Q3 2019 Earnings Call
Before the company begins its formal remarks I need to remind everyone that part of this to the discussion today includes forward looking statements.
These statements are not guarantees of future performance and therefore undue reliance should not be placed upon that.
We refer you to the company's most recent annual report on Form 10-K , and subsequent FCC 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.
They will also be making reference on today's call to non-GAAP financial measures adjusted EBITDA adjusted net income adjusted diluted earnings per share based business that sales.
Conciliation. So these financial measures to the most directly comparable GAAP financial measures are provided on today's earnings release.
Ken Romance see the company's President and Chief Executive Officer will begin the call with opening remarks, I discuss various factors that affected the company's result selected this is highlights and his thoughts concerning the outlook for the remainder of 2019 and beyond first walk out the company's Chief Financial Officer will then discuss the company's fight, but after results for the quarter.
As well as its guidance for 2019, I would now like to turn the conference over to CAD.
Good afternoon.
Thank you all for joining us today for our third quarter earnings call.
This afternoon I'd like to provide you with respect to borrow third quarter results before I turn the call over Bruce.
One more detail of our financial performance.
Over the years BG Foods has had a strong track record of increasing sales profitability and cash flow.
Well again a gross.
Disciplined acquisitions of complimentary branded businesses and new product development.
Unfortunately, we had no lived up to our track record over the past two years.
But I believe that our results this quarter shows it we're making the necessary improvements to our business and that we're beginning to return or company today.
Well I want to achieve our shores.
Long term goal.
Hi, waits for the third quarter, which I'll discuss more fully in a few minutes.
Include first the ongoing integration of clinical girl, which is pretty 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.
For achieving a price increases than a typical marketplace.
The first three quarters of 2019, we generated approximately $16 million and price increases which is trending at the high end of our expected range.
[laughter], increasing momentum behind our cost savings initiatives projected to be $20 million for the year, primarily and logistics costs.
And six continued strengthening of our organizational capability, including organizational redesign personnel that has been and system improvements such as our new local Jamie ERP system.
Its trade spend management system.
In the third quarter. This year net sales and adjusted EBITDA declined primarily due to the divestiture pirate brands in the fourth quarter of 2018.
Excluding asbestos divestiture.
Net sales increased 2.6%.
Mostly driven by the acquisition of cloud girl, which is performing very well in line with or acquisition mall.
The integration Calabro continued to proceed smoothly during the third quarter as we began transitioning clinical grow to ourselves G.
We expect to fully integrate Klabin girls sales and distribution in January 20 Twond.
Base business net sales, which excludes the impact of the pirate brand divestiture.
Well the girl acquisition and an extra two weeks of Mccann's Irish automobile declined 2.5%, mostly due to green giant and our spices and seasonings businesses.
Well 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 pepper and some lost distribution low margin private label business.
[noise] Green giant that sales going 4.9% versus the third quarter 2018.
Primarily due to the implementation of our trade promotion optimization strategy increased the promotional price point of our banking about product line.
Much of this was planned although in certain customers brochure bone sensitivity was reasonably expect.
However, we will continue this strategy no holiday time frames 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 call products from the poor crop in 2018.
We believe 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 positions are feeling comfortable orders from the 2019 harvest.
And lastly, Canadian Thanksgiving was later this year, which never negatively impacted the third quarter, but should positively impact the fourth quarter.
We recognize this was the first time in seven quarters dating back to 2017, the green giant hasn't shown road, 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 taxes on our bag in a box line, so that should not be a drain that it was in the third quarter.
In addition, as I mentioned earlier, we expect green giant to benefit from the we're Canadian Thanksgiving.
Well, 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 HCV.
We're very excited about these products. They include Green giant pizza with cauliflower credits Green giant cauliflower and spin engine Yaki.
Green giant vegetable hash Browns building off this terrific success of our Green giant veggie tell us and green giant married and grow vegetables.
