits from improved procurement, packaging, and waitouts, as well as the G&A rationalization that we implemented earlier in the year. These initiatives, in addition to the private brands divestiture, help lower our cost of goods sold, inclusive of the cost of materials, labor, overhead freight, and warehousing, from $1.35 billion in 2018 to $1.28 billion in 2019. Cost of goods sold as a percentage of net sales was 76.9% in 2019 compared to 79.5% in 2018, despite increased input costs that we faced, particularly driven by a second consecutive short agricultural crop that negatively impacted our green giant margins, increased tariffs, and increased can prices resulting from higher steel and aluminum prices. Selling general and administrative expenses decreased $6.7 million, or 4%, to $160.7 million for fiscal 2019 from $167.4 million for fiscal 2018. The decrease was composed of decreases in consumer marketing expenses of $5.7 million, warehouse expenses of $2.7 million, selling expenses of $2.5 million, and acquisition to investor-related and non-recurring expenses of $0.2 million, partially offset by an increase in other general and administrative expenses of $4.4 million. Expressed as a percentage of net sales, selling general and administrative expenses improved by 0.1 percentage point to 9.7% for fiscal 2019, compared to 9.8% for fiscal 2018. We generated $302.5 million in adjusted EBITDA in fiscal 2019 compared to $314.2 million in the prior year. As a reminder, 2018 adjusted EBITDA included roughly $20 million in contribution from Pirate Brands, which was sold during the fourth quarter of 2019. As we first highlighted nearly a year ago when we initially laid out our guidance for 2019, we expected to see reduced sales and adjusted EBITDA in each of the first three quarters as we lapped the sale of pirates. We then expected to see a favorable fourth quarter finish to the year, with pirates generating just $2 million or so in net sales during the fourth quarter of 2018. And this is exactly what happened. We generated $69.5 million in adjusted EBITDA in the fourth quarter of 2019, an increase of $11 million, or 18.8% from the year-ago period. Adjusted EBITDA as a percentage of net sales was 14.8% in the fourth quarter of 2019, which represents approximately 200 basis point increase from the 12.8% generated in the fourth quarter of 2018. Full year 2019 adjusted EBITDA as a percentage of net sales was 18.2%, which is largely in line with our expectations and the 18.5% generated in the prior year. We generated $1.64 in adjusted diluted earnings per share in fiscal 2019 compared to $1.85 per share in 2018. The decrease was primarily driven by the lost contribution resulting from the sale of Pirate Brands in late 2018, offset in part by incremental contribution from the acquisition of Clover Girl in mid-2019, the lower interest expense resulting from our reduction in debt following the sale of Pirate Brands, and a small reduction in our share count resulting from our share repurchase efforts. Despite the overall interest savings for the year, interest expense was negatively impacted in the fourth quarter of 2019 by approximately $512,000, or nearly a penny per share, following our fall 2019 debt refinancing by the negative carry of both our four and five-eighth notes that we retired and our newly issued five-and-a-quarter notes which occurred for about 14 days during the mandatory call notice period before the four and five-eighth notes were ultimately retired. The B&G Foods management team and our board of directors remained true to our commitment to return excess cash to shareholders, which in 2019 consisted of $123.7 million in cash dividends paid to our shareholders, or $1.90 per share, as well as share purchases that we made in the open market. During fiscal 2019, we repurchased $34.7 million in shares at an average price of $19.95 per share, which reduced our share count by 1.7 million to 64.04 million shares. The 2019 share repurchases followed our 2018 share repurchases of $26.9 million of common stock, or approximately 1 million shares, at an average price of $27.17 million. In fiscal 2019, we generated $120.4 million in net cash from operations after adjusting for the $73.9 million of negative tax impact from our gain on sale of Pirate Brands. As we highlighted during previous calls, we sold Pirates in 2018 for a great price, which resulted in a fantastic return on our investment, but also in a tax obligation that came due in 2019. Separately in 2019, we had a $70.4 million invested in net working capital or accounts receivable plus inventory less accounts payable. Net cash from operations after adjusting for the pirates gain on sale tax and assuming a flat net working capital number would have been approximately $190.8 million. While inventory crept back on us a little bit at the end of 2019, we think that this creates a nice opportunity for us in 2020. We expect normalized working capital levels to create an additional $35 to $45 million in net cash from operations and to provide a cushion for our expected $122 million of dividends during 2020. And now, I would like to review our guidance for 2020. We expect net sales to be in the range of $1.66 billion to $1.68 billion. We expect net sales to be positively impacted by a full year of Clavergirl. Clavergirl, which was acquired in May 2019 and generated approximately $50 to $55 million in net sales under our watch in 2019, should generate an additional $20 million or so in fiscal 2020. We also expect a strong year for Green Giant with a strong series of innovation launches this year, including Green Giant rice veggies, cauliflower hash browns, cauliflower crust pizza, cauliflower and spinach gnocchi, and cauliflower breadsticks. As Ken mentioned earlier, we expect our Green Giant frozen innovation efforts to also receive an extra boost this year and again in 2021 following our acquisition of FarmWise, which was just announced last week. FarmWise is the proud creator of veggie fries, veggie tots, and veggie rings. We think that the addition of these products to our frozen portfolio will be extremely comfortable entry to our efforts to revolutionize the frozen vegetable set. On the downside, we expect to see a reduction in our commodity spice sales by approximately $20 to $25 million as we continue to pare back certain lower margin private label and food service contracts. We also expect to see some softer sales at the company level in the first quarter of 2020 as a result of our trade spend optimization program. While pricing came in at the high end of our expectations in 4Q and full year 2019, our volumes were a little softer than we wanted. We expect a similar performance dynamic in the first quarter of this year from a sales standpoint. Trade spending may be an area that we tweak further throughout the year, as we may very well strategically invest in trade for some of our more elastic brands to optimize performance. Now back to the rest of our fiscal 2020 guidance. We expect adjusted EBITDA of $302.5 to $312.5 million, adjusted earnings per share of $1.60 to $1.80, a cash working capital benefit of approximately $35 to $45 million, net interest expense of $98 to $103 million, including cash interest expense of $94 to $99 million, an interest amortization expense of $3.5 million, depreciation expense of approximately $45 million, amortization expense of approximately $19 million, an effective tax rate of approximately 25% to 26%, cash taxes of approximately $10 to $20 million. And finally, we anticipate CapEx to be approximately $40 to $45 million in fiscal 2020, which is slightly below last year. Based on the midpoint of our adjusted EBITDA guidance range, we expect that our adjusted EBITDA, less CapEx, cash taxes, and cash interest will be approximately $150 to $155 million. We also expect to see an additional $35 to $45 million cash benefit from an anticipated reduction in working capital, taking this number closer to $185 to $200 million, which should leave us with a reasonable cushion from which to pay our annual dividend of approximately $122 million. Absent acquisitions, we expect our net debt to adjust at EBITDA before share-based compensation, as per our covenant calculation in our credit agreement, to be approximately 5.7 to 5.9 times by the end of fiscal 2020. This concludes our remarks, and now we would like to begin the Q&A portion of our 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'd 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. One moment, please, while we pull for your questions. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Good afternoon, everybody.

