Pinnacle Foods' (PF) CEO Bob Gamgort on Q1 2014 Results - Earnings Call Transcript

May.14.14 | About: Pinnacle Foods (PF)

Pinnacle Foods Inc. (NYSE:PF)

Q1 2014 Earnings Conference Call

May 14, 2014 09:30 ET

Executives

Maria Sceppaguercio - Senior Vice President, Investor Relations and Communications

Bob Gamgort - Chief Executive Officer

Craig Steeneck - Chief Financial Officer

Analysts

Andrew Lazar - Barclays

Farah Aslam - Stephens, Inc.

Robert Moskow - Credit Suisse

Sachin Shah - Albert Fried

Eric Katzman - Deutsche Bank

Ken Zaslow - Bank of Montreal

Jason English - Goldman Sachs

Bryan Spillane - Bank of America

Eric Larson - C.L. King

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Pinnacle Foods Earnings Conference Call First Quarter for March 30, 2014. 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 our host for today’s conference, Pinnacle’s Senior Vice President of Investor Relations and Communications, Ms. Maria Sceppaguercio. Please go ahead.

Maria Sceppaguercio - Senior Vice President, Investor Relations and Communications

Thank you, Ashley. Good morning, everyone and thanks for joining us today. Here with me to discuss our results for the quarter are Pinnacle’s CEO, Bob Gamgort; and our CFO, Craig Steeneck. Earlier this morning, we issued our press release for the first quarter of 2014. If you haven’t received a copy of the release, you can get one on our website at www.pinnaclefoods.com.

As you know, on Monday of this week, we announced that we entered into a definitive agreement for the sale of the company to Hillshire Brand. The transaction is subject to customary regulatory and shareholder approval and is expected to be completed by September 2014. The merger and voting agreements related to this transaction has been filed with the SEC.

I want to emphasize that the purpose of today’s call is to share with you our results for the quarter and to provide the opportunities for you to ask questions. Given the announcement on Monday, we expect the call to be brief and we will not be taking any questions regarding the pending transaction.

Turning to the quarter, consistent with our reporting in previous quarters, we have provided in our press release and we will discuss here this morning our results on an adjusted pro forma basis. This assumes the IPO and the subsequently financing occurred on the first day of fiscal ‘13 and excludes IPO and refinancing expenses and restructuring related and other items, which we collectively refer to as items affecting comparability. Stock-based compensation expense as we discussed last quarter is now included in our results. 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-Q, which will be filed later today. Also reconciled in our release and 10-Q 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.

Finally, I would 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 will hand it over to Bob.

Bob Gamgort - Chief Executive Officer

Thanks, Maria and thanks to everyone for joining us today. As you know, it’s been an eventful week for us. The pending transaction with Hillshire is a testament to the success we have had building Pinnacle into the great company it is today as well as the confidence we and others have in our business model and outlook for the future. Our shareholders have been rewarded by the value offered from this transaction.

We also see the combination of these two businesses to be highly strategic resulting in a stronger single company with increased gallon capabilities, including the ability to access new sources of growth across both portfolios. The combination also enhances the ability to drive ongoing cost efficiencies. As you know, the transaction is subject to regulatory approval as well as approval of Hillshire and Pinnacle shareholders. In the meantime, the team here at Pinnacle will continue to manage the business as we have all along, executing our focused business model that creates value. We at Pinnacle pay great pride in our company and our brands and we are committed to both continuing to deliver results in line with 2014 guidance we provided previously.

Now, turning to the quarter, first quarter was a good one for us despite the industry growth challenges driven by the late Easter and unusually tough weather earlier in the quarter, we delivered results that were consistent with our guidance. Starting with the top line, we grew consolidated net sales 5% and North American retail net sales approximately 8% driven by share growth and the benefit of the Wish-Bone acquisition. Our calculation of the impact of Easter timing suggested it was an approximate 2% drag on growth in the first quarter.

We again outpaced the performance of our categories enabling us to grow our composite share for the quarter. In fact we grew share in 10 out of 13 categories. All of our leadership brands grew share in the quarter except syrups and Wish-Bone. And as we discussed previously the Wish-Bone share results were expected given that we continue to cycle pass the heavy year ago promotional spending on the business in advance of its sales. In addition, our foundation brands also delivered strong share performance in the quarter.

