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B&G Foods [BGS] Conference call transcript for 2022 q3

2022-11-09 20:35:06

Fiscal: 2022 q3

Operator: Good day, and welcome to the B&G Foods Third Quarter 2022 Earnings Call. Today's call, which is being recorded, is scheduled to last about one hour, including remarks by B&G Foods management and the question-and-answer session. I would now like to turn the call over to Sarah Jarolem, Senior Director of Corporate Strategy and Business Development for B&G Foods. Please go ahead.

Sarah Jarolem: 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 financials 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. We refer you to B&G Foods annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact our company's future operating results and financial condition. B&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 his thoughts concerning the outlook for the remainder of fiscal 2022 and beyond. Bruce will then discuss our financial results for the third quarter of 2022 and our guidance for full year fiscal 2022. I would now like to turn the call over to Casey.

Casey Keller: Good afternoon. Thank you, Sarah, and thank you all for joining us today for our third quarter earnings call. Third quarter performance improved sequentially as pricing actions covered more of the inflationary costs. Net sales increased 2.6% versus last year with adjusted EBITDA margin at 15.2% compared to 11.3% in Q2. Adjusted gross profit margin improved to 20.4%, down 340 basis points versus last year compared to Q2 at 16.5%, which was down 760 basis points versus last year. Some key perspectives on the results. Inflation. Total fiscal year 2022 input cost inflation impact remains at plus 20%. This is the first quarter in fiscal year 2022 that has not worsened. In addition, freight transportation and warehousing costs have moderated from last summer, although still significantly higher than last year. Pricing. In total, pricing realization contributed $75.5 million in Q3 compared to only $20.5 million in Q2. Net pricing actions recovered in excess of 80% of inflation in the quarter with full recovery expected in Q4 behind final fiscal year 2022 price increases implemented in August and on October 3. Volume. Sales results were slightly below our expectations and impacted by volume declines on Green Giant canned vegetables and spices and seasonings. Green Giant declines were driven by the exit of a low to no-profit business in the dollar channel and higher elasticity following summer price increases. We are seeing some recovery during the fall promotion season. On spices and seasonings, trends reflected distribution losses from supply and service issues in Q1 and Q2 and a general slowdown of category trends post-pandemic. We are now recovering distribution in key accounts behind improved service with very strong spices and seasonings sales in October. Supply. Customer service and fill rates improved during the third quarter, reaching over 93% by the quarter's end. We are on track to deliver between 94% to 95% customer fill rates in Q4. Some supply issues still remain behind materials availability, but those are becoming more isolated situations. Looking forward, we are on track for stronger Q4 delivery, expecting net sales to grow mid-single digits, with adjusted EBITDA at or above last year. Q4 projections are based on full pricing actions, moderating costs and comparisons to the COVID, Omicron, service and shipping disruptions last December across several production and distribution facilities. As discussed, we have been implementing pricing actions to recover inflationary input costs as fast as possible during fiscal year 2022. By October, all current year pricing increases were sold through an effective, catching up to known costs for the remainder of the year. For fiscal year 2023, we expect inflation to continue but at a much lower rate, currently estimated at plus 4% to 5% with the biggest pressures on tomatoes, glass, et cetera. So far, we have not seen significant declines on key commodities. For example, soybean oil, corn, wheat, et cetera from average cost levels in fiscal year 2022. Again, we expect to raise prices to recover higher input costs, but with a more surgical approach against key commodity categories versus the broader actions required in fiscal year 2022. In terms of elasticities, we project that price elasticities will increase modestly as the economy tightens next year and some consumers trade down on the margin to cheaper alternatives. Further, we will be taking additional steps to manage cash flow and reduce debt in the near term. Although our leverage ratio will improve with stronger EBITDA flow in Q4 and early fiscal year 2023, the debt level at $2.4 billion is too high in a rising interest rate environment, with interest expenses on short-term debt increasing significantly. Working capital needs have also increased over the past year with higher inventory valuations as a result of cost inflation. At this point, we are taking actions to manage the capital structure that Bruce will address in more detail later, but at a high level, include revising our dividend payout rate to return a substantial portion of free cash flow to shareholders, but directing a significant remainder to reduce debt obligations. Completing divestitures of non-core businesses to generate proceeds to pay down debt and reduce leverage, we are actively seeking to sell the Back to Nature brand and have initiated a strategic review to identify other potential divestitures that will shape the B&G Foods portfolio for future focus and strength. Finally, I am encouraged by the startup of the four business units: spices and seasonings, meals, frozen and vegetables and specialty. As discussed, these units are intended to clarify portfolio focus and future platforms and push accountability down to improve management and decision-making. Although early days, we are already building stronger plans, identifying margin improvement opportunities, making faster decisions and more closely integrating demand and supply. I am confident this structure will sharpen our focus, build critical capabilities and deliver improved sales and margin performance over time. Thank you. And I will now turn the call over to Bruce for more detail on the quarterly performance and outlook for the remainder of the year.