As part of our continuing mission to be Green giant deep plan B food brand of future. These innovative new products will expand green Jones reach into areas of the frozen food case beyond vegetables, including frozen potatoes, frozen pizzas and frozen pasta.
And in 2020, we'd 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 or 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 are 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 told that 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 toward opened 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 million to $20 million for the year.
However, our earnings were hampered a bit in the third quarter and we'll continue to be it in the fourth quarter by higher costs than anticipated.
Therefore, despite delivering the high end of our budget or pricing and cost savings, we're lowering our full year adjusted EBITDA guidance to $295 million to $310 million.
This reduction is primarily driven by two factors one higher green giant.
2019, vegetable pack costs and the acceleration of the use of the new more expensive pack due to last year's sure vegetable drop as did not last as far as the calendar year as it normally does.
And to 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 came in or coming in higher.
I do not like lowering or earnings projections and disappointing our investors.
What I took this role I promise as much transparency as possible as early as possible and then I believe you should know our business expectations as soon as we do.
But despite these newly identified cost we have even more conviction in our plans moving forward.
Our expectations moving forward remains a bright zero to two present base business growth.
Deliver pricing in cost savings toward off inflation and improve margins.
And an accretive acquisitions tour 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 and growing categories, a substantial majority would categories in which we compete are healthy and growing.
Two we have strong brands of PNG foods brand is in over 80% of U.S. households, and many of our brands of the number one or two national or regional markets, you're in the categories in which we can be.
Three we have geographic distribution expansion opportunities.
Many of our brands have relatively low geographic distribution around the 50% more.
Like Mccann, Victoria Mama Mary's back to major has 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 at any shows 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.
Several of our other brands, which we were also very excited about.
On the cost.
Vision, we 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 tree program and system to manage it in 20 Twond.
Regarding our capital structure, we were very pleased with the successful refinancing of $1 billion or a 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 sixtyth consecutive quarterly dividend.
Two days ago, our board of directors declared our 61st quarterly dividend, which will be paid in January 20 Twond.
During the third quarter, we also return 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 we'd like to call the turnover to Bruce to discuss the details of our third quarter financial performance.
Thank you again.
Good afternoon, everyone.
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 net sales for pirate brands in the third quarter 2018, net sales increased by $10.3 million or 2.6% over last 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.
These business net sales decreased by $9.8 billion or 2.5% largely driven by declines in green giant and our spices and seasonings business.
Outside of Green giant and spices, and seasonings business nearly 60% of our brands were up for the quarter.
Third quarter net sales benefited from approximately $5 million and price increases.
Good for 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 pirate 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.
Turning to improve profitability on a recently revamped backing up offline.
Temporary out of stocks on corn on the call following and second short crop.
And the timing of the Canadian Thanksgiving, we shifted from third quarter, a year ago to the fourth quarter of this year.
Each of these events crosses about $2 million in reduce green giant net sales for the quarter.
On a year to date visas performance remained strong for green giant and net sales is up $9.1 million and 2.5% increase year to date from 2018.
And we're very excited about the brands process and the fourth quarter and we are introducing 11, new growth innovation products, which we expect to generate approximately $5 million to $10 million, an incremental net sales versus a year ago fourth quarter.
The new innovation launches include Green giant cauliflower veggie hash Browns.
Cauliflower and broccoli veggie hash Browns.
Colleagues, Larry Gnocchi cauliflower vintage.
Okay.
Marinated mushrooms.
Eggplant Peppers, and you gave me marinated veggies.
Zucchini grilled veggies.
Colleagues are cheese and Bacon Debbie.
Margarita Pizza.
Org Pizza and a 24 around value sizes, you tease bars.
These new innovation products are also expected to positively impact green giant net sales in 2001.
We expect 2020 to further benefit from another round of new innovation products that we planned launch in the first half of 2020 and that we expect will further submitted green giant as the preeminent.