In terms of margin, we expanded our adjusted gross margin by 70 basis points driven primarily by improved product mix, which is an important element of our strategy. While we expect productivity to outpace inflation for the year, it actually was the opposite in Q1 which demonstrated the importance of driving improved mix in order to be able to expand our margins. Altogether these elements drove EBIT growth of 10% for the quarter. Also as expected our interest expense was higher in the quarter due to the debt we assumed to fund Wish-Bone acquisition. While our effective tax rate was lower, the combination of all of these factors enabled us to deliver adjusted diluted EPS of $0.36 compared to $0.34 in the year ago period.

Turning to our Birds Eye frozen division revenue was up approximately 1% driven by the leadership brand portfolio particularly Birds Eye Voila! which continues to benefit from distribution expansion and the introduction of new on trend varieties as well as the successful lent for Ms. Paul’s and Van de Kamp’s seafood. Birds Eye vegetables net sales were down modestly in the quarter due primarily to the timing of Easter as well as new product introductory cost and share was actually up 0.6% for the quarter. Our foundation brands were even with the year ago with growth of Hungry-Man driven by our new higher priced Hungry-Man Selects varieties, offset by the balance of the frozen foundation brand portfolio.

EBIT for the division was down about 5% reflecting the timing of inflation versus productivity in the quarter. Our new Birds Eye Recipe Ready line of pre-chopped and blended vegetables continued to build distribution and trail. At the end of the first quarter ACV distribution for Recipe Ready exceeded 55% and we continue to expect to achieve distribution of about 60% to 70% by year end. The business which is highly incremental to both the category and Pinnacle enjoys very strong repeat rate and has a responded well to consumer marketing including the television we debuted during the first quarter. We plan to continue to invest in driving awareness in trail.

Our Duncan Hines Grocery division posted another quarter of strong top line growth largely driven by the benefit of Wish-Bone, partially offset by Easter related timing on Duncan Hines and Vlasic. EBIT for the division was up 41% reflecting Wish-Bone and a favorable inflation productivity relationship. Market share for the quarter was strong across most of the portfolio. During the quarter we introduced Duncan Hines limited edition Spring Velvets which expands on the successful holiday Velvet intro last quarter and a Decadent Slected Caramel Brownie variety which taps into a popular flavor trend.

Turning to Wish-Bone, the business continues to be on track with our expectations including our planned timing for startup of intro manufacturing at the end of the first quarter of 2015. During the quarter we added two new flavors of pourable salad dressing and two new dry mixes as well, all of which were sold into the trade prior to our acquisition of the business. Our specialty food division which includes our private label food service and snack businesses posted lower sales even in the quarter largely a result of lower sales of private label canned meat in a heightened competitive bidding environment. Finally, a critical component to our value creation model cash flow generation. Once again we delivered excellent cash flow results, significantly exceeding year ago levels.

With that, I will hand it over to Craig who will take you through the financial details of the quarter.

Craig Steeneck - Chief Financial Officer

Thanks Bob and good morning everyone. Starting with sales, our consolidated net sales increased 5.1% in the first quarter to $644 million largely driven by the benefit of Wish-Bone partially offset by the unfavorable impacts of the later Easter and a declining sales in our Specialty Foods division.

As Bob mentioned earlier, the later timing of Easter this year negatively impacted sales in the quarter by approximately 2%. North American retail net sales advanced 7.6%, reflecting an 8.7% benefit from Wish-Bone and slightly higher volume mix. Partially offsetting this growth were lower net pricing of 0.8% related to higher new product introductory expenses and unfavorable foreign currency translation of 0.4%. For our Frozen division, net sales increased 0.6% largely driven by an increase in volume mix. The growth was driven by our Leadership Brand portfolio, while sales for our Foundation Brands were flat.

For our Duncan Hines division, net sales advanced 16.6%, due to a 19.8% benefit from Wish-Bone partially offset by lower net pricing of 1.8%, a decrease from volume mix of 0.5%, and unfavorable foreign currency translation of 0.9%. For the base business, net sales growth from Armour canned meat and Nalley chili was offset by Easter-related declines in Duncan Hines baking products and Vlasic pickles.