Bruce Wacha: Thank you, Casey. Good afternoon, everyone. As Casey just discussed, while our third quarter was not without challenges, we believe that we are finally nearing the inflection point from a performance standpoint. Sales remained strong and are benefiting from pricing. Costs remain elevated, but are beginning to stabilize. Margins are still lower than where we would like them to be, but are now improving rather than deteriorating. Sequentially, we have seen approximately 250 basis points of improvement in both our gross profit as a percentage of net sales and our adjusted EBITDA as a percentage of net sales in the third quarter as compared to the first half of the year. While we are still not where we would like to be, we are confident that we are moving in the right direction, and we expect further improvement in the fourth quarter of this year and additional recovery in 2023. During the third quarter of 2022, we generated net sales of $528.4 million, adjusted EBITDA of $80.2 million and adjusted diluted earnings per share of $0.31. Net sales for third quarter 2022 increased $13.4 million or 2.6%. Price increases, coupled with product mix increased net sales by approximately $75.5 million, which was offset by volume declines of $61.3 million and the negative impact of FX of $1.2 million. Volume declines were driven by a combination of supply chain challenges, which has continued to improve over the course of the year, but are still not fully back to normal across the entire portfolio and elasticity. We knew that we needed to take price just like everybody else in our industry. And as I'm comfortable as that may be at times, we fully expect to see some levels of elasticity-driven volume declines. So we are closely monitoring our volumes by brand and evaluating volume losses against the pricing model that we constructed to better evaluate the impact of elasticity. Net sales of Crisco, the biggest beneficiary of pricing in the portfolio increased by $27.3 million or 38.3% for the third quarter of fiscal 2022 as compared to the third quarter of 2021. Net sales of Crisco are now up by $61.7 million, or 32.9%, for the first three quarters of the year compared to last year. Crisco, which was expected to deliver $270 million in net sales annually when we acquired it in late 2020, is now on pace to generate more than $350 million of net sales this year. While costs are up significantly and margins are down, we continue to expect Crisco to deliver profit dollars that are generally in line with our acquisition model. Clabber Girl also performed well. Net sales increased by $5.5 million or 26.6% in the third quarter of 2022 as compared to the third quarter of last year. Clabber Girl is having a strong year with net sales up $10.6 million or 19% for the first three quarters of the year as compared to last year. Net sales of Cream of Wheat increased by $3.1 million, or 20.4%, for the quarter, and $9 million, or 18.8%, for the year-to-date period. Net sales of Ortega increased by $1 million, or 2.6%, for the quarter. Ortega is recovering nicely from the supply chain challenges that hurt performance earlier this year. Through the first three quarters of the year, net sales of Ortega are nearly flat or down just $0.5 million, or 0.4%, compared to last year. Maple Grove Farms decreased $0.6 million, or 2.9%, in the third quarter of 2022 compared to 2021. Our spices and seasonings business, which have been plagued with supply chain challenges throughout the first half of the year and is lapping peak 2021 performance earlier this year, also showed improvements in the third quarter. Net sales of spices and seasonings were down $6.1 million, or 6.5%, in the third quarter of 2022 as compared to the prior year. This compares favorably to performance during the first half of the year when net sales were down $19.3 million, or 9.5%, as compared to the prior year period. Although we are still lapping strong Q3 2021 prices for spices and seasonings, our fill rates have improved as factory performance has continued to normalize, which has helped sales. Performance for spices and seasonings has also benefited from the launches of Cinnamon Toast Crunch spread, Snicker Shakers, TWIX and Einstein Brother, Everything Bagel Seasoning's licensing partnerships, which have also been very well received in retail. Compared to pre-pandemic 2019, net sales of the company's spices and seasonings increased by $20.1 million, or 8.1%, through the first three quarters of 2022. Net sales of Green Giant, including Le Sueur, decreased by $17.7 million, or 12.6%, for the third quarter of fiscal 2022 as compared to the third quarter of 2021. Green Giant is somewhat challenged this year, although some of the performance in the third quarter was related to timing and a portion also related to our decision to walk away from certain low-margin business in the discount channel that became problematic in this year's cost environment. On a year-to-date basis, despite the soft third quarter performance, net sales of Green Giant are down just $8.3 million, or 2.2%, as compared to last year. Base business net sales in all other brands in the aggregate increased by $0.5 million or 0.5% for the third quarter of 2022 as compared to the third quarter of 2021. Gross profit was $105.8 million for the third quarter of 2022 or 20% of net sales. Excluding the negative impact of $2.2 million of acquisition/divestiture-related expenses and non-recurring expenses included in cost of goods sold during the third quarter of 2022, gross profit would've been $108 million or 20.4% of net sales. Gross profit was $105.7 million for the third quarter of 2021 or 20.5% of net sales. Excluding the negative impact of a $14.1 million accrual for the estimated present value of a multi-employer pension plan, withdrawal liability in connection with the sale and closure of the company's Portland, Maine manufacturing facility and $2.8 million of acquisition/divestiture-related expenses and non-recurring expenses included in cost of goods sold during the third quarter of 2021, gross profit would've been $122.6 million or 23.8% of net sales. Similar to the first two quarters of 2022, third quarter gross profit was negatively impacted by input cost inflation. However, our efforts to mitigate this inflation have been more effective in the third quarter, largely driven by our price increases, which we have taken throughout the year, as well as cost contain measures, including our strategy of locking in costs with forward purchasing, coupled with product weight-outs or downsizing and other productivity measures that we have executed in our factories. As a result, we have seen sequential improvements in margins with adjusted gross profit, excluding adjustments as a percentage of net sales in the third quarter, increasing by approximately 240 basis points when compared to the first two quarters of the year. Selling, general and administrative expenses increased by $1.1 million or 2.4% to $47.5 million for the third quarter of 2022 from $46.4 million for the third quarter of 2021. The increase was composed of increases in general and administrative expenses of $1.1 million, selling expenses of $0.7 million and consumer marketing expenses of $0.3 million, partially offset by a decrease in acquisition, divestiture related and non-recurring expenses of $1.0 million. Expressed as a percentage of net sales, selling, general and administrative expenses remain flat at 9% for the third quarter of 2022 and the third quarter of 2021. We generated $80.2 million in adjusted EBITDA in the third quarter of 2022 compared to $96.2 million in the third quarter of 2021. The decrease in adjusted