B&G Foods Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the B&G Foods Third Quarter 2023 Earnings Call. Today's call, which is being recorded, is scheduled to last about 1 hour, including remarks by B&G Foods Management and the question and answer session. I would now like to turn the call over to A. J. Schwab, Associate Corporate Strategy and Business Development for B&G Foods.

Operator

A. J?

Speaker 1

Good afternoon, and thank you for joining us. With me today are Casey Keller, our Chief Executive Officer and Bruce Wacha, our Chief Financial Officer. You can access detailed financial information on the quarter in the earnings release we issued today, which is available at the Investor Relations section of bgfoods.com. Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

Speaker 1

We refer you to B&G Foods' most recent annual report on Form 10 ks and subsequent SEC filings for a more detailed discussion of the risks that could impact our company's future operating results and financial condition. D&G Foods undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. We will also be making references on today's call to the non GAAP financial measures, adjusted EBITDA, adjusted net income, adjusted diluted earnings per share and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release. Casey will begin the call with opening remarks and discuss various factors that affected our results, selected business highlights and its thoughts concerning the outlook for the remainder of fiscal 2023.

Speaker 1

First we'll then discuss our financial results for the Q3 2023 and our guidance for fiscal 2023. I I would now like to turn the call over to Casey.

Speaker 2

Good afternoon. Thank you, A. J, and thank you all for joining us today for our Q3 2023 earnings call. B and G's 3rd quarter results continued strong margin recovery with adjusted EBITDA as a percentage of net sales increasing 80 basis points versus last year to 16%. Gross profit as a percentage of net sales, excluding items affecting comparability, increased 230 basis points versus last year to 22.7%, demonstrating continued recovery of higher inflationary costs through pricing and productivity efforts.

Speaker 2

During the Q3, we lapped most of the pricing actions taken in 2022. Turning to sales performance. Base business net sales, which excludes the divested Back to Nature business, were down 3% versus last year, but slightly up or roughly flat without the Crisco brand, where we proactively reduced pricing to reflect lower soybean oil commodity costs, while maintaining gross profit. Overall, many of our brands delivered solid performance despite the uncertain environment of higher pricing and pandemic normalization. The exception was the Green Giant business across frozen and canned vegetables, which was down significantly versus last year.

Speaker 2

Excluding Green Giant and Crisco, the remaining businesses increased net sales plus 4.7% versus Q3 of last year. Some more detail on the business performance across brands and categories. Spices and Seasonings. The high margin spices and seasonings portfolio increased net sales plus 6.1% versus last year. Trends were particularly strong on the Foodservice and Members' Mark, Sam's Label Business, which largely serve out of home and small business customers.

Speaker 2

The core retail branded trends, DASH, Weber, Spice Islands, etcetera, were mixed, impacted by temporary service and production issues in our Ankeny Spices and Seasonings Factory, which has now been resolved. We also launched new seasoning and grilling blends under the Buffalo Trace, Fireball and Southern Comfort Brands and select customers, which are performing very well in initial distribution. The Crisco net sales decline resulted from a 15% list price reduction in August, consistent with our commodity pricing model on the brand. Soybean oil costs are down significantly, about $0.20 per pound versus Q3 last year, which we passed through to consumers while maintaining gross profit dollars. Crisco Oil key bottle size unit price is now largely below the key $5 $6 thresholds in market, and we are seeing healthy unit volume increases in recent weak scanner data.

Speaker 2

Green Giant. Green Giant canned and frozen vegetable trends were the weakest in the portfolio during Q3. Canned vegetables price promotion activity has increased with excess industry wide supply prior to the new season pack and we have increased trade spend to remain competitive. The frozen vegetable category has been impacted by a compression of price differential between frozen and fresh vegetables as the result of improved fresh supply and cost. Further, although the Green Giant frozen portfolio has improved product margins and mix, the rice vegetable SKUs face increased competition and price pressure from private label entrants.

Speaker 2

Supply and service. On a company wide basis, Customer service and fill rates continued to improve, averaging 97% during the quarter. The one exception was spices and seasonings with some temporary disruption. We are on track to deliver 97% to 98% CFR, our long term target before year end. Inventory.

Speaker 2

Turning to inventory. As of the end of Q3 compared to the end of Q3 of last year, Total inventory decreased by $79,000,000 to $726,000,000 before the impact of the reclassification to assets held for sale and partial impairment of Green Giant U. S. Shelf stable inventory. We are well on track to deliver lower inventories year on year at the end of for Q4.