These brand in the frozen pizza.
Among other large brands net sales of Maple Grove farms increased by approximately $1.3 million or 8.1%.
Net sales of Ortega increased.
By approximately $1.1 million were 3.2%.
And net sales of New York style increased by $300000 or 3.2%.
Net sales improve we were down $200000 a 1%.
Net sales of our entire spices and seasonings business were down $2.5 million were 3% largely driven by lower pricing of some commodities spices.
Well as.
Hey result of decreases in commodity input costs, primarily garlic and black pepper.
And some losses in certain low margin private label contracts.
It's in our spices and seasonings business remains strong and net sales of our legacy spices and seasoning brands, including accent Mrs Dash in south.
Were up 5.6%, 5.6%, 1.7% for the quarter respectively.
Gross profit was $108.8 million for the third quarter of 2019 or 26.8% of net sales.
Excluding the impact of $1.5 million acquisition divestiture related and nonrecurring expenses. During the third were up 2019, our gross profit would have been a $110.3 million or 27.2% of net sales.
Gross profit was $115 million for the third quarter 2018, or 27.2% of net sales.
Including the negative impact of $3.2 million of acquisition related and nonrecurring 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 first third quarter 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 in frozen distribution networks.
Improved procurement packaging and Egina rationalization that we implemented earlier this year.
These initiatives in addition to the pirate brands Divesture helped to lower cost of goods all inclusive of the cost of materials labor overhead freight and warehousing from $307.6 million in the third quarter of 2000.
$18 million to $297.5 million in this years third quarter.
Cost of goods sold as a percentage of net sales was 73.2% in third quarter of 2019 compared to 72.8% in the third quarter of 2018 and increase input costs, particularly driven by its second consecutive short agricultural crops negatively impacted green giant margins and off.
These needs.
Selling general and administrative expenses of $38.1 million were favorable by $1.9 million were 4.7% compared to $40 million from the third quarter 2019.
The visibility was driven by decreases in selling expenses of $1.6 million warehousing of point $8 million and consumer marketing spend $1.5 million. These improvements were offset in part by an increase in other general and administrative costs of point $8 million an acquisition.
Mr related and nonrecurring expenses point $2 billion.
Expressed as a percentage of net sales selling general and administrative expenses improved by one percentage 0.9, 0.4% for the third quarter of 2019 compared to 9.5% for the third quarter of 2018.
We generated $86.2 million and adjusted EBITDA in the third quarter 2019, compared to $91.9 million in the prior year quarter.
Which represents an increase of approximately $2 million after adjusting for the last contribution following last year's Divesture pirate brands.
Which we estimate attributed approximately $7.7 million in a year ago order.
Adjusted EBITDA benefited from improved pricing trade optimization product without packaging and freight efficiencies driven by our distribution realignment plan, which has now been fully in the implemented in both our dry in frozen distribution networks.
Net sales of our newly acquired collateral provided some benefit which also helped to offset declines in green giant insert over other legacy brands as well as modest input cost inflation across the portfolio.
Adjusted 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 were down 18.6%.
We generated 54 cents and adjusted diluted earnings per share in the third quarter of 2018 compared to 57 cents per share in the third quarter 2018.
The decrease of three cents per share was primarily driven by the loss contribution resulting from the sale of private brands.
Separately, while interest expense of $24.2 million was lower than the 27.9 million in interest expense in Three Q2 018, net interest expense was negatively impacted by approximately $1 million as a result of increased borrowings to fund the acquisition of fiber girl.
Adjusted diluted earnings per share result, and beginning to benefit from the recent share repurchases under our $50 million share repurchase authorization approved by our board of directors earlier this year.
During the third quarter. This year, we repurchased approximately 1.3 million shares of common stock at an average price of 18 to 35 were $24.7 million in the aggregate.
These share repurchases are in addition to the $36.9 million were 1.4 million shares we repurchased.