EBITDA was primarily attributable to industry-wide input cost inflation and supply chain disruptions. These cost challenges were partially offset by list price increases, locking in cost through forward purchasing, product weight outs or downsizing and other productivity measures in our factories. Adjusted EBITDA, as a percentage of net sales, was 15.2% in the third quarter of 2022 compared to 18.7% in the third quarter of 2021. However, similar to the sequential improvements that we saw in gross profit as a percentage of net sales, adjusted EBITDA as percentage of net sales in the third quarter improved by 260 basis points when compared to the first two quarters of 2022. Interest expense was $31.9 million for the third quarter of 2022 compared to $26.6 million in the third quarter of 2021. The primary driver for the increase in interest expense was an increase in our variable rate debt, which is currently tied to LIBOR. Interest expense was also modestly affected by increased borrowing during the quarter relative to last year. Depreciation and amortization was $20.8 million in the third quarter of 2022 compared to $20.7 million in the third quarter of last year. We generated $0.31 in adjusted diluted earnings per share in the third quarter of 2022, compared to $0.55 in the prior year. While our performance was solid in the quarter, it was a little bit light of where we wanted to be. We still feel good about our ability to turn the corner in the fourth quarter and get even closer to historical margin dollars, but we think that it's prudent to tighten our guidance somewhat at this point. We continue to expect net sales of $2.1 to $2.14 billion, and we now expect adjusted EBITDA to be in a range of $290 million to $300 million. Our updated guidance reflects our continued belief that while we have not fully returned to normal, we have seen the worst of the escalation in inflationary pressures and that pricing is finally catching up the cost. Additionally, we expect for full year fiscal 2022 interest expense of $122.5 million to $127.5 million, including cash interest of $117.5 to $122.5 million, depreciation expense of $57.5 million to $62.5 million, amortization expense of $20.5 million to $22.5 million, an effective tax rate of 26% to 27% and CapEx of $35 million. Key factors that could lend to either upside or downside to our guidance include the level of elasticity that we face given the price increases that we have already executed, as well as any additional elasticity as a result of our trade spend optimization efforts. And while we are hoping for at least a pause in the levels of inflationary pressures that we are seeing in certain input costs, we still live in a very uncertain world. While many of our costs for the year are largely locked in at this point, there are still some costs such as transportation costs that have an immediate impact on our P&L. Also, as Casey mentioned earlier, our supply chain situation and customer fill rates are improving and are expected to be a tailwind for the remainder of the year. There are obviously no guarantees in this world, and as we saw last year with the Omicron COVID variant, we must still expect the unexpected. Finally, while it's still a little premature to provide a full outlook for 2023, we continue to believe that net sales will benefit from price and thus net sales growth will likely be at the high end or exceed our long-term growth algorithm. We also continue to expect that adjusted EBITDA will be up above our 2022 finish, but still not at our 2021 level. When we think about our adjusted EBITDA and the question of when adjusted EBITDA returns to its historical level, we also must think about this in the context of our dividend policy. We have long held a commitment to create stockholder value by consistently paying a generous dividend to our stockholders, and we remain committed to our policy of returning to our stockholders in the form of dividend, a substantial portion of our cash in excess of operating needs, interest and principle payments on our indebtedness and capital expenditures sufficient to maintain our properties and other assets. However, our dividend policy was built on an assumption that we would use roughly half of our excess cash to pay the dividend and roughly half of our excess cash to reduce debt. In the current environment of high inflation and rising interest rates, however, our adjusted EBITDA temporarily declined, while interest expense has risen substantially resulting in a dividend payment that now consumes substantially all of our excess cash. The model has been further strained by the increased cost of float into our inventory over the past two years, resulting in significant revolver draws to fund our working capital needs. While we expect working capital to be a modest benefit over the next year or two, allowing us to reduce debt as cost stabilize, that has not been the case in 2021 and 2022. Therefore, we and our board of directors determined that it was prudent to re-examine our dividend rate in light of the current inflationary environment and our current cash flows and working capital needs. The result is a right sizing of the dividend to better reflect the current environment. Beginning with the dividend payment declared yesterday and payable on January 30, 2023, the current intended dividend rate for our common stock has been reduced from a $1.90 per share per annum to $0.76 per share per annum. Based upon the new current intended dividend rate of $0.76 per share and our current number of outstanding shares, we expect our aggregate dividend payments in fiscal 2023 to be approximately $55 million. By comparison, including the dividend payment that we made in the fourth quarter on October 31, 2022, we will have paid quarterly dividends of $133.4 million in 2022. We believe that the combination of better operating performance in 2023, coupled with more favorable working capital trends and the reduction in our dividend, will help drive our efforts to reduce leverage and improve our balance sheet. Earlier on the call, Casey mentioned that in conjunction with our transition to a business unit organization structure, we are continuing to review our portfolio to ensure that we focus on brands that are consistent with the strategies of each business unit going forward. This review will influence the types of brands that we want to buy. It will also influence which brands we decide to keep and which we seek to divest. One of the brands that we have been focused on already is Back to Nature. This is a brand that made sense for B&G Foods to acquire when we are attempting to build our snacking portfolio. However, given our current focus, we now believe that there are better owners for Back to Nature than B&G Foods. As a result, we're actively looking to sell the brand and have therefore reclassified the assets of the Back to Nature business as assets held for sale on our balance sheet. Following this reclassification and consistent with the accounting requirements, we then measured the book value of the assets held for sale compared to the estimated fair value, less anticipated cost to sell, and recorded a pretax, non-cash impairment charge of $103.6 million during the third quarter of 2022. You can find additional information about the impairment charges in our earnings release and 10-Q for the third quarter. We believe that sale of Back to Nature and possibly brands that may be a better fit in someone else's portfolio will help accelerate our efforts to reduce our debt. We will provide further portfolio updates as appropriate in the coming quarters. Now, I will turn the call back over to Casey for further remarks.