Speaker 2

The major drivers are unit efficiencies, lower soybean oil costs and a smaller seasonal pack on the LaSueur shelf stable versus last fall. Cash flow. Cash generation continues to be strong in Q3. Net cash from operations was $23,300,000 in Q3, increasing from negative $59,500,000 or a use of cash last year, with year to date net cash from operations of $155,700,000 Pro form a adjusted net leverage was 6.52 times, down from 6.74 times at the end of Q2. We are on track to continue to reduce our leverage ratio by the end of 2023, driven by adjusted EBITDA recovery, lower working capital inventory needs and debt reduction from available cash flow.

Speaker 2

Year to date, we have reduced net debt by over $210,000,000 For the full year, we remain on track to deliver within the previously communicated guidance range of adjusted EBITDA between $310,000,000 to $330,000,000

Speaker 1

inclusive of the divestiture of

Speaker 2

the Green Giant U. S. Can product line. For fiscal year net sales, we are revising guidance to remove November to December Green Giant U. S.

Speaker 2

Can sales, recognize lower Cristal oil pricing as well as reflect a slower recovery on the Green Giant Frozen Business. Bruce will provide more specifics on sales guidance. Finally, pertaining to Green Giant, we announced the sale and divestiture of the U. S. Green Giant canned vegetable product line to Seneca Foods earlier today.

Speaker 2

The sale does not include Green Giant Frozen, Green Giant Canada or the LaSueur brand, and we are retaining the Green Giant trademarks, which we will license to Seneca for use with the divested product line. This divestiture is a critical step in our efforts focused the portfolio on categories and brands where we can drive valuation growth, consistent with our choices, resources and capabilities. Canned vegetables are a mature category with high working capital needs. The seasonal profit inventory is packed and held for the entire year. The canned business required us to increase debt to finance CIVO inventory build with almost no synergies with the Green Giant frozen portfolio.

Speaker 2

We expect that the Green Giant U. S. Canned vegetable divestiture will modestly increase overall margins and modestly reduce leverage. Beyond this transaction, we continue to evaluate existing businesses that have lower margin and cash flow, higher working capital complexity or do not fit with our core capabilities and business unit structure. The divestitures of Actonator and Green Giant U.

Speaker 2

S. Canned Vegetables are critical will be the next steps on that journey. We have a target list being actively worked to reshape and focus the portfolio with the expectation that the proceeds from any divestitures would primarily be used to reduce long term debt. Thank you. And I will now turn the call over to Bruce for more detail on the quarterly performance and outlook for the year.

Speaker 1

Thank you, Casey. Good afternoon, everyone. Thank you for joining us on our Q3 2023 earnings call. As you can see, we had another strong quarter, actually our 4th consecutive quarter of increased year over year adjusted EBITDA and adjusted EBITDA as a percentage of net sales when compared to the prior year quarter. As we told you when we began the year, we expected to see large year over year increase in adjusted EBITDA and adjusted EBITDA as a percentage of net sales in the 1st two quarters of this year, followed by a more modest increase in adjusted EBITDA and adjusted EBITDA as a percentage of net sales in the 3rd quarter.

Speaker 1

And that is pretty much where we stand today through the 1st 9 months of the year. In the Q3 of 2023, we generated $502,700,000 of net sales, dollars 80,400,000 in adjusted EBITDA, adjusted EBITDA as a percentage of net sales of 16% and adjusted diluted earnings per share of $0.27 Base business net sales, which excludes the Back to Nature brand, decreased by approximately $15,600,000 were 3% in the Q3 of 2023 compared to the year ago period. Base business net sales excluding Cresco, where we have lowered price due to decreases in soybean oil costs were up $600,000 or 0.2%. Our base business net sales remain robust despite the year over year declines and we are essentially flat to the Q3 of 2021. We have now lapped many of the larger price increases, while also reducing price on our Crisco vegetable oil and shortening products and increasing trade spend on Green Giant and L'Osor canned vegetable products.

Speaker 1

As a result, the impact of pricing was a reduction to net sales of $1,100,000 FX added another $1,300,000 reduction and volumes contributed to the remaining $13,200,000 of the decrease. Our pricing strategy for both Crisco and Green Giant shelf stable appears to be working as both of the businesses saw increased volumes in the back half of the quarter. Driven in large part by our previously executed pricing initiatives and a moderation in the pace of inflation, our Q3 2023 adjusted EBITDA as a percentage of net sales, increased by approximately 80 basis points to 16% compared to 15.2% in the prior year period. Adjusted EBITDA increased slightly to $80,400,000 in the Q3 of 2023 from $80,200,000 in the prior year period. Net sales were mixed across the portfolio.