Hey, Andrew. Hi. Hi there.

Hi. A couple quick things from me. I guess first off, I wanted to just try and get a sense of the little bit of a disparity that we've seen over the course of the quarter between the Green Giant sales performance that you talked about today on the call and maybe what we've seen in some of the scanner data. Perhaps it doesn't take into account some of the areas that are growing in that franchise, but I just want to make sure I get a sense of what, if any, disparity we see there. Because I think sales were up a little bit for Green Giant, and obviously in scanner it's been a little weaker.

Yeah, so, well, first of all, that's U.S. Green Giant has had a terrific year in Canada, plus there are some unmeasured channels. But Green Giant sales were softer in total, not quite as soft as what Scanner showed, but a lot of that was the effect of our trade promotion reduction program. But we expect to be through that in the first quarter and on to more normalized sales. green giant results with stepped up innovation and not nearly as much cutbacks on trade post the first quarter of this year.

Got it. Okay. Thanks for that. And then I think you talked about what you anticipate for incremental sales in 2020 from Clabergirl. Do you have something similar for EBITDA? As I recall, you weren't expecting a whole lot of benefit in 19 on EBITDA from Clabergirl. So even though It's only in the base for kind of half the year in 2020. Is it more that you get closer to a full year of incrementality on EBITDA? Maybe I was thinking somewhere around $30 billion or something.

I might have that wrong. Sure. So, Clever Girl was a positive in fiscal 19. It'll be a positive again in fiscal 20. A couple million dollars in the first half of fiscal 20.

Okay. So you did actually end up getting some benefit as it turned out.

Yeah, we got some benefit in the second half of fiscal 19, and we have a collaborative obviously baked into our 2020 guidance.