Under our previous share repurchases authorization at an average price and $26.41.
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 announcing the acquisition of clever 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 years, adjusted EBITDA $255.7 million.
Less the estimated $22.7 million in contribution that left the organization due to the sale of pirate brands.
We are currently trending in about.
$292 million in trailing 12 month adjusted EBITDA through the end of the third quarter of 2018 were essentially flat in 2018 adjusted EBITDA after removing the contribution of higher brands.
As we outlined earlier this year, we expect to see benefits from 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 realize approximately $60 million and benefit from pricing and so we expect the finished at the high end of our expected range of $15 million to $20 million in pricing.
We have also realize more than $20 million in logistics cost savings.
Year to date, largely driven by or dried fruit and frozen distribution realignments.
Which have offset modest increases in rate.
We're also on pace to achieve at least $5 million in additional cost savings from other initiatives, such as procurement Wade outs and improve packaging.
These benefits should have push as higher into our initial expected cost savings range.
However, while we have executed our cost savings in price increases on the high side of our plan to offset inflation, we had experienced higher than expected costs in a couple of areas this year, including higher than anticipated that some costs driven by a second street short proper vegetables.
Greater than anticipated increases in Paris.
And increases in our can prices, resulting from greater than anticipated steel and aluminum prices.
As a result, we're revising our adjusted EBITDA guidance for the full year and tightening that guidance to $295 million at the low end of the range would we just a hair above our current LTM 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%.
Two or 2018 adjusted EBITDA, excluding the estimated product contribution that we lost as a result of the pirate brands to messenger.
We're also updating or adjusted diluted earnings per share guidance to $1.65 to $1.80, which reflects the change to adjusted EBITDA as well as the incremental interest expense associated with acquisition of fiber girl or share repurchases and our recent refinancing.
I would also like to quickly walk through the rest of Rpls functions from full year 2018, which include.
Net interest expense was 95.5 $99.5 million, including cash interest expense of $90 million to $95 million and interest amortization expense of three to four and a half a million dollars.
The increase in interest expense versus our original forecast is largely driven by $82 million of borrowings the financial fiber grow acquisition approximately $35 million spent on share repurchases.
Fees and expenses associated with our refinancing.
And the parcel double count of interest for a two week period between the issuance of our new five in the quarter senior notes and the redemption of our foreign Bobby was.
We also expect depreciation of expense of approximately $41 million amortization expense of approximately $18.5 million, an effective tax rate of approximately 25 behalf 26%.
Cash taxes, excluding the negative tax impact from the gain on sale pirate brands to be $5 million or less for the year.
And finally, we anticipate capex to be approximately $45 million to $50 million for 2019, which is inline with last year.
As a reminder, the pirate brands Divesture 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 includes the cash tax payments that we made during the second quarter of 2019 of $43.2 million and a cash tax refund, we otherwise would've expected to receive 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 2018 would've been approximately $73.1 million.
As a reminder, third quarter tends to be or softness.
From a net cash provided by operating activities perspective, as we typically build inventory during the large vegetable pack 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 outlays in third quarter than typical.
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.
This concludes our prepared remarks, and now we would like to begin to Q and a portion of the call.
Operator.
Thank you we will now be conducting a question and answer session.
I would like to ask your question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Q you May Prestart too if you will like to remove your questions from the Q.
Participants using speaker equipment and may be necessary to pick up their heads up before pressing the star Keith.
Our first question comes from Karru Martinson with Jefferies. Please go ahead.
Good afternoon.
Green giant introductions.
Slotting fees in the profitability of that those those products are in line with.
Staying or how should we think about that as it flows into 2020.
The routinely are now on is that.
We are now launching for the second year Roe.
The following years innovation.
To about a third of the TV.
That does it require slotting.
So the items were launching will have no slotting attached to it.
Right for the customers that requires a lot in.
They will be able to get that starting in January .