Speaker 1

Calabrio has continued its strong showing this year as we head into the baking system with some really incredible momentum. Calabrio increased net sales by approximately $8,100,000 were 31.5% in the Q3 of 2023 compared to the prior year period. New York Style is continuing to have an excellent year and was up by $1,200,000 or 18.5 percent in the Q3 of 2023 compared to the prior year period. Our spices and seasonings business is off to a strong start in the second half of the year and was up $5,300,000 or 6.1 percent in the Q3 of 2023 compared to the year ago period. Improving fill rates and strong demand have been drivers of performance in our spices and seasonings business, and we have now lapped some of the noise in the early portion of this year.

Speaker 1

We are back to basics in our core spice business with strong execution across the portfolio, while also generating some real excitement in the category throughout our new licensed brand launches such as Einstein's Avocado Toast, Texas Roadhouse, Sazerac Weber Flavors, Buffalo Trace, Fireball and Southern Comfort. Stay tuned as we look to build off this momentum with additional launches in 2024. Victoria had a strong second quarter in a row and increased net sales was $5,600,000 or 4.7 percent in the Q3 of 2023 compared to the prior year period. Net sales of Maple Grove Farms were up by approximately $500,000 or 2.4% in the 3rd quarter compared to the prior year period. Net sales of Cream of Wheat were down $600,000 or 3.5 percent in the Q3 compared to the prior year period, but were up $2,500,000 or 16.1 percent compared to the Q3 of 2021.

Speaker 1

Ortega was down $1,700,000 or 4.3 percent in the Q3 of 2023 compared to last year after being up in the first half of the year. Ortega is one of our marquee brands and we expect better for this business. Net sales of Crisco were down $16,100,000 or 16.4 percent in the 3rd quarter compared to the prior year, were up $11,200,000 or 15.7 percent compared to the Q3 of 2021. As a reminder, extreme input cost increases led to large price increases for Crisco during 2022. Although this led to increased sales for Crisco during the 1st 3 quarters of 2022, including a 38.3% increase in net sales for Crisco during the Q3 of last year, those large price increases eventually led to decreases in net sales for Crisco beginning earlier this year.

Speaker 1

However, we were able to reduce prices for Crisco during the back half of the third quarter, which led to increased volumes in the month of September for Crisco. More importantly, despite the decrease in net sales, Cresco remains on pace to achieve prior year and target profitability, which is really what this business is all about. Net sales of Green Giant were down $13,200,000 or 10.7 percent in the 3rd quarter compared to the prior year. Increased promotions for the holidays led to improved volumes for our shelf stable, Green Giant and L'Assure businesses with just a $1,500,000 decrease in net sales compared to the prior year period. Meanwhile, the frozen vegetable set continues to be challenged for our Green Giant frozen business as well as our competitors.

Speaker 1

Base business net sales of all other brands in the aggregate increased by $500,000 or 0.6 percent for the Q3 of 2023 as compared to the Q3 of 2022. Gross profit was $113,800,000 for the Q3 of 2023 or 22.6 percent of net sales. Excluding the negative impact of $300,000 of acquisition divestiture related expenses and non recurring expenses included in cost of goods sold during the Q3 of 2023, the company's gross profit would have been $114,100,000 were 22.7 percent of net sales. Gross profit was $105,800,000 for the Q3 of 2022 were 20% of net sales. Excluding the negative impact of $2,200,000 of acquisition divestiture related expenses and non recurring expenses, including cost of goods sold during the Q3 of 2022, the company's gross profit would have been $108,000,000 or 20.4 percent of net sales.

Speaker 1

Gross profit as a percentage of net sales, excluding the impact of acquisition, divestiture related and non recurring expenses, was up by approximately 2 30 basis points in the Q3 of 2023 compared to last year's Q3. The improved margins were largely driven by a moderation in input costs and logistics inflation, represented a continued turnaround compared to the first half of fiscal twenty twenty two, where we suffered from the severe input cost inflation that was seen industry wide and which led to declines in our gross profit and margins. Selling, general and administrative expenses increased $700,000 or 1.4 percent to $48,200,000 for the Q3 of 2023 from $47,500,000 for the Q3 of 2022. The increase was composed of increases in general and administrative expenses of $3,200,000 in consumer and marketing expenses of $300,000 partially offset by decreases in warehousing expenses of $1,300,000 acquisition, divestiture related and non recurring expenses of $1,200,000 and selling expenses of $300,000 Expressed as a percentage of net sales, selling, general administrative expenses increased by 60 basis points to 9.6% for the Q3 of 2023 as compared to 9% for the Q3 of 2022. As I mentioned earlier, we generated $80,400,000 and adjusted EBITDA in the Q3 of 2023 compared to $80,200,000 in the Q3 of 2022.