Okay, the last thing would be a little broader from just a frozen industry standpoint. We just hear a lot from any number of other companies that operate in this space, whether it be your area of frozen vegetables or, more broadly, frozen meals and such, about just a lot of change and disruption there. at the retail level in terms of things that they're trying to do, whether it be changing timing around freezer shelf resets, moving things forward maybe because of all the innovation being brought to the market, the whole sort of move towards click and collect and having to sort of get rid of, let's say, or take off the shelf some of the slower turning items so you have more facings of the things that have the highest velocity for click and collect and have the holding power. you know, at grocery. There's just a lot of different, you know, sort of trends happening and dynamics happening. I was hoping maybe you could put your perspective on it as it relates to what you see and more specific to your business, if it's having any impact like that on your business at all. Thank you.

Well, you know, when you just described what you've been hearing in Frozen, you could say that about the whole store. So, There are a lot of times where reset timing changes, customers change when they want to. We've even stated that we went from two innovation launches in Frozen in a year to our major retailers only wanted to reset the shelf once. However, with the increase in innovation from everybody, they have to figure out they don't want to pass up and wait to launch the innovation. So I wouldn't say frozen is necessarily any more volatile than the rest of the store when there's lots of innovation that comes. Retailers have their set timeframes. Sometimes they change them. It is very hard to get retailers all in the same timeframe because they're all on their own individual. Our major new muscle we have to exercise going forward is, While we had good rhythm launching frozen vegetables, our new innovation is now going to go across multiple frozen categories. So when we recount that we're going to launch pizzas, breadsticks, a few new items in vegetables, as well as gnocchi, that could be four different reset timings because there are different categories within the frozen food set. So how it pertains to our businesses is I can't tell you exactly each retailer when we're going to launch because it's going to be multiple dates that those are going to be launched in multiple retailers. So there is a lot of noise, but I wouldn't say that frozen is any more difficult than any other active category in the store.

Got it. Thanks very much for the color.

Thank you.

Thank you. Our next question comes from the line of Kourou Martinson with Jefferies. Please proceed with your question.

I guess in that same vein of when do we see the new Green Giant products on the shelf, I wanted to get a little more color on when do we see shelf-stable veggie rice out there and just the housekeeping. I thought I heard the number of 20 million in new product sales for 2020. Is that correct?

Yes.

Okay. And then how should we think about the cadence? I mean, I recognize that everyone has their own time, but, you know, when is this going to be more back half-weighted, more front half? How should we think about that?

Well, some of the items we launched already in the fourth quarter with some customers that took them early, and they're going to be launching all throughout first quarter and beyond. Specifically, you asked about the rice veggie shelf stable. That's not going to first launch until the second quarter. But I can't promise you, you know, but the acceptances and the first ship differs by customer all throughout the year.

Okay.

Said another way, $20 million in new product sales aren't the annual run rate. It's what we're adding up based on how best we can project the distribution level we're going to achieve and when the first ship date is by customer. Imagine a grid of, you know, 15 new SKUs across all the retailers, all first shipped at different times.

Absolutely. And when you guys look at the portfolio, I mean, how do you guys balance the volume declines that you've been seeing with the pricing? What is the optimum mix that you guys would like to get to in terms of the elasticity of the products?

Well, you know, we've answered this question over the past couple of years because in 2018, we took more just straight list pricing, which is a little bit more predictable in what the elasticities are. And we came in pretty much where we thought we'd come in. But that's a base price of maybe a dime or maybe 20 cents a unit, an everyday price. It doesn't normally show up in huge swings of volume either way. You might have a little bit of volume downtick. Some of our brands proved to be pretty inelastic of pricing in 2018, so it delivered. In 2019, we really transitioned to not only did some list pricing, but transitioned to cutting back on some very, very deep discounting on a few categories and you know, when you talk about elasticity, then that's much, much greater swings of elasticity because you're talking about, you know, changing very, very low promoted price points with, in many times, excess merchandising that goes along with them. And forecasting and guessing the volume decline on that is very complicated. You learn over time. And And there may be places, as Bruce mentioned, where we lost a little more volume than we thought. We might want to get some of that back, but it's not like we're going to do a wholesale change. We knew and said we were going to have less volumes because we were giving up very, very deep discounting, many at low and below margins. So it's why we were able to withstand a little bit of sales on the lower end and hit our EBITDA guidance because a lot of them were empty cases.

