Pinnacle Foods' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 7.14 | About: Pinnacle Foods (PF)

Pinnacle Foods Inc (NYSE:PF)

Q4 2013 Earnings Conference Call

March 06, 2014 09:30 pm ET

Executives

Maria Sceppaguercio - SVP, Investor Relations & External Communications

Bob Gamgort - Chief Executive Officer

Craig Steeneck - Chief Financial Officer

Analysts

Andrew Lazar - Barclays

Farah Aslam - Stephens, Inc.

Jonathan Feeney - Janney Capital Markets

Brian Hunt - Wells Fargo

Bryan Spillane - Bank of America

Robert Moskow - Credit Suisse

David Palmer - RBC Capital Markets

Eric Larson - CL King & Associates

Ken Zaslow - Damon Capital

Matthew Grainger - Morgan Stanley

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Pinnacle Foods Incorporated Earnings Call for the Fourth Quarter ended December 29, 2013. This conference is being recorded and there will be a question-and-answer session at the end of the call.

I would now like to introduce your host for today's conference, Pinnacle's Senior Vice President of Investor Relations and External Communications, Ms. Maria Sceppaguercio. Ms. Sceppaguercio, please go ahead.

Maria Sceppaguercio

Thank you, Howard, and good morning, everyone. Thanks for joining us today. Here with me to discuss our results for the quarter and our outlook for fiscal '14, are Pinnacle's CEO, Bob Gamgort; and our CFO, Craig Steeneck. Earlier this morning, we issued our press release for the fourth quarter of 2013. If you haven't received a copy of the release, you can get one on our website at www.pinnaclefoods.com.

As you know, we completed our IPO and subsequent refinancing in the second quarter of 2013. As a result, our GAAP financial results includes of the benefits and one-time expenses of these transactions. Consistent with our reporting in previous quarters and to help you understand how the IPO and refinancing impacted our results in 2013, we have provided in our press release and will discuss here this morning our fourth quarter and full year results on an adjusted pro forma basis.

This adjusted pro forma basis assumes that the IPO occurred on the first day of fiscal '12, and that the refinancing occurred on the first day of fiscal '13 and excludes IPO and refinancing expenses, restructuring related and other items and non-cash stock-based compensation expense, which we collectively refer to as items affecting comparability.

The company believes that the adjusted pro forma basis provides investors with additional insight into our business and operating performance trends. While the exclusion of these items is not in accordance with GAAP, we believe it is the most meaningful comparison and the most appropriate basis for discussion of our performance.

Details of the excluded items are included in the reconciliation tables included in our press release and are discussed in detail in our 10-K which will be filed later today. Also reconciled in our release and 10-K is adjusted EBITDA, which is a non-GAAP measure. We define adjusted EBITDA as GAAP net earnings before interest expense, income taxes, and depreciation and amortization adjusted to exclude items affecting comparability. Other adjusted metrics discussed on the call are calculated using this methodology unless otherwise indicated.

In discussing our results today, we will reference our performance excluding the impact of excluding the impact of the 53rd week, last year which benefitted net sales and diluted EPS in the fourth quarter of '12 by $28 million and $0.02, respectively. We have included in our release and 10-K, the details regarding the impact of the 53rd week in 2012.

On October 1, 2013, we completed the acquisition of Wish-Bone, and as a result, Wish-Bone is included in our financial results in the fourth quarter for the first time. As planned, we fully transitioned the business from Unilever by year end and Wish-Bone is now integrated into Pinnacle's business.

In terms of production, you will recall that Unilever is continuing to manufacture Wish-Bone for us under a co-manufacturing agreement that runs through early '15, while we establish new high speed capacity for the business in our liquid manufacturing facility in St. Elmo, Illinois.

Finally, as outlined in our release this morning, our board recently approved an annual long-term equity incentive plan that builds on the initial founders equity grants awarded in connection with the IPO. Given that this will now be an annual expense for Pinnacle, we will be including it in our adjusted results.

In 2014, this non-cash equity comp expense is expected to total $5.7 million after-tax or $0.05 per diluted share. In 2013, the expense totaled $5.9 million after-tax, or $0.05 per diluted share.

Because of the - now ongoing nature of this expense and to enable comparability with 2014 and beyond, we will no more retreat the 2013 expense as a discrete IPO-related adjustment, which means that beginning with 2014 reporting, our adjusted results for the current and prior year will include this expense. Included in our press release is a table that lays out the expense incurred in 2013 by quarter.

Before turning the call over to Bob, I'd like to remind you that our discussion this morning may include forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially and the company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the company's filings with the SEC.

With that, I'll hand it over to Bob.

Bob Gamgort

Thanks, Maria, and thanks to everyone for joining us today. 2013 was very eventful for Pinnacle, and I am pleased to report that we exceeded our expectations for the year. We grew our North America Retail sales by 2%, excluding the 53rd week impact Maria mentioned earlier, largely driven by the Wish-Bone acquisition and higher volume mix on the base business.

We outpaced the performance of our categories, enabling us to grow our composite share for the year, something we have done in three of the last four years. We accelerated our in-market performance in the fourth quarter growing share on nearly every leadership plan. We expanded our adjusted gross margin by 190 basis points through improved product mix and continued strong productivity delivery and this enabled us to drive double-digit adjusted EBIT growth for the year.

We also meaningfully reduced our leverage profile and interest expense due to the benefits of our IPO and subsequent refinancing. Taken together, these accomplishments drove adjusted diluted EPS growth of approximately 40% to $1.57, which is at the high end of our most recent guidance.

In addition, we enhanced our return to shareholders by initiating a quarterly dividend program in May, which we increased by 17% in the fourth quarter, reflecting our confidence in our core business model and the incremental benefit of the Wish-Bone acquisition. Taking a closer look at our North America Retail business, the 2% net sales growth in 2013 was driven by our higher margin Leadership Brands and the benefit of the Wish-Bone acquisition.

Our Birds Eye Frozen division revenue was up slightly for the year driven by growth across our Leadership Brands, particularly Birds Eye Voila! and Birds Eye Vegetables. Birds Eye Voila! grew consumption and gained share all year and Birds Eye vegetables after a challenging start in the first half finished the year strong due to the increased marketing spend for the holiday that we discussed with you on our call last quarter.

Also supporting the growth of Birds Eye vegetables in the quarter was the benefit of our new award-winning Birds Eye Recipe Ready product line. Recipe Ready is a new line of pre-chopped and blended vegetables designed to enable faster preparation of the top main meal dishes served in America. When combined with a protein and a few simple ingredients, Birds Eye Recipe Ready makes a family meal in less than 30 minutes for approximately $10 with no waste. This new business is off to a good start and continues to build distribution. At year end, ACV for Recipe Ready exceeded 50% and we plan to build distribution by another 10 percentage points during 2014.