Speaker 1

The increase in adjusted EBITDA is primarily attributable to a moderation in industry wide input cost inflation and logistics inflation that began in the Q4 of 2021. Adjusted EBITDA as a percentage of net sales was 16% in the Q3 of 2023 compared to 15.2% in the Q3 of 2022, an increase of approximately 80 basis points. Net interest expense was $35,900,000 in the Q3 of 2023 compared to $31,900,000 in the Q3 of 2022. The increase was primarily attributable to higher interest rates on our variable rate borrowings, partially offset by a reduction in our average debt outstanding and a $600,000 gain on extinguishment of debt as a result of the senior note repurchases. Interest expense was $35,800,000 in the Q2 of 2023.

Speaker 1

Depreciation and amortization was $17,300,000 in the Q3 of 2023 compared to $20,800,000 in the Q3 of last year. We generated $0.27 in adjusted diluted earnings per share in the Q3 of 2023 compared to $0.31 last year. We remain very encouraged by the progress we have made over the past year in terms of restoring our P and L. And in addition to our P and L improvement, we are also continuing to make progress in the improvement of our cash flows and our balance sheet. We generated $23,300,000 in net cash from operations in the Q3 of 2023 $155,700,000 in net cash from operations during the 1st 3 quarters of 2023 compared to net cash used in operations of $69,500,000 in the Q3 of 2022 and net cash used in operations of $48,400,000 in the 1st 3 quarters of 2022.

Speaker 1

Increased operating profits, improved margins and more favorable working capital were the primary drivers of the improved cash from operations performance, which was offset in part by increased interest expense. As a reminder, the 3rd quarter is typically a seasonal drag in 3rd quarter cash from operations as we build inventory in the pack season and ahead of the baking and dry suit businesses, for example. So we are very happy with the net cash from operations so far this year and especially in the 3rd quarter. We have also reduced net debt by 67 point $3,000,000 during the Q3 and by $212,500,000 in the 1st 9 months of the year to $2,100,000,000 we reduced our pro form a adjusted net leverage ratio as defined by our credit agreement to approximately 6.5 times at the end of the Q3 20 23 compared to 7.6 times at the end of fiscal 2022 and 7.8 times at the end of the Q3 2022. We expect to continue to reduce our net leverage and our pro form a adjusted net leverage ratio throughout the remainder of the year as we work toward achieving our long term target of 4.5x to 5.5x.

Speaker 1

During the Q3, we completed 2 important financing The first was the issuance and sale of approximately $75,000,000 of equity before fees and expenses through our ATM program at an average price of $11.90 per share. The second was the issuance a $550,000,000 principal amount of senior secured notes due 20.28 at a coupon of 8%. The equity issuance funded the repurchase of approximately $20,000,000 of our senior unsecured notes due 2025 in the open market, during the quarter at an average price of 96.9 percent of face value and was also used to reduce other long term debt. Subsequent to the close of the quarter, we redeemed approximately $555,000,000 of our senior unsecured notes due 2025, which leaves a remaining balance of $300,000,000 of the 2025 notes. And now with just 1 quarter remaining in the year, we feel very good about the progress that we've made in terms of improving our P and L, our margin profile and our capital structure.

Speaker 1

We have reduced our net debt and our pro form a adjusted net leverage ratio despite the many industry wide challenges that we are facing. Our reaffirmed adjusted EBITDA guidance and revised net sales and adjusted diluted earnings per share guidance include the impact of the sale of the U. S. Green Giant Canned Vegetable product line. The U.

Speaker 1

S. Green Giant canned product line was on pace to generate approximately $75,000,000 to $85,000,000 in net sales for 2023. We have adjusted our net sales target to $2,050,000,000 to are $2,070,000,000 for fiscal 2023. Through 9 months, our base business net sales are down approximately 1.4%. Our updated guidance reflects base business, which excludes Back to Nature in the final 2 months of the year were about $23,500,000 of U.

Speaker 1

S. Green Giant Cans Vegetable net sales. Excluding the impact of the divestitures, we expect 4th quarter net sales to be between flat and down 4% compared to the Q4 of last year. And as a reminder, the recently divested Back to Nature brand contributed approximately $10,200,000 of net sales in the Q3 of $20.22 $11,900,000 of net sales in the Q4 of 2022. Meanwhile, we are reaffirming our adjusted EBITDA guidance of $310,000,000 to $330,000,000 Adjusted diluted earnings per share is somewhat dependent on movements in interest rates, and we are adjusting our fiscal year guidance for the adjusted diluted earnings per share range of $0.93 to 1 $0.13 largely driven by the equity issuance described earlier.