So no slotting associated with these products in the margins are as good or better than the kind of average of what we've been introduced.
Okay.
Do you guys pulled back promotion and was it just.
Broad based slowdown.
And the Green giant volumes I think there's just concerns.
No this is something that.
Able to pull back on promotions.
We need to so what does the several so many segments of the green giant frozen business. There were two segments that hurt US one was the promotional pull back and that's we still believe it's the right thing to do in the non holiday time frames and the second was we were out of stock on corn on the call those will be passed that in the board.
After our innovation items that we've been launching had been doing very very well and so there's no issue with how the innovations performing.
Okay, and lastly, you talked about the distribution gain opportunities for the acquisitions.
You're only in 50%.
Geographic areas, what does it take due to broaden that distribution seems to be low hanging fruit for you guys.
Well some of the brands are relatively new to our portfolio. So for instance, mcadams.
Which we just bought last year, we've been growing that I think that was up in the quarter like 30 or 40%.
Now off a low base, but we've we've been out presenting all year long to customer that hey. This is a new brand. We have is a terrific heritage Irish show meal that was that was well below 50% I think our distribution I think we.
Purchase that brand, it's something like a quarter. These TV and now we're ramping that up Victoria pasta sauce, which we bought a couple of years ago again, an east coast, Brian . So we would take slotting dollars and it will take some some shopper marketing and some consumers aboard in those customers.
And some of it will take innovation some of our brands some of our legacy brands like Mama Mary's and now three year ownership of back to nature is going to take some re emphasis in terms of building out not only a strengthening the business in the current customers, but gaining new customers. So grades were totally relaunching.
Back that age or after a couple of years and saw sales as we even cleaning up the product line, we have totally revamping backed in Asia with new graphics.
New products in the cookie of the cracker in the Granola line of the portfolio, which will not only help current distribution, but is giving US now we're kind of a resurgence in the ability to talk to customers that don't have in distribution.
Thank you very much guys appreciate it.
Next question comes from Bryan Hunt with Wells Fargo. Please go ahead.
Yes, I was wondering if you could you know go back over you talked about a couple hits to sales throughout the quarter.
You know corn on the comp in a couple of other things and I think you enumerated.
Sales mix could you repeat that forming a associated with the shortfall or green giant.
Yes, three things we highlighted for green giant what 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 noted were approximately $2 million the Canada, one is tiny obviously.
So you'll get you'll get so 6 million in total and you'll get 2 million or that back.
In Q4, more or less EM, and we won't have the drag and we won't have the drag from the promotional because we're not we're not executing the higher price points in the holiday timeframe.
More back in south on quarterly GAAP, so that will be a drag.
Gotcha.
My second question is.
When you look at all the new products, which are you announced you said five I think $5 million to $10 million of incremental sales. In Q4. You know can you talk about are you are you retailers just ball thing out other brands.
Or any of these thanks potentially cannibalizing your your own because I buyer cauliflower piece of it now I've got a chance for by cross not going to chance to buy the whole pizza.
I want to us or potential for cannibalization to you know who are your popping out.
The good 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 but the vegetable set so.
As we continue they launched vegetable new vegetable items, we always will lose some while we gained some we always we always look to have a net game, but we don't believe we'll lose items in the vegetable said, but we're going after says that we're not we're not really president and so we're not very present in potatoes were not very present.
Pizza, we're not very president positive so while our while our new product development strategy is very consumer focused by bringing plant based alternative, 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 batches.
We already know in some of our customers, who merchandise our veggie tights top in potatoes, frozen potatoes, nodded frozen vegetables, which is a whole different section in a very large SEC.
And while we do very well where were merchandising in frozen vegetables, we the veggie Todd movie, even better when its next to the car carbohydrate.
We've filled alternative which is a lot of derivatives.
And also we would very strongly recommend that you continue to buy both across and [laughter] <unk> I am carbolite.