Recipe Ready has received significant recognition including being named one of the top of the 25 best packaged foods in 2014 by Parents Magazine for its great taste and nutrition for both kids and parents alike. This year we will be investing in consumer marketing to increase awareness and drive trial given the strong repeat rates on the business. Television advertising for Recipe Ready is airing now.

For the first quarter of 2014, we introduced a number of new products in our Frozen portfolio that [taps into][ph] new flavor trends, including two new varieties of Birds Eye Chef’s Favorites Vegetables, a limited edition variety for our Birds Eye Voila! skillet meals line and several new Hungry-Man dinners at our higher select price point.

Turning to the Duncan Hines Grocery Division, this business posted strong growth for the year, largely driven by the Wish-Bone acquisition as well as growth of Log Cabin and Mrs. Butterworth's syrups and Vlasic pickles. While the Duncan Hines baking business was down for the year, it's performance improved in the fourth quarter behind incremental investment spending and new seasonal varieties during the holiday period. We introduced a new limited edition Holiday Velvet seasonal cake building on the success of our award-winning Decadent line and our limited edition seasonal offering.

During the fourth quarter, Duncan Hines significantly outperformed the category growing dollar consumption by almost 2% in a category that was down slightly. While we still have more work to do, we are pleased with the progress we made in Q4. We just launched Duncan Hines limited edition Spring Velvets for Easter, and Decadent salted caramel brownie variety which [taped] [ph] into a restaurant flavor trend.

Our Vlasic business also registered share growth for the year largely due to the expansion of our Farmer's Garden line. Farmer's Garden has proven to be incremental to both the Vlasic brand and category as new consumers are attracted by this premium product. In the fourth quarter, we also continued our highly effective print ad campaign and in-store support to continue to build awareness and trial.

Wish-Bone which is included in our fourth quarter results, performed in line with our expectations. Market share results have been under pressure as we expected due to pulling back from the heavy promotional levels on the business during the sales process.

For the quarter and year, Wish-Bone contributed $0.02 to our diluted EPS as expected. We successfully completed the integration of Wish-Bone by year-end. We are focused on implementing the plans we developed for the business. Much of what you will see in the first half of 2014 reflects programs put in place before the acquisition.

We expect share to remain somewhat under pressure in the first half as we cycle significant promotional activity last year. You should expect to see our influence on Wish-Bone in the marketplace in the second half of this year with innovation to reach the market in 2015.

Outside of North America Retail, our Specialty Food Segment experienced a net sales decline for the year due to our planned exit of low margin unbranded businesses. Adjusted EBIT for this business was flat despite the decline in sales.

Shifting to the cost out of our P&L, our productivity program known as MVP or maximizing value through productivity is now well embedded in our culture, enabling us to deliver consistently strong results. Total productivity was 4% of cost of product sold in 2013, exceeding inflation for the year which totaled approximately 2.5%. Our productivity results coupled with improved product mix drove the 190 basis point improvement in our adjusted gross margin for the year.

We again generated excellent cash flow results and continue to leverage our lean and efficient overhead structure, which is serving us well in a low growth industry. In fact, our free cash flow yield in the high single digits places us at the top of the industry.

As we look towards 2014, we will continue to follow the strategy that has driven our success. In a nutshell, this involves investing differentially in our portfolio with a focus on our higher margin Leadership Brands. Driving gross margin improvement through continued improvement in product mix and strong productivity programs, generating attractive free cash flow driven by our industry-leading free cash flow conversion, enabled by our lean overhead structure and tight management of working capital and realizing the benefits of the Wish-Bone acquisition.

In terms of our outlook for 2014, we expect to achieve another year of double-digit growth in diluted earnings per share. This performance would again exceed our long-term growth target due to the incremental benefit of the Wish-Bone acquisition. For 2014, we expect diluted EPS in the range of a $1.70 to $1.75 after giving effect to the stock-based compensation expense.

As Maria mentioned, we're going to report results beginning in 2014 with this expense included in the current and prior year. On a like-for-like basis, our diluted EPS range for 2014 translates into growth of 12% to 15% versus diluted EPS of $1.52 in 2013.

With that, let me hand it over to Craig.

Craig Steeneck

Thanks, Bob, and good morning everyone. I will begin with the fourth quarter results and quickly touch on some of the details for the full-year that have now already been covered.

As outlined in our release, the impact of the 53rd week was more significant for the fourth quarter comparison than to the full-year. To help you understand the underlying trends in the business, we provided this impact for both the quarter and the full year.

Turning to the quarter and starting with sales, consolidated net sales in the fourth quarter including the $28 million benefit from the 53rd week in 2012, increased 0.06% to $709.3 million. Excluding the extra week last year, Q4 net sales increased nearly 5%, driven by North America Retail partially offset by Specialty Foods. North America Retail net sales advanced 5.7%, excluding the impact of the 53rd week, reflecting the benefit of Wish-Bone and higher volume mix on the base business partially offset by lower net pricing.

For our Frozen division, net sales were down slightly in the quarter due to a decline in net realized pricing, which offsets solid growth in volume mix. Importantly, all the frozen Leadership brands registered net sales growth in the fourth quarter.

For our Duncan Hines division, net sales advanced 12.5%, largely due to Wish-Bone and higher volume mix on the base business driven by growth from the Leadership brand portfolio. Lower net realized pricing and unfavorable foreign currency translation partially offset the growth drivers in the quarter. Finally, for our Specialty Foods segment, net sales were down about 1% in the fourth quarter, excluding the 53rd week impact. This performance reflected a 1.4% decline in volume mix and lower net pricing. Partially offsetting these factors was the benefit of the Wish-Bone foodservice business, which contributed 1.2% for the segment in the quarter.

For the year, despite a 7.6% decline in net sales, Specialty EBIT was flat versus year ago. Looking to 2014 for this statement, net sales for the private label canned meat business are expected to remain under pressure, particularly in the first quarter due to reduced government assistance programs which have intensified competitive bidding for this business. However despite the headwind, we expect Specialty EBIT to be up for the year.

Turning to gross profit, we continue to make very good progress in this area. For the quarter, excluding items affecting comparability, our gross margin expanded to 28.8%, which is a 40-basis point improvement versus Q4 2012, excluding the 53rd week. This performance reflected continued gross margin expansion on the base business, due to productivity and excessive inflation and favorable product mix as well as the inclusion of the higher margin Wish-Bone business. For the year, our adjusted gross margin expanded by 190 basis point, as Bob previously mentioned.