Okay. And just lastly, you guys called out last quarter higher garlic costs due to the tariffs. And now with the coronavirus, we've been hearing reports that garlic prices, again, are going up just because there's not enough production coming out of China. Just thinking of that as a lead-in to how you're looking at inputs and your ability to kind of price through for that.

We have some ability. So we're securing garlic supply, so we are already in – We have good supply already in inventory from China, but we're also looking at other regions to make sure we're protected and never have an interruption in supply. So there is going to be an uptick in our costs, and that's probably one of the biggest upticks in costs. We haven't really seen a lot of other volatility, but there is an uptick in garlic costs and the way that many of our spice contracts operate. We can pass some of that along. It's more commodity-based.

Okay. Thank you very much, guys.

And as Bruce said, you know, we had negative pricing last year on spices because we gave back some of the commodity savings we got. So, you know, it's not 100% pass-through either way, but it does go in tandem in the spice world.

Thank you. Our next question comes from the line of Brian Hunt with Wells Fargo. Please proceed with your question.

Thank you for your time this afternoon. I was wondering if you could maybe help bridge out the remainder of the 1% to 4% EBITDA growth for 2020. You gave us a little bit of contribution, a couple million from Clabergirl. Again, I was wondering if you can help cover the rest of it.

Yeah, so there should be a little bit of green giant from incremental sales. And then we referenced small price increase, which is really the wraparound benefit of last year and some more cost savings efforts. All of that will contribute and offset some increased costs.

Very good. Next, I was wondering if you could just touch on FarmWise, maybe what the acquisition costs are, I mean, is for that business, and maybe what the sales and EBITDA contribution might be for 2020 there as well.

Yeah, it's small, less than $5 million in all cases, and this was less an acquisition around a business that's generating EBITDA that we're going to leverage this year and more about, as Ken likes to describe it, it's a research lab, and this has product innovation, demonstrated ability to launch into the natural channel, and products that are very complementary with what we're looking to do with Green Giants.

Yeah, this business, as it comes in, will have de minimis impact on our numbers. It really is the accelerant of green giant innovation going forward, and we haven't yet even developed a plan for what we're going to do with farm-wise and the natural channel. We are very excited about our access into the natural channel, which will probably be more of a 2021 opportunity. But all of this great veggie innovation, we don't have any green giant in the natural channel. They don't want mainstream brands. So we see FarmWise as a great ability for B&G to now have access with our great innovation engine, both the B&G innovation engine as well as the FarmWise engine, to take FarmWise and build it in the natural channel.

Very good. I was wondering if you could also touch about – you talk a lot about innovation – When you look across your portfolio of innovation, how wide is the acceptance of items such as cauliflower breadsticks and the cauliflower corn blended shells at Ortega?

Well, if you look at food, because XAOC, as measured by Nielsen, has got convenience stores and stuff like that in it, which are hard to measure. and not really appropriate for a lot of our products. So if we look at food distribution, our food distribution on Green Giant as a brand is very high. It's in the 80% and 90% range. A lot of our top-selling innovation gets 75% or more distribution on our innovation on Green Giant. On Ortega... I don't believe we're that high yet, but we're presenting every day to customers. So I don't have the final number about what ACV distribution is, but it's clearly going to be, you know, somewhere in the 50% to 70% range on the innovation, given there are high-priority launches. So, you know, we want to do innovation on the big brands so that we can get more national distribution. And innovation on regional brands is not going to amount to all that much.

Do you believe the discrepancy between what you just reported for Green Giant and the Nielsen data? It was just you had better growth in placement and non-measured channels. Is that kind of a fair assessment of the situation?

A little bit, but Canada was probably the biggest driver of the difference between this. You don't see Canadian consumption numbers. But Green Giant did have a slowdown in sales, but, again, a lot of that was due to the pullback we did on trade.

Very good. I will hand it off to somebody else. Oh, I'm sorry, last question. When you look at the proposed improvement and leverage to 5.7 to 5.9, what does that imply with your discussions with the agencies? Does that get you into a spot where you're able to maintain the B2, B plus?

We would love to maintain our existing ratings and improve them. Probably not appropriate for me to comment on conversations with the analysts, but certainly our ratings are important to us. Our cost of debt is important to us. We've been very fortunate with pricing on our debt, as Ken mentioned earlier. We just did a debt refinancing last fall, our largest ever and one of our largest coupons ever, and so that's obviously important to us.

Very good. Have a good evening. Thank you.