Casey Keller: Thank you, Bruce. In summary, the third quarter showed continued pricing recovery offsetting roughly 80% of the gross margin impact of rising inflationary input and operating costs. We have implemented all pricing actions to fully recover projected costs in fiscal year 2022 and expect the fourth quarter to show continued improvement. Further, we are taking actions to improve our capital structure in a rising interest rate and inflationary environment, including divesting non-core assets to improve portfolio focus and reduce debt, and lowering the dividend to a more sustainable level that continues to provide a strong yield to our shareholders. This concludes our remarks, and now we would like to begin the Q&A portion of our call. Operator?

Operator: Thank you. And we will hear first from Andrew Lazar with Barclays Capital.

Andrew Lazar: Great, thanks very much. I appreciate the questions. Maybe to start off, you mentioned, I guess – if I compare sort of your pricing contribution and the volume impact, right, the volume impact has been much more severe, it seems, than most of your peers in response to pretty similar pricing. You called out two specific aspects, right, the Green Giant piece and spices & seasonings capacity constraints. If we were to sort of take those out of the equation for a minute, I guess, what are you seeing more broadly across the rest of the portfolio on elasticity? Is it greater than kind of what we're seeing for peers? And how does that sort of, I guess, affect the potential for what may be needed in terms of incremental pricing as we go forward?

Bruce Wacha: I guess there is two ways I'd talk about this, Andrew. So first, if you look at our results in the third quarter, I do believe the volume declines, some of them are not related to elasticity. So the spices & seasonings is really recovering distribution that we lost in the supply disruptions of the first quarter and the second quarter. So that's not really a pricing elasticity issue. And that was a big chunk of the volume decline. I would say that on some other businesses, we are seeing elasticities that are marginally higher than we forecast, but not dramatically higher. So for instance, Crisco, which would have the largest movements – initially, I think, when we first started pricing, we were seeing elasticities in the 0.5 range. I would say, in the last quarter, they were more like 0.7, 0.6 to 0.7, and we're actually measuring this at a store level, so we can see exactly what it is. And then, I think, going forward, we are expecting that it could increase a little bit to like 0.8.

Andrew Lazar: Got it.

Bruce Wacha: So that would be kind of a dimensionalization of how we think about it. I do believe, if – I don’t – I can’t really comment on other people’s portfolios though. But I do believe we operate to some extent in categories with a higher private label president. So we will see a little bit higher elasticities, but then maybe other categories and our brand positions, et cetera. I would say though that relative to historical levels, we’re still seeing relatively low elasticities. In a couple of cases, our pricing is maybe moving faster than competition or private label, but – so we might have a period in Q3 like on the Green Giant canned business where our pricing was a little bit ahead. So you might see some slightly higher elasticities but we expect as pricing moves in the entire category that will normalize. So the bottom line is I think if you just – if you looked at our business in Q3, the volume impact is not really being driven totally by the elasticities, and we expect particularly in the spices & seasonings just to have it recover in Q4.

Andrew Lazar: Got it. Got it. And as we think about the new dividend rate sort of capital spending that you anticipate some of the working capital release that you hopefully get next year and EBITDA that could be sort of between 21 and sort of 22 levels. I guess where could we see leverage, go call it by the end of next year? And some of this is going to be dependent on divestitures, right? But assuming some level of divestiture activity as well. I mean, is there a – where you sort of try and target? Where you think you can reasonably get to with some of these actions in sort of late next year?

Bruce Wacha: Certainly down from where it is, it’s hard to answer that question without giving you our 2023 EBITDA guidance number. We should certainly expect to see working capital not be as punishing as it was the last two years. And so you should see some nice debt repayment. It’s hard for me to give you a leverage target without giving you an EBITDA number.