Turning to productivity, for the quarter, our results were in line with our expectation at 4.3% of cost of product sold bringing productivity for the year in at 4%, the higher end of our 3% to 4% targeted range. Turning to input cost inflation. For the quarter, input cost inflation totaled 3% brining the year in at about 2.5% as expected. The positive relationship on the quarter on productivity exceeding input cost inflation enabled us not only to increase investment behind our Leadership brands, but also drive gross margin expansion.

Adjusted EBITDA totaled $155.4 million in the quarter, which was up 6% excluding the 53rd week impact. This performance reflected the gross margin expansion, partially offset by higher SG&A, due primarily to the inclusion of (Inaudible). Interest expense for the quarter on an adjusted pro forma basis declined 23% to $24.3 million and was down 37% to $83.7 million for the year. This improvement reflected the benefits of the IPO and our refinancing actions, partially offset by additional Wish-Bone acquisition.

You will recall that we entered into interest rate swaps to lock in rate on approximately 80% of our debt for the next few years. Our total interest expense for 2014 is estimated to be approximately $100 million. Adjusted pro forma net earnings totaled $67.6 million or $0.58 per diluted share in the quarter. This represents a 15% increase versus year ago, excluding the impact of the 53rd week.

Growth in net earnings reflected improvement in gross profit and a significant reduction in interest expense, partially offset by increased marketing investment behind our Leadership Brands and higher administrative expenses, primarily related to Wish-Bone. As expected, Wish-Bone contributed $0.02 in diluted EPS for the quarter.

Cash flow from operations totaled $262 million 2013 compared to $203 million in 2012. This improvement was largely driven by the growth in adjusted EBITDA and lower cash interest expense. Capital expenditures for the year totaled $84 million compared to $78 million in 2012. We did not make any meaningful capital investments for Wish-Bone in 2013, and continue to expect that we will invest approximately $40 million to $50 million, in capital, in 2014 to integrate Wish-Bone manufacturing into our St. Elmo facility.

As you may recall, in January of this year, we entered into a definitive agreement to acquire the assets of Duncan Hines protector Gilster-Mary Lee Corporation for total purchase price of $16.5 million, plus the value of inventories. With 10% of that paid at signing and the balance due under a full year note payable. The transaction is expected to close early in the second quarter, and acquiring this business enables us to invest in upgrading the facility, which will enhance our innovation capabilities and generate productivity savings over time.

Turning to debt, our year-end total debt was $2.5 billion, including $2.1 billion in term loans in 2020 and 350,000,478 senior notes due 2021. We had no outstanding revolver borrowings during the quarter and cash on hand at year end totaled $117 million, bringing our net debt to $2.4 billion. Pro forma for the Wish-Bone acquisition, our net leverage at the end of the year was 4.66 times.

In terms of the outlook for 2014, we expect diluted EPS in the range of $1.70 to $1.75 compared to diluted EPS of $1.52 in 2013, after giving effect to stock-based compensation expense and items affecting comparability in both years. This outlook includes the following assumptions, input cost inflation for 2014 is estimated at 2%, with Q1 inflation estimated to be the highest of the year due to higher costs inventory from 2013 being carried into 2014.

On productivity, we expect savings in 2014 consistent with a long-range target of 3% to 4% of cost of products sold. Also consistent with previous years, we expected savings to be greater in the second half versus the first half. It's worth noting that our productivity estimate does not include the synergies we expect from the Wish-Bone acquisition.

Interest expense is expected to be $100 million with $92 million in cash interest and $8 million in non-cash interest expenses. The effective tax rate is estimated at 38.9%. The full-year weighted average diluted share count is estimated to be and 117.2 million shares, including the impact of the new long-term equity incentive program.

Capital expenditures for the year is expected to be in the range $120 million to $230 million, including the $40 million to $50 million we anticipate spending on the Wish-Bone capital. In addition, this depreciation and amortization is expected to total $80 million.

Finally, let me take a moment to talk a bit about what we can expect from quarterly cadence standpoint as the year unfolds. As we mentioned, input cost inflation is the highest in Q1 and we expected to steadily decline throughout the year. In addition, productivity is expected again to be stronger in the second half. Therefore, the positive relationship of these two factors improves throughout the year and that will be evident in our results.

In addition, as you all are well aware, the benefit of Easter in 2014 will shifts out of the first quarter and into the second quarter. For us, we estimate the impact of this shift is about 2% to 3% in consolidated net sales from Q1 into Q2, and the corresponding impact on our diluted EPS is estimated approximately $2.5 that will move out of Q1 and into Q2.

With that, I will turn the call back to Howard to open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question or comment comes from the line of Andrew Lazar from Barclays. Your line is open.

Andrew Lazar - Barclays

Good morning, everybody.

Bob Gamgort

Good morning, Andrew.

Andrew Lazar - Barclays

Bob, you mentioned in the prepared remarks the pricing component in the North America Retail piece both, Frozen and Duncan had come in from sequentially from the third quarter and I guess my sense is - tell me if I am wrong about this, but most of that was the incremental investment that you had talked about putting into the fourth quarter based on some of the upside that you had earlier in the year.

If that's the case, I guess, I am just curious how you think that plays out as we going into '14. I think on the last call, you mentioned that was probably the biggest swing factor, if you will, because you need to have this positive relationship around productivity to cost and just didn't know exactly where that sort of promotional side or pricing side would lay out. So trying to get a sense we are now I guess two months into the first quarter, and just trying to get a sense of how that pricing component plays out for the year, rough guess at this stage I guess.

Bob Gamgort

Yes. You have described it correctly when we were I think talking with you all the way back to the second quarter, our forecast was that the fourth quarter would be more promotionally intensive and that we would have to invest some of the overachievement in the first half of the year into marketing as well as pricing in the fourth quarter to be successful.

Clearly, the results were very successful, because we gained share in 10 out of 13 categories in which we compete in the fourth quarter and we grew consumption in the absolute, despite the fact that our categories were actually down in aggregate, so no question it worked. In terms of our ability to cover that still with gross margin improvement during the quarter I think speaks volumes to the business model that we created.

As we are going into 2014, our share performance in the first month was outstanding, and pricing competition, I would say it's moderate right now. We knew that the fourth quarter was going to be very intensive, but January is more in line with what we expected a more normalization of kind of pricing and promotions.

Andrew Lazar - Barclays

Great. That's very helpful. Then your top line target obviously over time is in line with sort of your category growth and I guess would you like to posit your best guess around at least what your expectation is in terms of your internal forecast around how you are thinking about the overall category growth for you in '14. I am assuming not a big change from what we saw more recently maybe in '13, but want to get your sense.