Finally, for our Specialty Foods segment, net sales were down approximately 9% in the quarter. This performance was driven by lower volume mix of 8.7% and lower net pricing of 1% partially offset by 0.6% benefit from the Wish-Bone foodservice business. As we indicated last quarter, we expected Specialty Foods sales to be down in the quarter due to the softness in the private label canned meat market and the result in heightened competitive bidding environment. While we expect specialty sales to remain under pressure, we continue to expect specialty EBIT to be up for the full year.

Now, turning to gross profit, for the first quarter excluding items affecting comparability, our gross margin expanded by 70 basis points to 26.2%. Importantly, we delivered the strong performance despite inflation that exceeded productivity of the quarter due to improved product mix, including the benefit of the higher margin Wish-Bone business. Inflation in the quarter totaled approximately 3.5%, largely driven by higher cost inventory from 2013 flowing through Q1 2014, while productivity totaled about 3%. We continue to expect inflation to be higher in the first half of the year, while productivity is expected to be greater in the second half of the year.

Moving on to adjusted EBITDA. Adjusted EBITDA totaled $113.1 million in the quarter, which was up approximately 9% versus prior year. This performance reflected the growth in net sales and gross margin expansion partially offset by increased administrative expenses largely reflecting higher equity-based compensation expense. Interest expense for the quarter on an adjusted pro forma basis increased 20% to $24.4 million driven by the additional Wish-Bone acquisition debt. For the full year, we continue to expect total interest expense to be approximately $100 million.

Adjusted pro forma net earnings advanced 7% to $42.3 million or $0.36 per diluted share in the quarter compared to $39.5 million or $0.34 per diluted share in 2013. The growth in net earnings largely reflected the growth in EBIT partially offset by higher interest expense. The timing of Easter negatively impacted the quarter by approximately $0.02 per diluted share.

In terms of our outlook for the year, we continue to expect diluted EPS in the range of $1.70 to $1.75 after giving effect to stock-based compensation expense and items affecting comparability. This guidance continues to incorporate input cost inflation for 2014 of approximately 2%, productivity in the range of 3% to 4% of comps, and effective tax rate of approximately 38.9% and a full year weighted average diluted share count of 117.2 million shares.

Now, turning to cash flow. Cash flow from operations totaled $94 million in the first quarter of 2014 compared to $68 million in the year ago period largely reflecting the growth in earnings before income taxes. Capital expenditures during the quarter totaled $22.4 million compared to $18.2 million in the first quarter of 2013. For the year, we continue to expect capital spending to be in the range of $120 million to $130 million, including approximately $50 million for the Wish-Bone capital. At the start of Q2, we closed on the previously announced acquisition of the primary Duncan Hines manufacturing operations from our co-packer Gilster-Mary Lee. As we discussed with you last quarter, the total purchase price of the business was $16.5 million plus the value of inventories, which totaled approximately $10 million.

Now, turning to debt, at quarter end, total debt was $2.5 billion, including $2.1 billion in term loans in 2020 and $350 million in 4 7/8% notes through 2021. We had no outstanding revolver borrowings during the quarter. Cash on hand at quarter end totaled $158 million bringing our net debt to $2.3 million. Pro forma for the Wish-Bone acquisition, our net leverage at the end of the quarter was 4.6 times.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Andrew Lazar of Barclays. Your line is open.

Andrew Lazar - Barclays

Good morning, everyone.

Bob Gamgort

Good morning, Andrew.

Andrew Lazar - Barclays

Bob, a big part of Pinnacle’s strategy has been on the M&A front, you have talked often about some of the potential you saw being able to hopefully consolidate some of the Frozen category a bit over time? So, I am wondering if irrespective of the Hillshire deal, I’d love to get a better sense from you on perhaps what being bigger in the Frozen case might have done for Pinnacle? Forgetting about the potential financial accretion, I am really interested more in the strategic rationale. Is it just the scale that would help you? Does being bigger in Frozen help in other ways, such as with retailers or from what you can do from a demand building perspective? I am just trying to get a sense of any specific examples maybe that would be of help here?