Thank you. Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thank you so much. Bruce, you know, it sounds like you said some of the year-over-year EBITDA uptick you expect in 2020 may be driven by savings. Is that – I'm assuming that includes the $15 million, $20 million you mentioned, the prepared remarks, you know, each of the next three years – you know, or is there other kind of regular productivity? I'm really just asking to see, you know, if we think about that.

Yeah, that is the productivity. That's exactly what we're talking about.

Okay. So like if we're thinking about the 15 to 20 million each year, the next three years, I'm assuming there's some plan, you know, to reinvest some, if not all of that back, just given, I mean, obviously like the competitive dynamics increase, you know, you're posting some volume pressure and, the trade spend you pull back in, but you never know. You might have to put more of that back in. So if we're all forecasting the next three years, we shouldn't be taking, go at $17.5 million per year and dropping that to the bottom line. You are absolutely correct. Okay, cool.

Thanks. And then just in terms of- we're not going to be presenting huge increases in base business earnings. It's really to get back on track to being kind of the steady performance that B&G has always been known for, and then get back to accretive acquisitions. The problem over the last few years before 2019 was that while we continued on the acquisition hunt, we had leakage, and so the acquisitions weren't accretive, not because the acquisitions didn't perform, but because we had a leaky bucket. So our goal was to stop the leaky bucket, which we did last year, and Collabogirl helped us grow a little bit. You know, ex-pirates, because there's been so much noise with pirates in and out. And so going forward, we're saying we're going to have stability in top line and bottom line. We need to do cost productivity to offset inflation and maybe drop some of that to the bottom line, maybe invest some in marketing, but then make sure that our balance sheet can be prepared to do the accretive acquisitions and That's a little trickier with our debt the way it is right now, quite frankly, but not impossible. We did it with Clabber, and as we said in our remarks, there's opportunities we're looking at that will not put pressure on our leverage, but will help us grow our EBITDA, which is what this company's been doing for over 20 years.

Fair enough. And then just quickly on the dividend side, You know, you stated up front there are three issues that probably pressured the stock. One of them you caught out with the dividend. So I'm just curious, you know, you said in the prepared remarks, you know, not trimming the dividend because that's kind of how the company was built, which I understand to an extent. But then I also have to ask, why not allocate more to capital, you know, more capital to acquisitions and kind of just try and understand a little bit better just the process behind the capital allocation strategy, given your dividend yield is materially higher than the highest next to you within the space. That's all.

Thank you. Sure. And I think the board and the management team, Ken and I included, have had a consistent view on this. And we went public on the idea of returning excess cash to shareholders. We view the dividend policy as based on our cash generation, and the cash generation is here with the company, we do think the yield doesn't make a lot of sense, but we never set the dividend policy based on yield. It's been more a function of the cash flows. And our view is just the dividend yield doesn't make sense because the stock price doesn't make sense.

Okay, great. Thanks, guys. Thank you.

Thank you. Thank you. Our next question comes from the line of Hale Holden with Barclays. Please proceed with your question.

Hi. Thanks for taking the call. I had two questions for you. The first, it's been a little while since we've talked about Ortega growth, and you talked about the innovation, and then in response to Brian's question, gave a little bit of schematics on kind of where you were on distribution. But is it just sort of the new veggie tacos that you're looking at and street sauces, or is it distribution gains? And what would it take to get that to kind of a low single-digit growth as a brand?

Well, it's definitely the launch of, we think, probably the biggest news in taco shells since the taco shell. So, you know, with those launches and that and the taco sauces and good acceptance, we should see some, you got some, you know, low single-digit growth.

Does that take more marketing and noise around to do that?

Excuse me, I'm sorry?

Would that take more marketing support to do?

Well, we have marketing that we allocate amongst our brands, depending on what each brand has going on. But, yes, we're going to support it with a lot. You know, we don't have the biggest advertising budget, so we do focus a lot on digital and we focus a lot on shopper marketing with our retailers, and we also focus a lot on in-stores. So there are several categories. We have shared in the past where we have bought out some of the categories, like frozen vegetables, where the signage that goes on the freezer doors, we have exclusivity on that signage. So we have done that in other areas of the store to support both cross-brand merchandising as well as innovation.

Got it. And my second question, Bruce, is could you give us a sense of where the – where the working capital, the $35 million working capital savings is coming from, or I guess what drove the increase last year that you're pulling back on a little bit this year?