Bob Gamgort

Sure. Our long-term target is to grow in line with our categories. We have done better than that in three out of the last four years. We did better than that in 2013 and we accelerated our performance in the fourth quarter. That is translated over time into an absolute growth rate of about 1% to 2%, so as we look forward to 2014, we don't see things changing that much, so we built our plan on, I think we would all agree, long-term is a fairly low growth rate in the absolute, but being able to leverage our productivity, our product mix and our innovation to continue to improve profitability and expand gross margin.

As we describe here how we are thinking about productivity and inflation for 2014, there is a very favorable relationship. We continue to deliver very high end in the industry of productivity and we are expecting our inflation to be in the 2% range next year, so of course the wildcard is how much needs to be spent back on pricing, we've reserved money to be able to do that and we don't expect much of a turnaround on top line despite that we are confident in our EPS forecast of 12% to 15%.

Andrew Lazar - Barclays

Thanks. Last, very quick one, you mentioned that the long-term productivity goal doesn't include the incremental synergies that will come from Wish-Bone. It's still the case so that those synergies really don't start to flow through probably until sort of late '15 into '16. Is that right?

Bob Gamgort

Right. '15 is where we are going to realize the majority of them and that's consistent with the startup of our new production facility in St. Elmo, Illinois. We have been able to capture some of the SG&A synergies and some of the logistics pieces earlier in that, so that's correct. That's when we really expect to start tracking towards that run rate EBITDA of $65 million that we had talked about at the time of the acquisition.

Andrew Lazar - Barclays

Thanks very much.

Bob Gamgort

All right. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Farah Aslam from Stephens, Inc. Your line is open.

Farah Aslam - Stephens, Inc.

Hi. That would be Farah Aslam from Stephens. Good morning.

Bob Gamgort

Good morning.

Farah Aslam - Stephens, Inc.

A quick question on pricing again, can you talk about sort of how you are thinking about your pricing architecture and innovation going into next year, particularly with your good, better, best strategy.

Bob Gamgort

Sure. You said the pricing architecture? Yes, so, through our previous conversation, and we talk about our ability to expand our gross margin, it comes primarily from our Leadership Brands growing faster than our Foundation brands and our Leadership Brands being more profitable. Then also all of the innovation that we introduced being margin-accretive and that's exactly what happened in 2013.

You are right in that as we talked about for example in the fourth quarter having to get more promotional on certain segment we really are trying to trade people up a higher margin less promoted items and we've been very successful in doing that. I think probably the best example of that is in the month of December, on the Birds Eye vegetable business, where we did have to be more promotional on our line that is most closely compared to competitors, but at the same time, we are able to mix people up, which includes our margin, so the net result in the month of December on Birds Eye was that we gained substantial share and our average price was actually up and that's had benefit of this good, better, best framework that you talked about, we are able to trade people up to our more profitable segments while at the same time being price competitive on our more - segments compare more with competition.

Farah Aslam - Stephens, Inc.

Helpful. Then when you look at the M&A environment right now, could you just give us some thoughts on current deals and flow that you are seeing and areas of interest.

Bob Gamgort

Sure. We are always active in M&A and that's combination as we always talked about, about in-bound opportunities as well as those that we are proactively pursuing. You see some of the articles that are out there in the press and it seems like there are an increasing number of deals that are popping up in the industry right now. We will see if they get all the way to a completion. We know a lot of people are thinking about it right now and we are having more productive conversation and obviously we consider ourselves to be a consolidator in the industry and we love to be able to add incremental value by doing them.

Farah Aslam - Stephens, Inc.

What type of leverage would you be willing to take on for the right acquisition?

Bob Gamgort

At the time of the IPO, we talked about going up to as high as the low to mid-5 for the right strategic acquisition. After the IPO, we were at 4.2 leverage, we took on debt for the Wish-Bone acquisition, took us up to 4.7. We actually ended the year below that. On our current trajectory, we will be back to that 4.2 range around the end of the year, which gives you a sense of the free cash flow potential of this business.

I think those are the guardrails that we are still not thinking about right now that we would go as high as the low to mid-5 for the right deal and that of course assumes that it's funded 100% by debt and that we don't use the option of equity to help pay for that acquisition, but with current cost of debt that we are seeing right now, it's still very attractive tool to use in an acquisition.

Farah Aslam - Stephens, Inc.

Very helpful. Thank you.

Bob Gamgort

Okay. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Jonathan Feeney from Janney Capital Markets. Your line is open.

Jonathan Feeney - Janney Capital Markets

Good morning. Thanks very much.

Bob Gamgort

Good morning.

Jonathan Feeney - Janney Capital Markets

I wanted to dig into your input cost guidance a little bit both, in terms of its cadence over the course of the year, so what can see of the spot costs, it would seem to me as if there is a period in a year that if nothing else changed, you actually start to get a tailwind, so first of all I want to figure out. Give us a sense what the magnitude of that sort of like first quarter and then how much if it ever turn so to be tailwind how big it could be the second half of the year.

Secondly, maybe just a comment on the sort of your mix of your input and the specific affect that any of this drought in vegetable pricing, good that I am reading about that may or may not be affecting your outlook for cost for 2014. Thanks.

Bob Gamgort

Sure. Jonathan, first of all for the year for 2014, the guidance is that it's going to be a 2% inflation. As you decompose that a bit, the overall commodity basket which is obviously the most significant part of our input cost basket will move from inflation and deflation in the second half of the year. Where we are seeing some of the inflation is coming from our logistics area where you are looking at much tighter tough capacity and in our conversion costs where utilities and salary increases are driving inflation.

The early part of the year is negatively influenced by the fact that we are carrying higher cost inventory that we built from Q4, where we showed that inflation was 3% by carrying into the early part of the year. We have great line of sight relative to this area of the P&L, where 50% to 75% covered. We are fully covered for the first half. The only thing that really remains uncovered is some of the tradable brains in the back half, so I feel very comfortable with that estimate.

To answer your last question, the droughts in California had very little effect on this portfolio. Tomatoes and garlic were the largest items that we procured from California, and those are insignificant portion of our spend.

Jonathan Feeney - Janney Capital Markets

Thanks. Just one other question if I could. Could you talk about the level of marketing investment you are budgeting for the context of guidance right now and how that splits between new leadership and the Foundation Brands?

Bob Gamgort

Sure. We haven't talked about specific number. There are older numbers that we talked about here had a significant increase in our marketing budget. In addition to spending more on our Leadership Brands, we also have the addition of Wish-Bone as we talked about during the time of the Wish-Bone acquisition. Our plan was to restore marketing to this brand and start driving it as well as the category, so that's all in those numbers for '14, and almost all of our spend by the way is focused on our Leadership Brands.