Bob Gamgort

Sure. Look, I will answer from the perspective in which you asked, which is how do we think about the Frozen category from M&A standpoint. And as we talked in these calls as well as most recently as our CAGNY lunch and how we were excited about making acquisitions in Frozen. I mean, we look at Frozen and a couple of facts, incredibly large temperature class is made up of a bunch of different categories. From a retailers’ perspective, it is really important not only from sales, but from a profit perspective, they have a lot of assets tied up in it. And it’s one of the areas, where we know the space isn’t shrinking. In fact, if you look at alternate channels, space for Frozen is actually growing as dollar and drug continue to add freezer cases. So, it’s one of those unique opportunities, where you know that the space is fairly locked in, in traditional and yet it’s expanding in non-traditional. So, we saw that as a really good long-term trend.

We also know that Frozen is not one category from a consumer perspective. It’s made up of a number of different individual segments. And if you look at the numbers, they have very different growth levels. Some of the areas that have been much better in growth have been seafood, vegetables and fruits, frozen breakfast, anything that’s in a handheld format. And so when it gets kind of tapped in one category that’s always written as challenge, we never look at it that way, because we look at pockets of growth within there, many of which that we participate that we really like. We have been attracted in consolidating that space when it’s fairly fragmented, especially when you look below the top five, we know from firsthand experience with the Birds Eye acquisition that there are tremendous synergy potentials. You can really get it above average cost levels in Frozen, because of the manufacturing capabilities and the logistics synergies that are possible. We also know that category, excuse me retailers are looking for somebody to step up and help them lead the category. And it’s a really unique position to be in, because as I said that space is large and it’s fairly fixed. What was open for discussion is where does that space get allocated and how does that section get promoted?

And we have been taking an increasingly bigger leadership role in that category largely because we have been one of the few companies that’s been talking positively about frozen. So you can imagine if you are retailer, you all want to work with people who are excited about it. And we have been encouraged by them to get bigger in frozen for that reason. So I mean I will give you a lot of examples but the most recent one is incomplete (indiscernible) mills we have been getting more and more space handed to us by retailers because of our strong performance on Birds Eye Voila! and our vision for that section, whereas some other brands have really faltered in that category. And we actually find ourselves in some position being maybe for the first time in my career getting more retail space than we wanted to in some of these segments.

So we know that by adding new brands into that portfolio we can drive cost out of the revenue side. I think the other thing that we have been looking at in frozen is it’s obviously not an indiscriminate described by anything frozen. We have been very thoughtful about where we would want to go. And part of the opportunity is to bring new capabilities in. I mean one, I will just throw one example I said handhelds are growing. And we have got a lot of brands that will play really well in handhelds and we kind of doubled in that space with co-manufacturers. But if we were able to get a capability to allow us to be more serious in that space, that will be great from both growth and profitability. So I will pause and see if you want to drill on anymore. Sorry for the long answer but as you know we have a lot of passion for frozen and for the upside in that space and clearly we thought a lot of that but over the past couple of years.

Andrew Lazar - Barclays

Thank you for that. That’s really on the lines of what I was looking for. One quick follow-up on the quarter would be how much if any of the negative price mix that you saw, the negative price that you saw in the quarter, was any change to the promotional environment or – because I know you have said in the recent past, all the categories were always competitive, it seems like we were not at least in this race to the bottom as of yet, so has there been any change or is it primarily really just some of n the new product launches and things that you had sort of estimated in the way you budgeted the year.

Bob Gamgort

Yes. I think a look at the IRI results and it’s important to say we are talking specifically about the quarter, but we now have IRI results through April which is helpful because it allows us to look at least on a consumption basis and share basis at an industry with the noise of Easter is at least removed. And so my conclusion after looking at the first 12 months if the pricing environment is slightly improved versus the fourth quarter no surprise there. I would characterize it as fairly consistent to what it’s been and really nothing remarkable and any of the negative pricing that you would see in our numbers a lot of that is due to and Craig you can jump in timing, sliding and some other features. But when you look at our effective price in IRI, it’s pretty much in line with our categories very similar to what it’s been.

Craig Steeneck

So Andrew we noted in the script and in the Q that will be filed shortly, the overall pricing for North America retail for the quarter was only down 0.8%, so less than 1% and most of that was the slotting cost of the new product introductory costs in this quarter that were different from the year ago.

Andrew Lazar - Barclays

Great. Thanks very much everyone.

Bob Gamgort

Thank you.

Maria Sceppaguercio

Thank you.

Operator

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

Farah Aslam - Stephens, Inc.

Hi, good morning.

Bob Gamgort

Hi Farah.

Farah Aslam - Stephens, Inc.