Andrew Lazar: Yes, Okay. And…

Casey Keller: I mean, Andrew, the only thing I would say is, our long-term range that we want to leverage it, we want to be in 4.5 to 5.5, we're not going to get there. But I think we can get down closer to the low sixes, maybe even six. I mean, that would be my goal if we can get to that point within the next 12 months or so.

Andrew Lazar: Got it. Got it. And last thing for me would be just as you think about the characteristics or the filter that you’re using to sort of determine what businesses maybe would be a better fit for someone else than for you as you go through this portfolio. How do you sort of think about that? Is it businesses with better growth patterns profitability patterns where certain categories that you’re just like with the snack piece that you’re like, that’s just not where we’re going to be? How are you thinking through that as you go through the portfolio review?

Casey Keller: It’s a little bit of all of the above. I mean, certainly, the expectation isn’t – we’re going to go sell all of our Pirate Brands. I mean, think about when we sold Pirate, it was a great brand, but we got a really good price. And as a result of that, we just really weren’t in snacks in any kind of way that made sense. And so you think about other things like Back to Nature sort of doesn’t really fit in what we’re doing anymore. There are certainly some older businesses that we could look at and see if we could monetize those at a level that makes sense and maybe someone that makes a lot more sense for. And so I think, you look at the portfolio, you look at the business units and you look and say, does this make sense in the current construct with where we’re looking to spend money to invest in the brand and build the business.

Bruce Wacha: And I think, if you think about our business units, Andrew, we’re trying to set up platforms. So – and the platform to me is a place where we think we can build capabilities where it fits and longer term fits with our core competencies where we have sales and profit growth potential and also M&A platforms where if we acquire businesses, we can bring them in. We can wrap them into our infrastructure and run them well. And they fit with what we do best. And some of the business like snacking, cookie cracker is just not where we’ve built a capability. It’s a small business, it’s just not something that we’re going to build scale in. It doesn’t play to our core strengths of kind of dry warehouse distribution, so – and longer shelf life products. So I think, we’re trying to set up the platforms where we want to drive the growth. The criteria are you would are pretty, I think they’re pretty consistent across where do we think we have the strengths and where can we drive future growth and valuation.

Andrew Lazar: Great. Thanks so much.

Operator: And our next question comes from Carla Casella with JPMorgan Chase.

Carla Casella: Hi. Thank you for taking the questions. Did you give the EBITDA from the Back to Nature business?

Bruce Wacha: Did not.

Carla Casella: Okay. Okay. Any sense for whether it’s higher or lower margin or is it, does it generate EBITDA?

Bruce Wacha: It generates EBITDA, really not fair to give a margin number out.

Carla Casella: Okay. And I know you renegotiated covenants. What’s your comfort level with those? And just your thoughts on – you mentioned you have too much debt for the, given, the current rate environment, and I know your term loan’s now more expensive than your bonds. Does that make you look at pay down differently than you would’ve in the past? You focusing on the term loan versus refinancing or paying down bonds?

Bruce Wacha: Always looking and seeing what we can do to optimize and in the world that we’re living in, that theoretically could change every week with some of the moves that we’ve seen. So we’re always looking. Bonds are maturity is 2025, so we still have a little bit of time before we have to do anything there.

Carla Casella: Okay. And you’re – the confident level, you’re comfortable with those no more renegotiations?

Bruce Wacha: Yes, we negotiated them to a certain level for a reason.

Carla Casella: Okay, great. Thank you.

Operator: And we’ll move next to Hale Holden with Barclays Capital.

Hale Holden: Hey, thanks for all the detail there, Bruce. I have a quick question on just Back to Nature. Last time I saw sales on it, it was sort of plus or minus 60 million. Is that sort of still the right zip code?

Bruce Wacha: It’s probably been about $50 million for the last few years. Early on when we bought it, it was closer to $60 million. There was some really low margin business like cereals, juice boxes that we exited and it’s been kind of comparable levels since then. The business that performed fine during the pandemic but didn’t really get a big lift. Like some of the things like canned vegetables or can beans or can beef and it’s kind of just had decent performance, just not the right business for us over the long-term now.

Hale Holden: And then just as a quick follow-up on that, the – I mean de-leveraging is all about multiples, right? So if you were not going to get a sale price that was de-leveraging or below kind of where your current leverage is on a tax adjusted basis, is that still something you would consider?

Casey Keller: In this case or in any case?

Hale Holden: I guess in this case or in any case because the company historically is not sold assets for – because the multiples or because the cash flow is worth more to use. So I was wondering…

Casey Keller: Certainly in this case, our expectation would be that we’d be selling this at a price that would allow us to delever. Given the size, it’s probably really not going to move the needle too much. But it would be – our view is we can sell this for certainly more than our leverage ratio is. And as we look at other things in the portfolio, there’s a matter of fit, there’s a matter of growth profile, margin profile, capital intensity. But absolutely there’s also a concept of what do we think we could sell it for? Who are the likely buyers and if that’s something that’s allow us to delever. And so all of those factor into our portfolio review.

Hale Holden: Got it. And then I just had one last question on spices. We saw the announcement from a McCormick that they were going to put out more of a value line and I was wondering if you and I know your spice portfolio is a little bit different, so I was wondering if that’s a competitive threat or something that you would’ve to compete for Shells based on?

Casey Keller: I mean, they’re certainly the big player in the industry. They have a different portfolio strategy than us and let them answer questions on their strategy. We play a couple different areas and a couple different brands and categories and so we have a different strategy than they do and we’re perfectly happy with that.