Jonathan Feeney - Janney Capital Markets

Good to know. Thank you very much.

Bob Gamgort

Thank you.

Thank you. Our next question or comment comes from the line of Brian Hunt from Wells Fargo. Your line is open.

Brian Hunt - Wells Fargo

Great. Thanks for your time. I was wondering if you could talk a little a about your product portfolio and how it relates to the decline in snap payments. What exactly is your anticipation of your customer mix the potential impact on the reduced SNAP payments on your sales in 2014?

Bob Gamgort

Sure. I mean, as the reduction in SNAP really cuts across the entire food industry. I think the best estimate that we have seen is that it takes about 1% of sales out, so which add that to the list of many things that are holding down growth in the food industry which is why we have been able to build or we needed to build a model that could do well despite the top line growth and also focus on continuing to build share.

Our portfolio as we look at it is impacted on probably an average basis, not much different than food in total. That coupled with really small segments within our specialty division, we do some private-label canned meat business. It is not surprising that that would have a slightly heavier impact from a production and SNAP in terms of its impact on our profitability it's minimal, so I look at it as really one of the two or three most significant industry headwinds that we are all facing right now.

Brian Hunt - Wells Fargo

Okay. Then my next question is about Gilster-Mary Lee. I mean, when you at look at most acquisitions in the space today, it's branded company, it's a conduct multiples are quite large, 10 times EBITDA or more. Can you talk about in general terms maybe what you paid for Gilster-Mary Lee and the type synergies you are anticipating by integrating that acquisition into your business?

Craig Steeneck

Brian, it's obviously you can't look at the acquisition of a co-packer against comparing that to acquisitions and branded food companies in the industry. I think as you will recall, this was a long-term contract that we have had in place for nearly 10 years. The contract was going to expire in mid- 2015. We just felt there wasn't opportunity for us to be able to acquire the facility and related inventories. Bring that into our network, that way we have over 90% of our business manufactured in our own facilities versus outside through co-packers.

We will invest some capital in the facility which is not included as part of our normal CapEx estimate and really it's going to give us a much more significant benefit as it relates to innovation capability and working on the Duncan Hines portfolio and we will get some synergies, but those will be more spread over time. Certainly (Inaudible).

Bob Gamgort

Those productivity numbers will be built into our 3% to 4% ongoing target? That was just getting corporated in every one of our sites and will start driving productivity in our normal life. The real benefit of it is to get control of our supply chain, make sure that we are driving the best quality. Then as Craig said, it gives us a lot more flexibility from an innovation standpoint.

Brian Hunt - Wells Fargo

My last question is, when you look at historically, it usually takes the industry about six months to pass through cost deflation into their P&Ls. Certainly it's reflected, so your numbers and what you outlined makes a lot of sense based on what we were anticipating. However, can you talk about what you believe will happen to promotional cadence with the industry overall given the outlook for deflation for most companies that have Green Bay's products as we work throughout 2014.

Bob Gamgort

Yes. I think that most companies that are head-to-head competitors, that's what I would want to comment on. I have a cost basket that's going to look very similar to ours. I think our differentiator is our productivity levels that's proprietary. You can drive productivity above your competitor. It's hard to necessarily buy better than your competitors, but I think that everybody in our space is going to be looking at inflation of about 2%. I don't know what their productivity levels are going to be.

It's not as if there is tremendous windfall that's going to start the price war in my opinion. I think, whenever whatever as we continue to see an industry where there isn't a lot of top line growth and price environment is more general, there is always the temptation to promote. We saw what was happening last year and really predicted that it was going to spike up in the fourth quarter, which is exactly what has happened, so really too early to tell what's going to happen in the back half of the year, where it's going to happen I would expect it to. As I said right now, it's very competitive, but it has - I would describe it as more normal level, consistent with what we have seen over the past couple of years.

Brian Hunt - Wells Fargo

Bob and Craig, thanks for time.

Bob Gamgort

Thank you.

Operator

Thank you. Our next question or comment comes from the line of Bryan Spillane from Bank of America. Your line is open.

Bryan Spillane - Bank of America

Hi. Good morning.

Craig Steeneck

Good morning, Brian.

Bryan Spillane - Bank of America

Just two follow-up questions. I guess the first just sort of assessing, trying to get some feel for consumer responsiveness to some of your programs. Could you talk a little bit about as you are flexing the promotion in the fourth quarter how you felt like consumer responded to that to the elasticity that you were expecting to see, and I guess as you go into the first quarter and you are putting more new products in place, your confidence level I guess that the consumer is receptive to being intended to do something additional to buy the product, whether it's new, a new marketing campaign or lower price point, do you feel like a consumer sort of coming off to that being to respond to some of that?

Bob Gamgort

I guess the answer is, it all depends on the execution. If execution is there whether it's a promotional program, a marketing campaign or new product offering to consumers, there is response that is [ever]. We hear a lot about this promotions is the key, I think a lot of that relates to temporary price reduction bombshells, which are highly ineffective right now and the longer the period of time which is promotion wrong period actually more fatigue.

One of the benefit that we had in the fourth quarter is not only did we reserve the money to be able to invest to be competitive in the fourth quarter is that we committed to it early enough that we were able to lock-in the more favorable promotional event and also get our organization in place to be able to execute it in a really terrific way and that's why we got the lift as a result of that.

Similarly, with the new products that we are introducing Recipe Ready off to a very good start. Almost a one share of the category right now and we are just over 50% distribution and building on that. The television advertising just started that 1% share was before we turned onto television. As long as you're introducing products that meet their need and enable them to have a better experience or more convenient at a good value, it's a homerun, so when we talk about premiumisation or even good better best. It's not as if we are trying to trade people to super high price points or to products that they don't need. These are all absolutely needed products within the household, and in most cases if not all cases, the higher margin to us but also of great value for consumers, so I would use Recipe Ready as an example. It's a higher margin for us, but there is no prep time and zero waste in this product for the consumer, so they view this is actually a cost saving, not a price or a charge.

As long as we are building products out there with that kind of insight behind them and continue to execute at retail the way that we have had a lot of confidence in our ability to continue to perform in line or better than our category.

Bryan Spillane - Bank of America

That's really helpful. Then just the second question following up on M&A. Could you talk a little bit about just has any change in terms of where you are looking in terms of adjacencies, categories. Is the Frozen Foods category more or less attractive to you today now that almost a year has gone by since the IPO?

Are there other categories that are more attractive? Just trying to get a sense for whether as you have gone further down this path, whether there's any changing view in terms of maybe where you would be more attracted and less attracted.