Speaker 1

The majority of the heavy lifting in our adjusted EBITDA margin and dollar recovery has already happened this year. And as we mentioned on our previous calls, we expect improvements in the Q4 of the year to be somewhat more modest. For full year fiscal 2023, we also expect interest expense of $145,000,000 to 150,000,000 including cash interest of $138,000,000 to $143,000,000 depreciation expense of $47,500,000 to $52,500,000 amortization expense of $20,000,000 to $22,000,000 an effective tax rate of 26.5% to 27.5% and CapEx of approximately $35,000,000 to $40,000,000 Now I will turn the call back over to Casey for further remarks.

Speaker 2

Thank you, Bruce. In closing, Q3 results demonstrated strong year over year improvement with pricing covering inflationary costs, improved margins and a reduction in leverage. We remain on track to achieve fiscal year 2020 3 guidance of adjusted EBITDA. We've also made significant progress Again, reshaping the portfolio with today's announced divestiture of Green Giant U. S.

Speaker 2

Canned Vegetables. This concludes our remarks. And now we would like to begin the Q and A portion of our call. Operator?

Operator

We'll now begin the question and answer session. The first question comes from Michael Lavery of Piper Sandler. Please go ahead.

Speaker 3

Thank you. Good afternoon.

Speaker 2

Hey, Michael.

Speaker 1

Can you give some

Speaker 3

of the color on the sales run rate for the Green Giant shelf stable or the can.

Speaker 4

Can you

Speaker 3

I know you're not disclosing the terms of the deal, but can you just help us figure out what some of the proceeds would look like for debt repayment? I know you paid $765,000,000 for that business. And it looks like from our data, the canned piece at the time might have been around a third of that. Would that 265,000,000 Sort of allocation to can be a starting point. And if we took the $133,000,000 impairment that you recorded in conjunction with the sale, about half that's left is the 130 something proceeds.

Speaker 3

Is that about the right way to think about it or is that the

Speaker 4

math call?

Speaker 1

So like you said, we didn't disclose what the terms of the transaction were. This business is about $75 plus 1,000,000 of net sales out A total of $500,000,000 plus for Green Giant. So it's a small piece. So I wouldn't suggest that this is a significant portion of what we paid for the business. So as a reminder, within Green Giant, we've got in the U.

Speaker 1

S, the Green Giant frozen business. We've got this Green Giant canned business, which has just been under pressure for years. We also have a nice business with Lassar, which is a premium canned vegetable business. And then we've got our Green Giant frozen business and canned business in Canada.

Speaker 3

Okay. That's all

Speaker 2

I can say.

Speaker 1

So this is Just the Green Giant Canned Business.

Speaker 3

Okay. Yes, that makes sense.

Speaker 2

In the U. S.

Speaker 3

Right. You're keeping Canada as well, right? Yes. And just a quick housekeeping on the share count. I know you mentioned some of Proceeds from the ATM in the Corp in 3Q, would the timing of that mean that even without doing any further issuances, we should bump up the share count for 4Q or put another way, what was the share count at the very end of 3Q?

Speaker 1

So you'll see it on our Q when it's filed. I think it was approximately 78,600,000 shares.

Speaker 3

Okay, great. Thanks so much.

Operator

The next question comes from William Reuter of Bank of America. Please go ahead.

Speaker 3

Hey, thanks for taking my question. This is Rob Rigby on for Bill. So I guess, While you guys thinking about pursuing additional asset sales and kind of how we should be thinking about that in terms of Do you think that they're going to be more transformative in nature or smaller? And then if you can speak to just the general divestiture market and that looks like. Thank you.

Speaker 1

Yes, sure. So part 1, we've now divested Back to Nature and this Green Giant U. S. Can business, which as we laid out sort of vision business unit strategy go forward From an M and A standpoint, the divestiture strategy included identifying businesses that we didn't think we are positioned to win over the long term, potentially growth challenge, margin challenge, in this case working capital. And so we've now divested 2 of those businesses.

Speaker 1

We haven't really talked publicly about other brands that we may be considering, although we've identified things internally, nor do we typically talk about things from a brand standpoint that we're going to sell. So we're going to continue to evaluate that. And again, this is 2 of others probably to come. Casey has talked recently in the past of looking to divest between 10% 15% of our total net sales. And so for context, I think that maybe that could help you out.

Speaker 1

As far as the overall M and A environment, it's been relatively quiet over the last 2 years, but it has shown spurts of some big deals getting done and some other deals like this transaction, getting done. And so we're going to continue to monitor and act at the appropriate time, and then also very much stick to a process from what we think fits in our portfolio and what we think someone else is a better owner of.

Operator

Great. Thank you. The next question comes from Hale Holden of Barclays. Please go ahead.