Could you share with us the performance of Duncan Hines and the rest of the portfolio in particular Birds Eye for the Easter seasons?

Bob Gamgort

Yes, so when I take a look at March-April and I get I have the consumption numbers, I don’t have the share numbers right in front of me I can get them in a minute but I can tell you that both the Birds Eye brand and the Duncan Hines brand when I look at March to April had absolutely terrific share performance and both grew absolute consumption in negative categories. But I take a look at from an industry perspective when you look at March-April it’s moved out the noise and the timing of March into April, but I can tell you from a total industry perspective, it wasn’t a very robust Easter when you compare to the same time period a year ago. And we see across a bunch of categories a lot of negative numbers. But for example our March-April consumption on veg was plus 1.5 in a category that was down pretty historically our baking business was up 3.1% consumption in a category that was down pretty significantly down about 3%. So Maria do have the shares handy on those, I have another consumption and you might…

Maria Sceppaguercio

Yes, vegetable we actually grew in the eight weeks 1.2 share points and on baking with 1.6 share points.

Bob Gamgort

So those are I mean as you know which is why you are asking the question, those are category that are really impacted by Easter and I feel great about the programs we have put in place is evidenced by the share.

Farah Aslam - Stephens, Inc.

And just a follow-up on that sort of that program around the holidays, if you look at your success on the top line, do you think it’s driven by new products, your sales teams. If you had to kind of highlight the things that you have changed over the last two years or three years at Pinnacle that’s built the organization, could you just share with us your product innovation efforts and particularly your sales team strength?

Bob Gamgort

Sure. I think it’s – as it’s typically the case, it’s a number of things that converge to deliver great results. It’s not a here is one thing that we did. So, let me give you just a couple of them. I think one is we will start with sales organization, which you are asking about specifically. If you recall last year, we converted a number of our headquarters from broker to direct. And in fact, we now represent more than half of our headquarter sales with our own people. We had a higher number of people and get up to speed. The good news was there were no issues in that transition, which are hopeful on year two and then you say we want to start to gain traction from that. Clearly, we are getting very good traction from having our players with a dedicated focus of talking to customers. And we continue to build good strategic business relationships with the team. So, I have to complement our sales team for just outstanding execution during that time period.

The other piece of it is the combination of new product and marketing efforts, Duncan Hines, we have had good success now introducing seasonal new products. We had holiday limited edition at Christmas. We did the same thing in spring, which has a big benefit. And then in the case of veg, it’s a combination of higher value-added products in terms of helping not only mix, but growth and some of it being Recipe Ready, but also chef’s favorite and some of the higher end items that do really well during holidays. But one of the things you see during the holidays is branded typically grows at the expense of private label and higher end items typically get better performance, which is great value from a growth, but a profit standpoint. We certainly got that. And also I think we sharpened our pricing strategy as we did in the fourth quarter on veg, where we got more aggressive on certain items and less aggressive on other items and the balance worked out really well from a combination of share growth and profit. So, again sorry for the long answer, but it’s always a combination of a bunch of things that work to drive share growth. It’s never as easy, it’s just one thing.

Farah Aslam - Stephens, Inc.

Thanks for the additional color.

Bob Gamgort

Sure.

Operator

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

Robert Moskow - Credit Suisse

Hi, there. Hey, Bob, I wanted to get your thoughts on the potential in the shelf stable part of the store for brands that are in the refrigerated or frozen section to kind of come in and introduce new products that play well in the middle of the store. Obviously, your acquirer has talked about that as being a big part of the strategy and how much room is there in the middle of the store and how hungry our retailers for yet another brand to come in to some of these categories?

Bob Gamgort

Retailers are hungered for any brand that will bring a new solution and a new set of consumers potentially into any section of the store. And I think one of the untapped potentials in many companies, and obviously, I am not going to speak about this one in particular, but Easter really transfer the benefit with strong trademark that exist in one product format into another format as long as you are delivering the same benefit that exist. And I will give you an obvious one in the case of Wish-Bone, Wish-Bone is a leader within the pourable salad dressing. And the total salad dressing category has been growing about 2% per year. We have taken a look at that and said how do we get into the refrigerated side of the portfolio, because the Wish-Bone brand is completely expandable into that, especially in a premium format. And yet we haven’t had the capability to do that and refrigerated salad dressings have grown nicely. So, I think there if you step back and you say brand stand for benefit and they don’t stand for the temperature state or a format, they stand for a benefit. And what we do with our innovation pipeline is we try to extend that brand’s benefit into other forms. The practical side of that is if you don’t have capabilities in certain temperature classes, it doesn’t make sense to launch brands as a one-off.