Craig Steeneck

Sure. I think our strategy is largely consistent with what it's been and what we've communicated in the past. I think, Wish-Bone is a great example of our criteria for acquisition actually happening and then how we are seeing this integrated in plans that we have forward, especially in the second half of '14, having also years of confidence that it is the right strategy, so just to quickly reiterate, you we are looking for businesses that are North American in our existing or adjacent categories and I will come and talk a little bit about adjacencies.

High synergy potential and we are also looking for businesses that are Leadership or close to Leadership, not buying distressed businesses, so that's the criteria that we use as we evaluate all of the opportunities that are in front of us right now and you can imagine that they all score differently across that criteria and it's our judgment in the end that which is the right acquisition that makes this company better over the long-term.

Ideally, we would tap into adjacency that were categories that were growing faster than our average. The reality of that is, that means you typically have to go out of the center of the Frozen, and as you see some of the multiples you are paying excessively high multiples for that growth.

We know ourselves very well. We have been able to build the business model that can deliver great shareholder return also the growth that exist within Frozen and center of the store, and we like to businesses that other people have declared non-strategic or they run out of ideas and really be able to drive them further. I think, Birds Eye and the growth that we have experienced on that business and we feel like to some degree we are just getting started on that business, I think, is a perfect example of that.

We are still very interested in frozen. I'm always amazed every time I read any article about Frozen, it's generally negative. As we always talked about, there are different pockets of categories within Frozen. We are fortunate to be categories that are growing. Most of that negativity is around single-serve frozen entrées , which only represent about 5% of our sales. We know that, not only we can generate significant synergies in Frozen, but we also have a lot of confidence that we can drive growth in the right segments as well.

Bryan Spillane - Bank of America

Thank you very much.

Bob Gamgort

Okay. Thanks.

Operator

Thank you. Our next question or comment comes from the line of Robert Moskow from Credit Suisse. Your line is open.

Robert Moskow - Credit Suisse

Hi. Thank you.

Craig Steeneck

Good morning, Rob.

Robert Moskow - Credit Suisse

Good morning. I wanted to follow-up on the Gilster buyout also, because I tried to some math as to what the margins are on baking mixes currently. Correct me if I am wrong, but I thought they were below the company average, which is around 27%, so it just struck me as odd that that type of business would have below company average margins, because it's sugar and coco in a box, and I was excited about the possibility of buying out the co-packer, because I thought that would become the catalyst for margins to go quite a bit higher. Am I roughly in the right ballpark for what the margins are and are those typical in the industry like it just strikes me that this could be a much higher gross margin business based on just the simplicity of it.

Craig Steeneck

Yes. I think clearly from a manufacturing standpoint, the simplicity of it is I think you have described really well. If you go back and you look at three years ago, four years ago there was significant inflation in all those input costs that you just talked about, sugar, coco and the grains that go in there as well. There has been quite an improvement in the cost structure of that.

The profitability across the board has improved in that segment as a result of improving our normalization of prices. The real opportunity in this category is to offer differentiated products that you can charge a premium price for promote -.

I think our Decadent line is a great example that it continue to grow, it continues to expand share. We charge a some more premium price for that and we get a higher margin as a result we promoted less than we do on our core line and that's really the key to the future. There is some leverage on the cost side of the P&L, but I would argue that there is a lot of efficiency across the industry on this because of the simplicity that you described.

We look at taking control of this co-manufacturer and bringing back production in-house that's when I would say, yes, there is going to be some benefit on productivity will be on our normal 3% to 4% that we target over the long-term, but the real benefit is for us to have more flexibility and innovation which allows us to do more differentiated product, which is the [yield curve] in this industry to drive profitability. The opportunity is value-added, not so much in the supply chain type, because it's not particularly complex manufacturing profit.

Robert Moskow - Credit Suisse

Okay. I guess a different question then. There's Newswire reports that [Rag] who is up for sale and it is from a player that you've done a deal with before and the people have asked this question already in many different ways, but is it a category that has been declining for many years, spaghetti sauce? What is our appetite for on a category perspective for those types of situations?

On one hand, you are looking for growth businesses, but you also said you are also looking for brands that you think that are non-core by their seller, so you are not just buying growth brands, right? You are also buying things that could be declining as well, but could be fixed?

Bob Gamgort

Yes. Let me clarify a couple of points in case I wasn't crystal clear. In the perfect world, you would meet all of the criteria that I talked about before and it will be at faster growing category. In reality to be able to meet all that criteria is unlikely, and as I said before, anything that has more of a growth element - to pay a significant premium for as you would expect in an industry that has little growth right now, so we are not afraid of categories that are flat or declining. We are not afraid of brands, especially Leadership or host of Leadership Brands that have underperform as long as we have got the game plan to be able to turn that performance around, we would not buy any business and just hold onto it, continue to manage it the way that it's been managed and expect their performance that was in the past to continue.

We only do it if we had a game plan to turn it around. We haven't done a lot of work on a category. I read the same article that you guys have. We have done a lot work on our categories, so it's hard to meet its need specifically on that one, so think about you that salad dressing category and Wish-Bone and even when we acquired Birds Eye, those were not growth businesses. We had to turn Birds Eye for example into a growth business through a lot of the innovation that we launched.

Craig Steeneck

Robert, the differentiating factor is the synergy potential that the business can generate, which makes Wish-Bone such a good acquisition for us is it meets all the criteria that Bob articulated, and we are thus being able to in-source the manufacturing, we can generate significant synergies from that. As we analyze and look at acquisitions with synergy potential in addition to growth characteristics and center of the store Frozen brands that has adjacencies to our portfolio is a significant factor for us. Those synergies allow us to reinvest in the marketing and innovation, which is exactly what we are going to be doing in the back half of the year on Wish-Bone. That's how the model started to work much better.

Robert Moskow - Credit Suisse

Got it. Thanks for the color.

Operator

Thank you. Our next question or comment comes from the line of David Palmer from RBC Capital Markets. Your line is open.

David Palmer - RBC Capital Markets

Good morning, guys. As a follow-up to Andrew's question earlier, the synergies, I think you answered that the synergies would reach a full run rate in '15. Could you just give a little color as to how you see those synergies ramping through over the next couple of years?

Bob Gamgort

In answering that question, so we will get to full, the overall Wish-Bone's business once the full synergies are realized, we estimate will be around about $65 million in EBITDA. We will get to that run rate in the second quarter of 2015 once we have fully integrated the manufacturing into our St. Elmo liquid manufacturing facility.