And then and then lastly, you know what I think about pack vegetables, and then steel cost as some of the other high inflationary items that were unexpected.
Ken can you talk about what maybe that carryover costs will be for 2020, and your ability to either price or create additional offset cost savings to offset those costs.
We're still developing our 2020 plan, but just to just to either reminder, for first time educate people are what happens in the Midwest. The harvest only happens once a year so.
Vegetables, both in our can business as well as some supply of our bench frozen vegetables.
That harvest happens throughout the summer.
The packing of those products.
Our just right you know just wrapped up in October .
So when we when we put together a planned for 2019, we don't even know what the 2018 packs gonna be normally most of that is for the 2020 PNM now, but because we were so short on vegetables. This year, we started getting into this year's pack much earlier than we them we.
Usually do because last year's pack was so sure. This year's pack was also a short in the Midwest, but we have to go outside the miss that well Midwest and other suppliers, which cost us more to make sure we have enough product for the full year, but at a slight our cost.
So we'll have some elevated cost with vegetables next year, I'm button, but but.
As part of you know inflation that we would expect.
And we would continue to have our pricing and cost savings. We start early plans for 2020 on pricing and cost saving to offset that again.
Very good I won't have enough 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 regional trends, we see in the scanner data and just how to think about turning the tide. There. If you look at from July through we have large through mid late October .
Theres pretty significant.
Declines, especially in the to your two largest categories, which are.
12, or 15 points worse than than the trends in July .
Can you just give us a little bit a diagnosis.
It's prepared vegetables, and spices, it's not going on the comp because that comes through in our data. It's that's playing frozen.
Just maybe what's happening there and how you plan to turn that around.
Well again on frozen Green giant our Bakken Abbas line is a very very large segment of our total frozen business. It accounts for about $140 million $130 million out of our 500.
Out of our 400, almost 400 million off for the frozen vegetable so that promotional strategy did cost a lot of volume and that's that's the main drag on our frozen business. We we don't expect that to be happening in the fourth quarter, because we're not we're not implementing that promotional strategy in that timeframe.
On the Spice and seasoning business, while we had some softness in consumption.
A lot of business in spices and seasonings that are that are not recorded by Nielsen. So as Bruce mentioned, our our spice and seasoning business. In total is only off was only off about 3%.
And a lot of some of his promotional timing in certain periods.
So some of it is distribution some some some distribution losses on some small skews.
But nothing nothing major there were concerned about.
But I guess, maybe if you look at the total company I recognize there is on measured channels of course, and some are very important but.
Certainly the.
And with this data covers or significant an important as well and the total company pays for example is gone from kind of down one and a half to like a down seven I mean, I guess I'm a little surprise that.
There's.
I wonder if it I mean look sort of sense of urgency do you have about about trying to.
Turning this around certainly even on a slice of side I think thats.
Important minutes your largest measured category.
Is there a little more sense of how you might be able to expect some improvement or what is going to cycle through these kind of declines into next year.
No we don't expect that I'm not sure by our measure in the way we are Nielsen measure our total 13 week consumption was down 2.5% full company.
And spices was down to four and our frozen trends really hurt us, but like I said, we expect we expect frozen trends to turn around.
Spice trends should also turnaround based on pro programming, that's going in the marketplace and back to nature, especially next year, 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 we're not certainly satisfied with that but we understand what the consumption was.
And on a quarter to quarter basis, there that can be swings, but we wouldn't project out we spent by our by our tracking we wouldn't project. The fact that we're going to continue to be down to 3% consumption.
Okay. Thank you very much.
Thank you.
Next question comes all Carla Casella with JP Morgan. Please go ahead.
Hi. This is there on for Carla can you talk a little bit more about your process of placing your new plant based proteins and retail given all the hype and this phase and then how're grocers approaching this shelf.
Space placement differently.
And any color that you think.
Well the customers of enthusiastically accepted our products, there's lots of activity going on we've we presented at all these 11, new items that we've shared with you to our customers a while ago diabetics enthusiastic acceptance.