Speaker 5

Hi, Bruce. Congrats on the sale. That can business has always been kind of a working I think in our view, particularly as you're coming to 3Q and 4Q. So maybe you could talk about What this does for cash efficiency and if you're looking into the next year, what kind of working capital swings you wouldn't have with the can business, I think would be helpful.

Speaker 1

Yes. So you highlighted it. Over time, this business is it's a very competitive Market, with high private label. We are not the manufacturer of this business. So our counterpart in this transaction, Seneca, with the manufacturer that they're a great owner for this business.

Speaker 1

And as you pointed out, this is a seasonal working capital business where you are basically buying at least a year in advance of all of your sales that inventory during the period between July in October, which means that you're planning is starting some 18 months before that tax

Speaker 2

season, which puts a lot of pressure.

Speaker 1

And so as we've owned this business, virtually every year has been either a high working capital or low working capital as we've tried to adjust to the right size path. And we just haven't gotten it right. It's just a challenging business. It's closer to the agricultural chain than a lot of our other businesses. Even though it is a canned packaged food business, It's just tough.

Speaker 1

We're not in the agricultural food game. There's a better RONA for it and this is really going to simplify our business going forward.

Speaker 2

And the reality is this was a very, very high inventory intensity business. So we bought the entire year supply at one time during the year and held it for the entire year. So you think about the intensity of that on the sales profile, it's pretty high. So we obviously will not have to finance that additional kind of inventory going forward in the future, particularly in the Q3, Q4 timeframe.

Speaker 5

Will you actually get your working capital out of it before the sale closes? Or was that kind of baked into the proceeds? Is there proceeds plus the invested working capital? Because you should have an offer, right, for

Speaker 1

the next quarter?

Speaker 2

Yes, everything will come out.

Speaker 1

So we sold the business and all of the inventory.

Speaker 5

Okay, great. Thank you.

Operator

The next question comes from Robert Dickerson of Jefferies. Please go

Speaker 4

ahead. Great. Thanks so much. Just a couple of quick ones for me, if they're easy. So I guess in the quarter, organic volumes were down 2.5%.

Speaker 4

Seems like they were doing tracking a little bit worse than all the tracked channel data that they all look at. So maybe just kind of simplistically just explain what the delta is. I'm not sure Yes. You're clearly selling in non tracked channels or there's any inventory dynamic or what have you?

Speaker 1

So our track channel that we see, and I think it's pretty similar for most of the analysts. I know there were a couple that were way, way off in terms of what they were saying was going on in consumption versus what we actually saw, but I think we were down about 3.5% in consumption with the data that we see and that compares to being down 3% in net sales for the quarter. So we do have some non tracked channels. So our Canadian business is obviously not tracked here, that's a little bit less than 10% of our business, but we've got some foodservice.

Speaker 2

Foodservice and members' mark and Sam's wouldn't necessarily be tracked in the general data. So there are some differences. And we've seen strength in our kind of out of home business, particularly in Spice and Seasonings.

Speaker 4

Right. Okay. Okay. Got it. That's helpful.

Speaker 4

And then I guess just Q4, Pris, I think you said sales would be down 0% to 4%. I mean, I didn't catch it on the same, that's organic. And then secondly, it's just like, what gets you to flat, what gets you to down 4, like, the 2 months flat, more of the fulcrum variables?

Speaker 2

Yes, that's a base business sales calculation. So we exclude the divestitures in that 4th quarter period. Honestly, the main thing that we're watching we know what the Crisco price decline is. So it's the The price decline is depressing sales, but again, which much lower oil costs, we're doing just fine on the gross profit line. So it's really a matter of, I would say, how we come through our seasonal kind of merchandising period And how well are we getting left in the kind of the November December time period on our holiday merchandising, particularly in the baking season.

Speaker 2

So And then I think it's just do we start to see some recovery in our frozen portfolio as we've taken some actions to compress the price premium to on our rice vegetables and some other places where we needed to act on that portfolio. So, we're that range is kind of what we're just we have out there now. We'll watch it obviously pretty carefully and see where our trends are, but I feel pretty comfortable that we're in the middle of that range right now.

Speaker 4

All right. And then I guess with respect to your share issuance and ATM capital structure, you kind of went through a lot in the call. I mean, do you feel at this point, you're just in clearly a much better position with respect to capital structure, such that like we shouldn't really expect more kind of opportunistic issuance or is that going to be determined?

Speaker 1

The biggest thing from our capital structure over the last 2 years or maybe the biggest two things have been leverage and then this first tranche of 20 25 notes. Certainly, we would love to go back in time to 2021 and refinance something at like Sub 5% or crazy like that. Knowing the environment that we've been in, we've been very focused on solving That maturity, and then also bringing our leverage down. So the equity issuance this quarter or Q3 really helped accelerate our debt reduction. I think these two asset sales will help bring debt down marginally beneficial from a leverage standpoint.