Bruce Wacha: We don’t really have an entry in that segment. I mean our portfolio is more blends, salt free, we have Spice Islands, which would be an AC but more in the premium segment. So I mean we don’t have a direct line that’s in that value space.

Hale Holden: Great. That was what I need. Thank you very much. I appreciate it.

Operator: And we will take our next question from Karru Martinson with Jefferies.

Karru Martinson: Good afternoon. Last quarter I think we had talked to that we’d realize about 85% offset on the inflation and then kind of a 100% in the fourth quarter. I thought I heard you say we were kind of at 80. Is that just the timing aspect of when those prices went in or are you seeing a greater than expected inflationary push out there?

Bruce Wacha: I mean the actual number I was just speaking around – the actual number is like 83% to 84%. So I was just, I said in excess of 80. So it’s pretty close. I would say, we had – like we talked at the beginning, a little bit more volume, softness, maybe slightly more elasticity than what we modeled, but pretty close and I think we’re on track with what we expect for Q4.

Karru Martinson: And when you look at that volume softness, I mean where is that volume going? Is it transitioning into private label or is there a competitive response out there?

Casey Keller: I think, the volume softness that we talked about it, it’s really the two biggest – the two significant drivers are Green Giant canned vegetables. That’s – I think the biggest piece of volume is that we exited a discount channel or dollar business that was looking to be no profit for us in this inflationary environment. So we dropped that distribution. So that’s one. And canned vegetables also are pricing moved probably earlier than either private label or the Del Monte. So we’re a little bit ahead of the curve, which caused a volume softness, but we fully expect category pricing is going to move. On the spices & seasonings business it was really, frankly it’s really mostly related to, we had significant disruptions in our factory and the Q1 period during Omicron and at the time we couldn’t support kind of sales or distribution. So we had to kind of, some of our distribution got pulled back and we’re just now kind of getting it back in with full service and capability. Like I said spices & seasonings, I’m not as worried about because I can already see the quarter to date, the October numbers and they’re pretty strong, they’re growing. So that one I’m less worried about, the Green Giant and want to keep watching that trend on pricing pretty closely.

Karru Martinson: Okay. And then when you referenced the next year, call it inflation of 4% to 5% tomatoes, glass and other things, is there another round of pricing that’s coming or did that October price increase that you guys put in account for that future inflation?

Bruce Wacha: The October price increase was really just to cover the current – the fiscal year 2022 costs run. The new cost increases that we expect to come in next year of that 4% to 5%, we will have to execute new pricing but it won’t be that broad. It’ll be on things that are really sensitive to the major commodity movements. Because what we’re seeing is a lot of commodities have stabilized or a lot of input costs have stabilized, but there’s a few isolated ones like tomatoes because of the drought in the West Coast that are up, significant tomatoes are up 30%, 40%. And then glass, glass continues to be short in the industry. So we know anything in a glass, jar or bottle is going to have some cost increases. So we’ll be much more surgical next year about where we take pricing to recover the significant inputs. We won’t have to do anything broadly in the line. It’ll be against the product lines that we’re really experiencing the cost increases.

Karru Martinson: Thank you very much guys. Appreciate it.

Casey Keller: Thanks, Karru.

Operator: And we’ll move next to William Reuter with Bank of America.

William Reuter: Hi. So when you guys were responding to the previous question about leverage and I know that you didn’t want to provide something that would give us what EBITDA guidance would be for next year, but it did sound like you’re hoping that through divestitures plus business improvements the next year you guys could be down to a six times range and then with a longer term target of four and a half to five and a half. Was that the message we were supposed to take from that?

Bruce Wacha: We want to decline from where we are now. We want to get below seven first. We want to try and get into the sixes, even the low sixes if possible. I think that’s what you heard from us. We’re not going to probably be able to get down to our long-term range, but all that will depend on we expect working capital needs will be lower. So, we expect EBITDA lows to improve. So, and then we’ll have some divestitures that will hopefully help us delever as well. So all those things, happening, depending on what degree they happen will drive how much progress we can make.

William Reuter: Understood. Are there certain assets that are off the table in terms of looking at and I guess, is there other scenarios where you could end up selling really large components of the business if there were buyers out there that would decrease leverage really meaningfully far below 6 times?.

Bruce Wacha: Yes. I think at the end of it, it's kind of hard to comment on M&A before it's happened. Certainly, we are financially driven. We've always been financially driven. So I think we'll evaluate things based on opportunities and based on value and valuation and what the financial impact is. But certainly we're very much interested in what our portfolio is going to look like when we're done with all of that. And we're very focused on having a portfolio that's consistent with the business unit strategies that Casey laid out and something that we want to run as a public company.

William Reuter: Got it. I know that...

Casey Keller: We'll evaluate fit pretty strongly in terms of where we want to go. We're not just going to do this for just purely deleveraging. It's going to be about our strategy and shaping the portfolio against the businesses that we can grow so we can create platforms where we can add value, get synergies. We'll be focused on that as much as can we get some deleveraging out of it.

William Reuter: Perfect. And then just lastly for me; I know you mentioned that you lost some shelf space in spices and seasonings. Did you get all of it back or was some of that permanently lost? And I guess was there any other shelf space that you guys lost permanently as a result of low fill rates earlier in the year?