I will remind everybody that when we launched Farmer’s Garden, the consumer wanted to see it in refrigerated and produce. While we did that, we had tremendous results, but it was only in the 2% of the ATV we are able to reach and the profitability wasn’t very good. So, we pivoted and we launched in shelf-stable and it’s done well. It would have done better in produce and refrigerated have we have been able to do it. So, I think it’s a matter of the consumer wants to see these brands everywhere. Does the company has the capability to profitably deliver these brands in different formats. So, I think it’s wide open.

Robert Moskow - Credit Suisse

Okay. A quick follow-up, the food PPI data came out today and it’s much more inflationary than I thought, it’s over 4%, I imagine a lot of it is protein-related, but Craig, are you seeing anything on the horizon, where your ingredient costs could be going up quite a bit?

Craig Steeneck

I mean, Rob, when we did the call last quarter, we had our input cost guidance, our all-in cost inflation at 2%. We remain – we remain at that guidance level today. We have certainly seen input cost inflation in proteins and in dairy and incredible grains, but because the hallmark of this portfolio being the diversification of the input cost basket, that diversification has allowed us only to get minor increases in those categories. And we are still very comfortable that 2% all-in inflation for the year is still the right answer.

Bob Gamgort

Rob, just to add to it, as Craig talked about, one of the things we talked about with you guys in the past is about how broad our input cost basket is. We really show up internally. We always have something going up significantly, but it’s usually offset by something else going down. And so that’s been our – with the exception of one or two years, where everything the food industry went up, we have been able to withstand a lot of these shocks and offset them. That’s certainly is the case today. I think the other piece that’s interesting, you mentioned dairy and protein, but also fresh vegetables and fruits have gone up dramatically. A lot of that has been sourced from California. We know the issues in California. We do not have a much coming from California at all across our input cost basket. And as I think you guys know most of our veg sourcing is from the Midwest. And so I think we may be in a position where if the fresh produce prices continue to be high, it actually can be a benefit for the frozen category, what we offer relatively good value.

Robert Moskow - Credit Suisse

Got it, thank you.

Bob Gamgort

Sure.

Operator

Thank you. Our next question comes from Sachin Shah of Albert Fried. Your line is open.

Sachin Shah - Albert Fried

Hi, good morning.

Bob Gamgort

Good morning.

Sachin Shah - Albert Fried

I just want to talk to you about the deal the stock has kind of traded off a little bit on a implied basis, because of Hillshire’s stock declining as well, because of the stock consideration, but more importantly, I don’t think some questions as far as them being speculated on being acquired has been really addressed in a public way? So, I know it’s a different company, but at the end of the day, the merger agreement the way it reads, it leads people to further speculate that something else is going on here with them even though they are the acquirer and they are acquiring you? So, how can you maybe address to shareholders of your company more importantly here to show that this deal is moving forward and that both board’s commitment to seeing this deal to the finish line is obviously there?

Maria Sceppaguercio

This is Maria, hi. Thanks for your questions.

Sachin Shah - Albert Fried

Hi, Maria.

Maria Sceppaguercio

Hi. What I want to just get back to is what we said at the outset is that the purpose of the call was really to talk about the quarterly results and provide investors the opportunity to talk about the business fundamentals. And this call is not about the transaction and we are really not going to take questions regarding that. So, I know it’s of interest and there is a lot of speculation out there, any speculation. And we just don’t often take questions regarding that.

Sachin Shah - Albert Fried

Okay, fair enough. Thank you.

Operator

Thank you. Our next question comes from Eric Katzman of Deutsche Bank. Your line is open.

Eric Katzman - Deutsche Bank

Hi, good morning.

Bob Gamgort

Hi, Eric.