Speaker 1

But all in, we think we solved that capital structure issue. And so things are improving dramatically. But certainly, if there are questions around capital structure earlier this year or mid summer, we think those should be largely answered.

Speaker 4

Sorry, Trevor. I'll pass it on. Thanks.

Operator

The next question comes from Karl Tischalce by JP Morgan. Please go ahead.

Speaker 6

Hi. This is Mike on for Carlo. Thanks for taking our question. Two quick ones from us. The first being is that, you see in the balance sheet for this quarter, the $69,000,000 assets held for sale.

Speaker 6

Is that the right way to assume what the proceeds are for the sale of Green Giant Can and then better yet, is the as a second part to that, the FY guide, you guys held EBITDA. Does that kind of imply that EBITDA for this business that you sold was kind of minimal this year, so there's minimal impact or is it just better improvement in the base business that's offsetting that. Thanks.

Speaker 1

Yes. So on the EBITDA part, just a reminder that this is dollars 75,000,000 to $85,000,000 of annual net sales. There's 2 months left in the year that we won't have this business for. That's 10 months that we had the business. So it will impact what our EBITDA is by a few $1,000,000 but we're largely through the year.

Speaker 1

We'll come back next year when we give our Q4 and full year update to talk more detail about The full year impact. And then as far as the other piece, we didn't disclose the transaction details.

Speaker 6

Okay. That's all from us.

Speaker 2

The bottom line is that this is the shelf stable of U. S. The Green Giant U. S. Can business is a lower margin than our average.

Speaker 2

And so we feel like we can cover within our EBITDA guidance range, we can cover the 7 week impact of that coming out. On a sales basis, that's obviously a little bit larger. So we're disclosing we're kind of Adjusting that in terms of our sales guidance.

Speaker 6

Got it. Yes.

Operator

Thank you.

Speaker 6

Yes, that's all from us. Thanks.

Operator

The next question comes from Karl Martin of Jefferies. Please go ahead.

Speaker 3

Good afternoon. Just so I work hard, the asset has been divested. We're not waiting on any kind of

Speaker 2

No, it's complete.

Speaker 1

The investor is complete to Seneca, please. Okay.

Speaker 3

With the sale, like when we look at L'Osor or Canada canned, does this just change anything in terms of having a more difficult time going to market with scale, more difficult time with sourcing product or how do you look at the remaining Can side of the business.

Speaker 2

I mean, honestly, the can business in Canada is a completely different business, not the same supplier, not the same products, not the same formulas. So it has really nothing to do with the U. S. Business. We have a Canadian supplier that supplies everything labeled differently, packaged differently.

Speaker 2

There's no synergies between our U. S. And Canadian Can Business. The store is a different business. We actually source that from Seneca, Who bought the Green Giant Can business?

Speaker 2

So we'll continue to manage and market that. That's actually a nice margin business. It's very differentiated and it's held up very nicely. So we'll keep that business for now. I mean, in the future, maybe that's something that we could divest, but it's a reasonably good business that I think we can run and continue to source.

Speaker 3

Thank you very much, guys. Appreciate it.

Speaker 1

Thanks, Kurt.

Operator

The next question comes from David Palmer of Evercore ISI. Please go ahead.

Speaker 7

Thanks. Congrats on the sale.

Speaker 5

Casey, I'd love

Speaker 7

to get your thoughts about how your Strategic vision on Green Giant has maybe changed over time. It sounds like you're thinking frozen is a bigger part of your future than maybe you might have been thinking in the past and that's leading to this more selective sale. So any thoughts about your future with the category and maybe how you might have warmed up to the Green Giant frozen side? And I thought it was an interesting point made before about that maybe perhaps the smoothing out on inventory or effects to your free cash flow from this part of the Green Giant being sold. So any can you maybe give us a sense about how much your free cash flow might be smoothed out versus what it was prior?

Speaker 7

Thanks so much.

Speaker 2

Yes. So on that last question, we should see a significant impact from smoothing our cash flows without having to finance the inventory. As Bruce said, it's gone up and down with how much we bought each year. And sometimes we end up buying a lot, sometimes we end up buying a little, but this will make this will look make our inventory profile to be a lot smoother. Will still have some seasonal build to our inventory in Q3, just thinking about moving into the seasonality of Crisco Oil for Crisco shortening for baking.