There are some synergy benefits that exist in 2014, but in the grandiose scheme they are relatively minor. They are SG&A and a little bit on the procurement and logistics side, so that's obviously been incorporated relative to our estimate. You will get a full year benefit once you get to 16, but you will get three quarters of benefit once the manufacturing is integrated at the end of Q1 of 2015.

David Palmer - RBC Capital Markets

Great. Separate question on Birds Eye. It feels like in '13 when the emerging trends or an accelerating trend was the perimeter of that supermarket doing better produce meats dairy, it feels like Birds Eye, particular look at convenient advantage of steaming in the bag is in some way participating in that that wellness trend or at least to outperforming other frozen, do you think that's something you can push harder on? Is that a focus for you heading into this year, pushing harder on that trademark and see in your bag.

Bob Gamgort

Again, I think we are just getting started on this plan. If you take a look at a lot of the macro health and wellness trends are out there and you look at the debate over what is health and wellness and the different definitions of health and wellness.

The one that everybody can agree with is the fact that most Americans do not eat enough fruits and vegetables. In fact, the numbers that we start few less than 10% of American eat the minimum recommended amount of fruits and vegetables, so we this as a very expandable category and this is really vegetables of all forms.

Our more opportunity is to continue doing what we have been doing, which is look at the transformation of Frozen vegetables it's gone from a frozen block of broccoli that we all grew up with in our Steamfresh bags, the Chefs Favorites Birds Eye Voila! then the most recent launch being Recipe Ready.

We were able to tap into a lot of those cased and wellness trends in convenient, and offer people with great option for how to incorporate more fruits and vegetables into their life and I don't think that this is at all a trade-off between fresh and frozen. I think it is the expandable and that's why when you look at the macro trends on health and wellness, we feel that we are really well positioned with this brand and have been taking full advantage of that trend despite the fact we have been able to grow it today.

David Palmer - RBC Capital Markets

One last separate question on gluten-free in baking, it feels like one of your competitors has pursued that more aggressively than you have with Duncan. Is that something that's on the menu for you or how do you feel about planning to having those offerings?

Bob Gamgort

Yes. Gluten-free in total that's haven't been in the industry for almost 30 years now. We have seen and wellness trends come and go, and what I don't know is the gluten-free going to be for long-term or not although it's making a lot of impacting noise right now.

If you take a look at our entire portfolio across Pinnacle, about 50% of our products are gluten-free if chose to certify and label and as such. All the work that we have done with our consumers suggested that isn't that attractive to them. We have the ability to introduce gluten-free versions of our baking methods.

Our concern, I would be quite frank with you that the quality of those disappoint and we don't see them as sustainable or some other formats, but if there's a breakthrough, it allows us to do it in a way that meets the Duncan Hines taste profile and quality, we would accelerate that, but I think most people have been disappointed with this product therefore they try them unless they absolute need them, because celiac disease, but that's a relatively small percentage of people that are gluten free.

David Palmer - RBC Capital Markets

Thank you very much.

Operator

Thank you. Our next question or comment comes from the line Eric Larson from CL King & Associates. Your line is open.

Eric Larson - CL King & Associates

Thank you, everyone, I have a couple of questions. Most of them have been answered, but it relates to the Recipe Ready line you are now at about 50% ACV across the country. How incremental are those sales and has it had any impact on various SKUs, particularly in the Steamfresh line where you already have a bag of frozen vegetables medley of vegetables in those bags.

Bob Gamgort

It's a great question. 80% of those these sales are Recipe Ready or incremental. The way vegetables category has split out is about half of the consumption is for ingredients and half of it used as side dish. Steamfresh is clearly positioned as the side dish opportunity and that's we have been able to innovate beyond just [and] mixed vegetables into the restaurant follow these side dishes under Chefs Favorites.

Recipe Ready was really an innovation targeted at renovating the ingredient side of the portfolio, and really attracts different consumer used more in unique occasions and as a result it's very, very incremental. It's interesting that we originally envisioned that, kind of small regional test and there was so much excitement from the retail community, because they show exactly the potential that we are talking about here that we ended up accelerating it and really stretching our capacity in the early days, because based on this there is an opportunity to bring incremental sales freezer case and also just to expand consumption of vegetables and that's exactly where it played out so far.

Eric Larson - CL King & Associates

Okay. Good. Then just a related question to that I believe you said that you were planning on trying to capture another 10 points of ACV in 2014, I guess the question that I had was it seems like that ACV number seems light to me. It seems like you could capture more distribution from that if in fact performance is good is a matter of balancing the investment of the rollout for that ramp this year or but why would you not be targeting something North of a 60% ACV in that.

Bob Gamgort

Sure, so I think we will get it. By the time it would be the year end, it will be closer to 70 and we will 60 and that's a good distribution base. The decision to go beyond that gets into sliding costs and the amount that we want to invest to get in some alternate retailers or channels, but look 70% ACV distribution is great and obviously we feel like we got enough coverage right now that we turned on the national television advertising and we will start to see velocity increase as a result of that.

Eric Larson - CL King & Associates

Okay. Thanks, guys.

Craig Steeneck

Sure.

Operator

Thank you. Our next question or comment comes from the line of Ken Zaslow from Damon Capital. Your line is open.

Ken Zaslow - Damon Capital

Hi. Good morning, everyone.

Craig Steeneck

Good morning, Ken.

Ken Zaslow - Damon Capital

Just two questions, just follow-up, one is you don't talk a lot about Foundation Brands. I get it that there is enough focus, but it seems like if I look at the sales growth of the businesses, they maybe a little bit below the zero, and is it really worth trying to find some of these and maybe able to be a little bit [more] and maybe devote a little resource to it. It just seems like you are starving there. (Inaudible).

Bob Gamgort

Ken, I would appreciate you asking that question because in the interest of time, we typically focus on our conversation on our Leadership Brands, but there is actually a lot of work that goes on our Foundation Brands. As we talked about at front, when we defined Leadership versus Foundation, we spent most of our marketing dollars on Leadership Brands and we also are driving more true innovation on our Leadership Brands and the reason is because they are the most responsive to that marketing to an earlier question and they also want to have a highest potential for innovation.

Foundation Brands, we have to constantly renovate those through our fresh and the benefits bring new benefits to them, make sure that we got all of the execution in-store are absolutely perfect with them, so we have a whole team that's focused against those Foundation Brands that works very hard to get them, so I actually appreciate the opportunity to talk about them a little.

If you take a look at, for example, our share performance in the month of January of the six Foundation Brands that we track we grew share in five out of the six, and that doesn't happened unless you are focused on them and you are improving. We have got a lot of ideas that we haven't really talked about yet on Foundation Brands that we will probably on the next call, we'll talk about improving the packaging delivery on some of them, introducing the flavors with a lot of line expansions that go in there.