Eric Katzman - Deutsche Bank

It was great following you for a solid month, we appreciate we enjoyed every moment of it. I guess kind of following up on Rob’s question. So we are seeing more inflation, Bob, I think you said volumes in the industry although you are doing reasonably well, volumes in the industry continue to be soft. Easter wasn’t as good as expected. So I guess Bob, not to talk specifically about this transaction, but what are you putting on your industry, what do you think that means for kind of the industry both from a fundamental perspective, do you think companies really and the consumer have an ability to take pricing on the back of inflation today? Is this going to result in more portfolio adjustments across the industry maybe just kind of pontificate on that? Thanks.

Bob Gamgort

You know I don’t pontificate, so I will take that as an opportunity. Let me talk first about what I think is going on in the industry from a growth perspective and clearly we thought a lot about that. I won’t talk about M&A more generally because I do think one the stalls for this from a manufacturer standpoint is M&A. So just from a growth standpoint, I realize we would always reporting – obviously we are tracking the stuff month by month. There was a lot of noise, probably more noise than ever year-to-date because of it’s not just the Easter timing which happens all the time but the tough weather and how you read in the weather. It’s hard to believe now with the temperature finally breaking 60 degrees in New Jersey, how bad the winter was back there.

But when I step back now and I will get the four months worth of data. I would say that my conclusions are we had great share performance as I said we gained share in 10 out of 13 categories, but this industry is still very growth challenged. And even though I am very happy with the performance we had at Easter and disappointed with the level of growth that we see when you smooth out a lot of the Easter noise. So when I set back and I say is that surprising, it really shouldn’t be surprising any of us. This is always routed in the health of the consumer. And in the end the problem was caused by the health of consumer, it will get solved ultimately by the health of consumer. Everything else that we do as manufacturers and retailers in the meantime is to try to bridge the gap until the consumer is healthier.

I started to think about I can list a long number of negatives that are impacting the consumer today including unemployment, no growth in real income, snap reductions etcetera, etcetera. But then you have to pile on top of that in the first quarter they also had probably their highest heating bills they have ever had. And well read about also personally I am sure we turned our tax returns and in April we were surprised by how much higher they were because there were lot of kind of hidden taxes (indiscernible). People felt a lot poor than they did after the winter and in April than they probably expected.

I will try to find what’s the list of positive catalysts are and I can’t find one right now. So as a manufacturer you say we keep driving what we can control. We control share growth. We believe we have a huge influence of share growth as evidenced by our results. We keep trying to drive innovations that not only just take share but bring new benefits to consumers. They will try to bring some excitement. We told we are completely focused on margin expansion because that is the biggest controllable. And a lot of this which will kind of quick (sauce) on this growth issue was go to emerging markets or let’s go on to ultimate channels. They don’t appear to be as great as they once were, see the issues with emerging markets and then look at whole foods performance year-to-date, even whole foods is vulnerable in this environment.

So I think again you could tell that all the stuff that gets down to how healthy is the consumer, not very healthy, when will they be healthy again, I don’t know but we got to prepare to run a business and deliver value in the meantime that won’t last for ever, but we need to see some positive catalyst. As a result one of the biggest stalls in this environment is M&A. And I think we did the CAGNY Luncheon we had a really good conversation about M&A. I said there were probably four reasons, probably four reasons why M&A was going to heat up in 2014, I had no idea. Our good month prediction was going to be I just didn’t expect to be on the other side of that conversation, but I said the industry is incredibly growth challenge and it won’t get fixed in ’14.

There is an incredible pressure to reduce cost. There is more activism than ever to do something. And there feels like there is a debt window right now to do deals with low debt. And I would also say by the way those things are linked, are absolutely linked. The reason that debt is still low is because the economy is still weak. So it’s exactly what’s happening and I think it will continue to happen. And I think it is at stall that gets people through the next couple of years until the consumer is feeling better again. But we are not going to see growth in this industry until that happens.

Eric Katzman - Deutsche Bank

And is that – I will just follow-up quickly do you think that your peers because of the tax basis of the assets that’s always been the impediment to changing around the portfolios, do you think that we are at a point now where the challenge CEOs and Boards are willing to take tax dilution to change the portfolios around tax related dilution?