They are stay are struggling where they're going to put them all.
And there is a lot of activity going on we are we are seeing or hearing that actually some of the innovation in frozen is gonna moved to the fresh so the fresh space, particularly in in the in the protein alternatives. So we actually see that as an opportunity that might free up more up.
To the in the frozen food case as some of the recent entries are focused more on the fresh food case on but it is a battle for real estate, it's not simple I mean on and the product that the strongest brands in the product that do the best stay on the shelf and the weaker brands in the brothers that aren't journey well enough.
Come off the shelf and our green giant frozen business notwithstanding this last quarter because of nothing to do with innovation, our green giant innovation products. Our continued to be amongst that's turning items in the category, our who are our vegetable rice business, which really started cauliflower rice business, which started this revolutionary to say.
Dave the frozen food case from the distinction.
It's still growing and we're now three years into.
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 it. It's the oldest silver innovation, but it's still a very low household penetration. If you look at the penetration of call of our rights versus just frozen cauliflower in general or even all cauliflower, there's a lot of room to grow and while these items continue.
And do all Bill will continue to deserve.
Based 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.
The U.S. Thanksgiving and Christmas impact you at all.
No our sales.
It base Thanksgiving to basically shifts a week, so it's kind of still in our.
It's still in still basically in most of the sales in November , particularly since Thanksgiving week as a short week for shipments. So we usually don't ship five days out of that short weeks. So it's still going to its still in its due within the quarter and most of its even within the modes in November .
Got it. Thank you all from me.
Thanks.
Next question comes from Eric Larson with Buckingham Research Group. Please go ahead.
Yeah. Good morning, good afternoon, everybody. Thanks for taking my question.
Just a couple of things.
Your your pricing your volume losses still are sort of exceeding your your net sales gain so.
Yeah.
Is it is it you pulled back on promotion, but are you still promoting some things in that in that mix and and then so you're getting the impact negative impact of positive pricing plus some some slippage from promotional spending could you walk through the animal but.
Well, it's not just the net sale we aren't we aren't we have taken a net sales in some of these promotional but but this isn't a net sales manager move this is about improving improving margins. So.
It's really to make better that margin on the business that we go back off on but it's not a strategy that can kinda can't keep doing it forever. We we pulled it back and that's over and now we'll 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.
Really not heavy promoted timeframe that could be the first quarter next year. Then we'll be then we'll be these on green giant will be done with most of the.
Heavy promotional strategy shifts.
And we got it and.
And when we look at Ares when we look at our sales softness due to that versus our EBITDA. Our EBITDA has hung in there.
X X X Pirates Booty X X all the other factors when you think about the volume was really have a 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 for the total business or the Topia, though.
Okay. So when you when you look at consumption.
When you look at consumption public consumption data one would you then expect to start seeing.
Maybe at least some near term four week data one do you start thinking you would see up.
Positive cadence on those numbers.
October data should be better and the fourth quarter clearly in the frozen business because of the factors, we talked about that won't be repeated.
In in.
In the fourth quarter like it hurt us in the fourth third quarter from a sales rattling.
Okay, and just one other follow up here, so and so in the fourth quarter were back to normal promotions on frozen and we are launching the new products on frozen or why you won't see the Canadian Thanksgiving and the consumption numbers in the new up that will also help support or in our internet sales.
Got it okay and so just my final question. My final question is on on on cash also your your net debt is just under 1.9 billion enough I use the midpoint of your.
Your EBITDA guidance, it set three or two and a half that puts up.
A 6.2 times leverage ratio on you folks and I think you'll you'll want to kind of get that closer to five so.
You know how are you going to try to get a 100 basis points off that does 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.
Youre calculating ratios off our third quarter numbers, which tends to be or seasonal highs from an inventory from in 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 attacking the divestible crop and so I understand that maybe the near term side of it uses a lot of cash. So you start seeing that come down as early as Q as fourth quarter here now then Bruce correct.