I will make sure that we actually highlight those on the next call, so that we don't neglect them in these conversations, but our performance on Foundation Brands has actually been pretty good. I think to your other point, can a Foundation Brands become a Leadership Brands? Yes. If we see that we are able to do something with them to tapped into one of those trends, sure we will be happy to be able invest more in that, but I think the message you got to take away is that we are very focused on where we place our investment and one of the reasons that we are happy with the consumer lift that we are getting on our marketing programs, promotion programs and innovation, because we understand which of those brands are most responsive to that of activity. If we were to spend money and activity equally across the portfolio, we wouldn't be happy with that result.

Craig Steeneck

Ken, we have seen a more improvement in the gross margin percentage of those Foundation Brands, so the productivity programs are clearly working there as has the renovation and the anything related price that we have seen a very nice improvement in the gross margin percentage in Foundation in 2013 and anticipate in 2014.

Ken Zaslow - Damon Capital

Okay. My last question is, when you talked about cost savings, you don’t give us kind of details like, what are the key levers within the efficiency programs and you are looking to do in there, opportunities to accelerate or there could be snack foods one way or the other way that how do you actually think about how did you guys have been exceptional at delivering the cost savings opportunities, but the question is are there opportunities to exceed that and what are the risks that you don’t deliver?

Craig Steeneck

Ken, we have given the long-term guidance relative to productivity at 3% to 4%.The last two years, we have generated around about 4% in both years and it's driven by our holistic program called MVP, which is multifunctional in nature and really breaks down the P&L into components and has teams dedicated on the manufacturing side, in the logistics area, in procurement and R&D, where we are looking at formula modifications, where we are looking at optimizing formulas, optimizing vendors, so it’s a holistic program with literally hundreds of projects in it that are reviewed at the senior level once a month and we feel very confident about the range that we put forward relative to 2014.

As I said, it's something that we have a good line of sight on and something that we have articulated. We had nearly a 100% of our 2014 productivity estimate locked in coming into the year, which give us a great comfort that we are going to be certainly in that range.

Bob Gamgort

Yes. Just to add a little more colorful. We managed the pipeline of productivity program similar to the way that we manage our innovation pipeline. We have them all at different stages. We wait them based on our level of certainty and where they stand in the pipeline and we had a system to track them throughout the progression from concept to realization and also try to model how they're going to reach the P&L, because there's as somebody said earlier on the call, there is a lag between when the project happens sometimes when it reaches the P&L.

This enhancement that I am talking about is really something that we perfected over the last couple of years, so it's a very well embedded in the culture. It's got a great tools and system behind it and this is something that as a senior team we review very, very frequently to manage that pipeline of productivity idea. The reason we do that is, because we think it's a real differentiator on performance and it give us the firepower that we need to invest back in the business.

Ken Zaslow - Damon Capital

Okay. Appreciate. Thank you.

Craig Steeneck

Okay

Operator

Thank You. We have time for one final question. Our final question comes from a line of Matthew Grainger from Morgan Stanley. Your line is open.

Matthew Grainger - Morgan Stanley

Hi. Good morning everyone. Thanks for the question.

Maria Sceppaguercio

Good morning, Matt.

Matthew Grainger - Morgan Stanley

Just two things, Bob, we heard mixed feedback from your peers about inventory levels at key retailers during the holiday period. Just curious for your thoughts if you are seeing any changes far as the overlay between shipments and consumption and how it has trended to do during the first quarter?

Bob Gamgort

Yes. We have seen some of that, but clearly we have got a couple of big retailers down the fiscal end in month of January, and we noticed a little bit at the end of December and we noticed during the month of January our expectation is that gets smoothed out over the first quarter. It's a little frustrating as organization we take a look at the difference sometimes between consumption of shipment that haven't been in this industry for long time. One thing that's true, focus on the consumption because the shipment always catch up the consumption one way or the another over time and that’s what we are seeing in the month of February and into March, but clearly there were some pressure on cash flow and I think it shows up in our ended December and certainly early January shipment.

Matthew Grainger - Morgan Stanley

Okay. You would expect that to be normalized in your first quarter numbers or should we expect perhaps a bit of an impact that adds to the Eastern headwinds?

Bob Gamgort

Yes. Even I was going to say that, because it gets a little bit confusing is then to get caught up in the Easter number as well, so obviously when we plan our first quarter, we build into Easter impact. I think our expectation is it will largely catch-up by the end of the quarter talking about the some of the inventory reductions, some of that, I believe, a little bit into April, it's really hard to call, but we are seeing it start to catch up is the way I would characterize that, we are hopeful that it gets all the way there.

Matthew Grainger - Morgan Stanley

Okay. Thanks. Sorry, Crag if I could get squeeze in one more.

Craig Steeneck

Sure.

Matthew Grainger - Morgan Stanley

Apologies if I missed this, but can you give us a sense of how you see gross margin progressing year-over-year in 2014? You have got positive mix, favorable productivity inflation. Roughly, what level of I would assume expansion do you expect? Then if we are thinking about the drivers, how much of a mixed contribution is there from Wish-Bone and Specialty business, continue to decline faster?

Craig Steeneck

Look, Matt, I won't give you a specific, but it's the decompose component. We are saying inflation is going to be at 2% and there will clearly be more inflation in the first half less in the second half. Productivity will be at 3% to 4% again more second half rate, so if you pick the midpoint there you are going to get a delta of 3.5 to 1.5 relative to that.

We certainly see continued improvement in mix in 2014, similar to what we drove in '13 with Leadership Brands growth being higher percentage versus Foundation. Then you can start to flow through some of the synergy benefit you get from Wish-Bone which is not substantial in 2014, certainly more so in '15 and beyond. Then the Wish-Bone brand, these are the higher gross margin than our average portfolio, so you will see some mixed benefit from.

Bob Gamgort

I think, we have got visibility obviously to all those elements that Crag talked about. The one wildcard in all of this is, do we have to spend any of the backend pricing. We are very transplant about that into '13 and that's the piece that we have hold in reserve right now and we have an assumption that we might have to spend some of that back. The time will tell.

Craig Steeneck

Certainly, that covers that you could anticipate that we will see gross margin expansion quarters in our [quarters] in 2014.

Matthew Grainger - Morgan Stanley

Okay. Great. Thanks, everyone.

Craig Steeneck

Okay. Thank you.

Operator

That's all the questions that we have at this point. I will turn the conference back over to you, sir.

Maria Sceppaguercio

Thanks, everyone. We are around today, so give me a call if you have any follow-up questions. We appreciate your support and interest. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

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