Casey Keller: I think most of it, we're getting back. It's just happening on different time frames. Some of it was just we were out of stock. So we're just now getting back into the shelf from an own stock situation. In other cases, retailers kind of temporarily replaced us, and we're working our way back in to get our individual items back in where we couldn't service it. In other cases, there might have been longer-term losses, but we've gone in and sold in the new planograms and mods and been able to get most of that back. So I feel pretty confident. Like I said that we're on the right track, getting spice and seasonings growing again and as I said, the fourth quarter start looks pretty good.

William Reuter: Perfect. That's all for me. Thank you.

Casey Keller: Thank you.

Operator: And our next question will come from Eric Larson from Seaport Research Partners.

Eric Larson: Yes. Thanks guys. Thanks for taking my question. So we've talked a lot about pricing, and that's been kind of the center of discussion, but you haven't really given us an idea of sort of what kind of productivity you have this year. That's also probably has to help you somewhat at least limit some of your pricing. So what is your productivity contribution this year? And how much how much could you expect to have kind of – I don't want guidance per se, but will productivity play an important role again in 2023 as well.

Casey Keller: Yes. So we do have a productivity program. I think this year; it's kind of hard to separate a couple of impacts. So productivity is that, I'd say in pure cost savings, we have delivered probably around 1% in productivity. But we've also had a lot of engineering effort against doing some down weight and downsizing. So think about Crisco, some of the Green Giant box products. So a lot of our productivity efforts went towards changing our packaging sizes and configurations and managing through all that. I think that's probably, we're through most of that now. So we're going to direct that effort to pure cost savings. I would say next year, my goal would be to get us up to at least 2% pure productivity. And we've got – our business units are now working against that harder to try and find value engineering and product reengineering opportunities. So I want to grow this over time, but next year I would say we're going to get up to probably more of a 2% run rate versus this year to 1% with a lot of packaging reduction activity.

Bruce Wacha: Yes. One other thing to mention we've talked previously when we were talking about pricing of getting to $200 million plus number for the year. And so the benefit of the third quarter, a lot of this was back half weighted, but we're at something north of $130 million of benefit already through three quarters and feel very comfortable with that target for the full year.

Eric Larson: So with an October 3rd price increase, I'm guessing that you probably won't get the full benefit of that in the fourth quarter, maybe most – maybe by first quarter next year, we'll get that full benefit. So if you kind of look at your pricing less kind of the loss of volume, et cetera, have you been able to actually cover your – the gross profit dollars in terms of your cost increases? Or are you still short on a dollar basis? I'd rather hear more about the dollars than the percent margin?

Casey Keller: I mean that's the 83% to 84% number in the third quarter that I quoted before.

Bruce Wacha: Any expectation that you're covering that by the fourth quarter, yes.

Eric Larson: Okay. Got it.

Casey Keller: And the 10.3 price increase honestly was kind of a smaller level. So I think we're going to get 80% to 90% of the benefit of that in the fourth quarter.

Eric Larson: Okay. Perfect. Thank you for clarifying that. Thanks.

Operator: And your next question comes from Ken Zaslow with Bank of Montreal.

Ken Zaslow: Hi. Good evening guys.

Casey Keller: Hi, Ken.

Ken Zaslow: So just my first question is you said during the call that the veggie oil business is actually on par relative to your base-case or your business case. So my question is, when I think about your total reduction of guidance from the real beginning, I think it was like $60-something million reduction. Where was that from? I was so it wasn't – so it wasn't at all related to Crisco in any way, and it was all related to the base business. Is that the way to think about it?

Bruce Wacha: It's both. So I guess the point from a Crisco perspective there was a lot of cost increases. There have been a lot of price increases. It is still performing and so our expectation is that, that business is still going to perform in line with our model. On a this year basis we saw margin compression across the portfolio; some areas more than others.

Casey Keller: Crisco, I would say we are getting back to delivering against that model – acquisition model in the third quarter, but we were not there in the first two quarters because costs were moving faster than pricing, but we now feel confident that pricing, yes.

Ken Zaslow: I misunderstood you. I thought you said it hit your business case for the acquisition, so it didn't – it is starting to hit that versus where it is?

Casey Keller: It's starting to. The run rates are starting to return to that. It hit in 2021 but in the first two quarters of 2022 we had a little depression, but we're now on a run rate basis, kind of getting back.

Bruce Wacha: Yes. The real challenge was two of the months in the second quarter. We're really bad. Where costs escalated and we were not able to raise price fast enough.

Ken Zaslow: What happens in 2023, if there's another sizable increase in veggie oil prices as more renewable diesel comes online? I think there's another slotting of renewable diesel. Are you – can you be proactive and be ahead of that? You have to wait for the pricing of vegetable oil to go up or how do you think about that?

Bruce Wacha: Yes. Our goal is to be tighter from a pricing stand point than we were this year. I think with all of the price increases that we've had and cost increases on Crisco, we've done a pretty good job at covering that with the exception of April and May of this year, which is really a lot of the pain on a year-to-date basis. If costs increase and not so long ago, people were talking about relief on vegetable oil. Cost increase we're going to be as aggressive as we can and as fast as we can to nail those cost increases with price increases and we've seen an ability so far to pass price on; expectation is we're going to do as good of a job as we can going forward.