Okay.
Lets use that is usually our steepest drop in inventory is from the third quarter highs in 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 holidays for our frozen can't vegetables. So it does come down.
But an answer your question when we when we share our 2020 plans, while we'll have you know 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 next this year next year, we can even generate more cash than our that are more of a key.
Cash increase than our even our EBITDA growth will generate because of because of better better reductions in inventory not not nearly the huge reduction we had in late in 2018, but we do see the opportunities to tighten up on inventories from where we are today to generate more cash and as are outlined.
During last year's third quarter to last year's fourth quarter.
Included in unwind of the seasonal inventory something like $87 million.
Right right right. Okay, yeah. Thank you.
Once again, if you would like to ask your question. Please press star one on your telephone keypad.
Next question comes from David Palmer with Evercore. Please go ahead.
It is.
Hey, Bruce just to follow up on the last thing just said about the that the third quarter inventory.
Yes, it because it does look like the operating cash flow.
He 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 ask 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, regenerated, something like $70 million to $75 million and cash from operations and so realistic to expect something greater than that this year's fourth quarter.
Okay. So north of 70, 75, I mean, I would imagine you would want it to be.
Higher.
Significantly higher than that on an asset here is that correct thats why.
Let's just say comes in at 80.
And why that 80 would would be that low I mean, obviously you want to have more to prove to the naysayers that you can 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.
Right it'll come down just the working capital cycle and like I said expectations are we reduce inventory something similar this year between the third and fourth quarter as last year and that we likely have.
Very much greater than last year's fourth quarter cash from operations number.
Okay, which is very much in line with what we've done historically and then would you would and then you'd want to any probably would you imagine that youre inventory levels would be similar at year end to last year.
There will be a little bit higher maybe a little bit higher these business and when we acquired clever gorilla came with a little bit more than $10 million of inventories of that'll that's obviously an impact as well.
But it shouldn't be that single as should this should be significantly less than where it is right. Now. We're also what 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 the impact more this year. So we don't run out next year, which unfortunately gives us a little bit.
The higher inventory profile, but it's to make sure we don't run out of any product by the end of next next season before the new back hits and 20 Twond.
Got it thank you and and then when you talked about the consumption data.
We were seeing that to how late in the third quarter it looked like.
Some of this data was falling off in green giant in your spices business you talked about some of the off out of the non channel or non measured channels stuff with spices, but also it should get better but I'm wondering.
Is there a not how much of a delta between your non measured and measured do you think we should see.
Sort of medium term basis for your business do you do you expect your non measured for your total channel to be outperforming your non due to the measure data on every channel definitely outperforming the men data because our you know I or at least our measured spices away in the way we each.
Track all of our Spice and seasonings businesses for the 13 weeks ending September 28 was down 2.5%.
But that doesn't include a very large foodservice business. That's doing very well doesn't include some measured items in a very large customer one of our big large club customers.
So our sales is definitely outperforms consumption.
Okay.
I mean, just anything and thank you that for that.
Do you think the timing of items.
Promotions and whatnot.
I would have take stolen certain measurable 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, Alright, well. Thank you very much obviously that will be up to the consumer voting with their pocket local we will have the inventory out and stores 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 catalyst for closing comments.
Well, we appreciate your attention and questions today like I said, well, we don't like to lower earnings projections, we do believe with a quarter to go we can tighten the range for you. All we do believe that everything we set out to do this year, we're actually doing.
Well, we were set sales could always be a little higher we'd like that we do believe that we battled the cost the cost inflation, we've been pricing and cost savings initiatives save a little bit of Uncontrollables in the area of mother nature handing us another bad vegetable back and then of course, the effect of terrorists, but save the thing.
With that or not in our control we were 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 yearend 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.
You want to go back.
With this comes in.
Yes.