Yeah, sure. And as I'm thinking about working capital, I'm literally thinking accounts receivable, accounts payable, inventory. We did a great job 2018 bringing inventory down. It came up a little bit again in 2019. Some of that is the acquisition of Claver Girl. And then payables went the wrong way on us. And so both of those will be a big focus in 2020. We think that there's an opportunity to generate some excess cash by bringing those back down to the right levels.

There's no one category, like the canned category, that you kind of liquidated out of to do that. So it's just better management across the system.

better management across the system.

Okay. Thank you guys so much. I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Ken Zaslow with Bank of Montreal. Please proceed with your question.

Hey, good afternoon, everybody.

Good. How are you?

Good. A couple of questions. You took away the cash flow question, so I don't have to ask that. When I think about all the reduction in your lower margin SKUs, SKU rationalization, I How come that's not going to add to the operating profit line? Is that not accretive to your numbers?

It was, and if you look, our EBITDA was up $11 million in the fourth quarter.

Is that going to continue into 2020, or that action is done?

So we talked about a very small price benefit in 2020, I think $3 million to $5 million. Okay.

But you're not calling any more SKUs. I thought when you talked about the guidance, you said it would be 0% to 2%, but partially offset by some SKU rationalization, taking rid of some low-margin SKUs.

Correct. And that is all factored in and baked into our full-year guidance of 302.5 to 312.5.

But I guess what I'm trying to say is, When you're thinking about the EBITDA bridge to 2020, is that materially incrementally, marginally incremental? It just seems like it would be... It's marginally incremental and baked into our numbers. Okay. My second question is, in terms of managing complexity, so I don't remember exactly when was the last time you had this much product innovation coming, this much products going into different categories, you know, how do you, what capabilities are you better equipped to be able to have, uh, manage the complexities relative to history?

Um, well, I'd say that, um, you know, we have been launching a steady array of new products in green giant frozen for now started in 16, right? So 16, 17, 18, 19. So, um, we haven't had any significant material hiccups in our ability to launch a lot of new innovation in Frozen. Having said that, since we are putting the accelerator on, one of the initiatives that we are doing that we haven't shared is that we are dedicating – the old B&G model was to take everything we have and put it in the same salesperson's bag, and now that bag has over 50 – 50 brands in it. So we are dedicating some of our salespeople to only focus on frozen Green Giant. So across our major customers, we're going to have people that are dedicated on frozen because there's so much activity and now competing in multiple categories within the frozen food space. And then we'll have a group that sells the rest of the line. So that's our commitment to accelerate our capabilities to handle frozen green giant.

Okay. And then my last question is, as you think about your new product innovation, the investment that goes alongside that, how much incremental investment is required year over year for the new product launches investment? And is this going to be a new level of investment on a per year basis? Does it Is this something that you're going to, as a base case, what you're going to build onto, or is this a one-time infusion? Can you talk about how you think about the capital investment for the new product launches and, you know, how you think about this?

No, I mean, we're not proposing a significant increase in marketing investment. We are spending a little bit more on slotting next year, but that's based on our sales assumptions, and slotting is a, you know, gross-to-net reduction. And in terms of capital, we're not spending a lot of capital, but a lot of this quick R&D and commercialization of these items are with partners and outside manufacturers. So none of what we outlined in Innovation for 2020, correct me if I'm wrong, none of the green giant is going to be internally produced. And the cauliflower taco shells and pizzas will be internally produced, but that wasn't a significant capital investment. It's really more about R&D expertise and consumer insights than anything else.

Yeah, and I don't think anything that we're proposing that we're planning on doing in 2020 has radically been different than what we've done in the past. So for Green Giant, new innovation sales contributed something like $200 million in retail sales in the last year, up over a half a billion dollars since launch. And then different brands, but just showing what we've been able to do with big brands. When we bought Ortega, it was something like $75 million in sales. It's north of $140 today. And so we've definitely demonstrated with some of our big key brands an ability to innovate around the brand, grow things. Clearly what we're doing with Green Giant is revolutionary in the category, but it's more of the same as far as what we've been doing with Green Giant for the last couple of years.

Great. I really appreciate it.

Thank you. We are out of time for today's call. I'd like to turn the call back over to Mr. Romanzi for any closing remarks.

Well, we thank you for joining us this afternoon. I hope we addressed the issues that people have with our with our performance in the past and that you can understand that we're committed to drive continuous, sustained performance in the future and that the model for B&G is alive and well and works. So thank you all, and have a good night.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.