Casey Keller: We are shifting our approach on Crisco pricing, by the way. So we're moving to more of a kind of quarterly commodity-based pricing model with our retailers so that we will have we'll kind of go actually take an average market cost and then price to that with the retailers on a kind of a forward basis. So I think you're going to see us – we're moving our pricing structure and how we manage it to try and – to get much tighter against the actual cost running tor the P&L than we were this year, which we got kind of shocked by the Ukraine war situation and everything went out of whack. So I'm pretty confident we're going to move to a better model in fiscal year 2023 with our retailers.

Ken Zaslow: Okay. And my second question is I think you said that all your pricing has caught up to your commodity inflation and I've covered that. And then when I think about 2023, 2024, how come you're recovering EBITDA will be quicker if your pricing has caught up to the inflation? Is it still just the challenges on supply chain? What's the discrepancy between that if you were able to catch all your pricing and then I'll leave it down? I appreciate your time.

Bruce Wacha: Yes. I think the biggest part of that, Ken, is it's still a very uncertain world. There's been massive cost increases? We've taken price. We've been fairly aggressive taking price. It's hard to sit back right now and say, hey, we're going to take our margin dollars back up to where they were in 2021 or 2020 – in 2023. So it's a lot. And so we want to be appropriately cautious on that.

Ken Zaslow: Great. I appreciate it guys. Thank you.

Casey Keller: Yes. Thanks.

Operator: And your next question comes from Robert Moskow with Credit Suisse.

Robert Moskow: Hi. Thank you. You're not alone in terms of spices & seasonings companies having problems with supply chain. And I just wanted to know maybe give a little more detail on what were the core reasons for it. I mean, was it hard to get spices from overseas, like hard to get the raw materials? Was it labor? Or was it capacity constraints? And why is it better now?

Bruce Wacha: So it's probably a mix of capacity, labor and some other issues. The biggest driver when you really think about the spices & seasonings category is the massive uptick in sales and demand that we had on a delayed draw with COVID. And so kind of reacted six, eight months after the beginning of COVID in the category just got really big. And so where we thought we had a lot of excess capacity, suddenly we are running up in the capacity constraints. And that was exasperated by a tough labor market for a little while. And then COVID happened to hit some areas harder during the Omicron phase than it did at the height of the pandemic for some factory disruption. It was kind of a perfect storm.

Casey Keller: Yes. For us it was really December through March of last year, we – number one, had a big plan in Iowa. We had a lot of call outs. We had a lot of Omicron infections. We were understaffed if the labor market was really tight. We were having trouble with some getting even availability of some materials, packaging those things. So our service levels fell down below 80% in the first quarter. So that was where we – so we're just recovering from that and now we're up in the mid-90s, so we feel we are back in service, we're able to kind of supply the business, but we went through a period where we were not able to do it, and that was really – that was a tough trough to dig out of because we went low on safety stock, started cutting customers, and I think we're now back in business. And so I feel we're on the right track.

Bruce Wacha: And part of that was just weird dynamic when we bought that business, that factory, state-of-the-art-factory, we always said we had excess capacity there. Part of the M&A strategy became, let's buy more things in spices & seasonings because we've got a lot of capacity in the factory. The reality is, the way the category grew, 2021, during 2022, the sales demand was so much bigger than what we were able to even in a normal environment provide coupled with then, we had challenges from a – as Casey outlined, from COVID and disruption and labor.

Casey Keller: We were 10% understaffed at that plant in January because of the tight labor market and then we had 20% call outs because of Omicron. So I just – that's what happened. And then we had some material shortages and it all compounded, but we're back in business. We're running well. We're fully staffed and we've got what we need to kind of service the business now.

Robert Moskow: Okay. Well, my follow-up is now that you're taking steps to kind of rejigger the capital structure, I've noticed that your CapEx spending is well below your peers on a percent of sales basis. And you are bringing up the fact that you bumped up against capacity levels here in spice and seasonings, Will there be any thinking internally on increasing investment behind the business or at least in the areas of the business that really need it?

Bruce Wacha: Yes. I mean we – I mean I would say, number one, my perspective on the capital is it's really not that far off of our peers because you got to consider that half of our product lines, half of our sales are co-manufactured, where we're not really spending the capital. So we're spending capital on half of our product lines and our own assets. And on that basis, we're not too far off. We're not too far off at least my experience in the food industry. I would say that, we will invest where we need capacity. So we have invested in some new lines at Ankeny in the spices business to particularly in some of our foodservice and chef models and other places. We have invested in capacity on Taco Sauces on Ortega. So we will invest in capacity where we need it. I mean right now, I don't think there's a lot of places that we necessarily need to build additional capacity. We just – but there will be some minor investments to do that over time. And when we cross a threshold where we need to do it we will invest even if it means going above our current capital.

Robert Moskow: Okay. Thank you.

Bruce Wacha: Thanks Rob.

Operator: And this concludes their question-and-answer session. I'd like to turn the call back to Casey Keller for closing remarks.

Casey Keller: Thank you, everyone, for joining us. And I appreciate all the questions, and we will talk to you next quarter. Thank you.

Operator: And this concludes today's conference call. Thank you for attending. Goodbye.