Speaker 2

Bear Creek Dry Soup will still have some build, but we won't have this inventory from having to buy everything on a Seasonal pack once a year, that impact was largely in the can business. Look, I'm This doesn't imply a change in my view of Green Giant frozen. This implies an opportunity to divest the Green Giant Can business that I don't think was a good fit with us long term, where we had to carry all this inventory we had in a high interest rate environment in a category that kind of is mature and slightly declining and we were the 2nd Branded player. I still have the same questions that we've talked about on frozen business going forward. I believe that we're going to have to fix the economics, which we are making some progress doing.

Speaker 2

Right now, the category overall is a little soft as you've heard from other frozen players. And we need scale in distribution logistics in a frozen network to make this work because our costs of going to market right now are probably a little bit higher than people who have larger scale, and you need that scale to make it efficient. So I haven't changed my view on frozen, honestly. I mean, this just to me was a natural buyer for this business, made sense, made our balance sheet a little bit cleaner, gave us a little bit stronger focus on trying to fix some of the fundamentals on frozen in the meantime. But look, I've been pretty clear that where we're driving right now is 1st and foremost, the focus on spices and seasonings, where you see higher margin business with good trends.

Speaker 2

You saw us, we're innovating, we're driving that business. We've got good sales growth this quarter, good margins. I think we've got good plans to keep going on that business. So that's the first place that We want to focus as a company. The second place I've talked about is the meals category and specifically kind of Mexican meals behind the Ortega brands, the Las Palmas brand, driving that, getting strong innovation.

Speaker 2

We've kind of upgraded our focus on that business now that Bruce talked about. That's the second place I want to focus. And then 3rd is the specialty business, which I define as businesses that we can run with good stable cash flows, stabilizing kind of margins and top lines. The Green Giant Can business did not fit that model. So keeping those kind of businesses and running well.

Speaker 2

Crisco is part of that, but we're managing that for kind of gross profit and stability over time and I think doing a good job at that, but it looks a little bit different. But the specialty business, we would look at that as how do we run those efficiently and well and maybe even acquire some more of those businesses that we can plug in and run efficiently with good stable cash flow in a high leverage environment. The question mark for me is frozen, because I think we have to improve the funnel economics on the business. We have to figure out how to improve our distribution and froze the network and get a little bit more efficient in order for me to say that's a long term focus for the company. So hopefully, that's clear.

Speaker 2

If we kind of implied anything else, maybe that kind of helps you think about the way we drive the portfolio.

Speaker 7

That is super helpful. I think I was piecing together some comments you made at a conference previously in the fall and then ran with this what you're doing here and thought maybe you were shifting a little bit more than you were. So my apologies for misinterpreting those two things. I just wanted to ask Bruce And Casey, is there any early read for 2024 that you feel like sharing with us in terms of the key Gross margin drivers, pricing, productivity, inflation, anything that we should be thinking about for our models, particularly the first half?

Speaker 2

Yes. I mean, I think we'll give you more formal guidance after the with the 4th quarter release. But I would say right now, there's some signs that we're picking up already. So one is that our read on inflation right now is like 1% to 2%, which I'm almost doing backless because given the last 2 years, that's quite an improvement. So we have now 1% to 2% inflation.

Speaker 2

We don't think we'll have a lot of pricing, but there may be some tactical pricing on certain commodities that might be disproportionately going up. But broadly, I don't think we'll have a ton of pricing. We will a little bit, as I said, on the places where we need to and we have good justification. I personally we will also have good we are ramping up our productivity. So we're getting much stronger cost savings.

Speaker 2

We kind of started that formally last year to really and measure how much we're driving. We're stepping up our expectations next year and we're getting good delivery on that. So I expect to see some margin improvement from productivity and I expect to see productivity offset some of that 1% to 2% inflation that we can't cover with pricing. I'm honestly, I feel pretty good about the track of our businesses, most of our businesses. Crisco, honestly, I don't know how to call it because it depends on how much oil goes up or down, which is where we'll price accordingly.

Speaker 2

I would say the only place we got to see kind of improvement in the business to get good solid kind of top line progress where we want to be in the kind of that 1%, 2% range. We need to kind of get the frozen business performing better than it is now. But that's kind of what I'm seeing. I'm seeing kind of a more steady state environment that we're heading into next year, Inflation monitoring down to 1% to 2%, more limit much more limited pricing actions, getting back to kind of the fundamentals of driving some of our brands in the portfolio and doing the right things to drive cost savings in the business.

Speaker 7

Thank you very much.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Casey Keller for any closing remarks.

Speaker 2

Thank you all for joining us today, and Appreciate your attention to the Q3 results and the announcement of our investor of the U. S. Green Giant Canned Vegetable Business. Thank you, and we'll talk to you next quarter.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating.

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Earnings Conference Call
B&G Foods Q3 2023
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