Bob Gamgort

That’s a really good question. Everything I just said with say M&A growth at the root, we know we all know that there are two headwinds to it. You just – you described one of them which is we call tax linkage and the other one I put in category strand is overhead. Those are still a headwind to more deals happening. So what I expected and I think we talked about it at the CAGNY Luncheon. What I expected was you would see more company sales, outright sales of companies versus selling it brand by brand. You will continue to see companies that have some tax advantages that’s why Unilever continues to sell brands like Wish-Bone to us. And you would also see some more creative transactions. And as you know our big wish-list was to do an RMP, a reverse most trust like transaction to be able to consolidate a big piece of business in a tax advantage way. So I think that those are still barriers that everybody’s individual situation Eric is different and it’s going to depend on at what point they say we got to do something.

Eric Katzman - Deutsche Bank

Thanks. I’ll pass it on.

Bob Gamgort

Sure. Thanks, Eric.

Operator

Thank you. Our next question comes from Ken Zaslow of Bank of Montreal. Your line is open.

Ken Zaslow - Bank of Montreal

Hey good morning everyone.

Bob Gamgort

Hi, Ken.

Ken Zaslow - Bank of Montreal

Hi, so I hope you think this question is within the boundaries, but goes to Eric question before is, if you work upon RMP and if your acquisition opportunities. Where would you think stock price would have been and don’t you think that would have created any cost 15% to 20% upside in your stock price if you found the right RMP out there?

Bob Gamgort

I mean first of all I would ask you to tell what the stock price would be? I can’t predict that. I think all I would say on the RMP is we always characterize it. That one was – it was in the category of high return it’s hard to pull off, Wish-Bone is on the other end of the continuum of the bolt-on acquisition very easy for us to pull off and integrate. So there is a continuum of potential M&A to speculate on that and then what the impact of the share price would be, really tough to figure out and honestly I think you guys are probably in a better position to figure that out than even we are at this point.

Ken Zaslow - Bank of Montreal

Was there a lack of opportunities out there that you thought of because I – your camp and then we actually wrote some in the – some in your camp that there were – there are a lot of acquisitive opportunities out there. Did you find anything drive up a little bit?

Bob Gamgort

No, I would tell you we were active in the M&A business late up until we receive the unsolicited offer. So what I talked about at the CAGNY Luncheon and what we would talk about here I think is in fact true and we were very active in that space.

Ken Zaslow - Bank of Montreal

Okay. And then my other question is you talked about all these opportunities from Andrew’s questions who I think Rob’s question. You didn’t give a timeframe to which one would be able to execute on these type of opportunities if hypothetically they were to come about. Can you talk about how quickly you would be able to execute the synergies in the frozen category as well as move categories into other middle of the store, center of the store categories, how long does that take?

Bob Gamgort

Totally dependent on the size of the deal and the transactions that how complementary it is to existing manufacturing capabilities and distribution. I mean when we acquired Birds Eye that was really very a synergistic for us and I don’t just mean it from the cost standpoint, I just mean in the way the businesses we run and we were able to identify and access a big chunk of those synergies within six months. But then I would remind you that and we exceeded our initial projections on synergies but then I would remind you we then found additional savings by consolidating plans into our second and third year of operating that business and we were able to incorporate that into our MVP program which help drive our productivity up to the high end of our 3% to 4% target range.

So there are immediate synergies which you can typically get very quickly and those fall in the SG&A and procurement area depending on the construct of the logistics network and the manufacturing system you can get it some of those quickly and then you got some big buckets that are to come in the areas of plan consolidation and some other game-changes that you might contemplate and they take longer. So I can’t give you a rule of thumb, it’s completely dependent on the deal.

Ken Zaslow - Bank of Montreal

Okay. I appreciate it.

Bob Gamgort

Okay. Thanks, Ken.

Operator

Thank you. Our next question comes from Jason English of Goldman Sachs. Your line is open.

Jason English - Goldman Sachs

Hey good morning folks. Thanks for the question.

Bob Gamgort

Hi, Jason.

Jason English - Goldman Sachs

How are you?

Bob Gamgort

Alright.

Jason English - Goldman Sachs

We just did a conference yesterday and it sounds like next year may not be possible. Question for you on your business and I almost fair to say know this or maybe I’ve just forgotten. But can you remind us on what percentage of your sales go through your own direct salesforce versus third-party broker and also similar on logistics, what percentage of your sales are running on your own trucks versus the third-party distributor?

Bob Gamgort

Absolutely. I’ll do the sales piece and Craig will talk about logistics. We use a Acosta as our broker. They’ve been a tremendous partner of ours and have done really done great things for our business. We use Acosta for 100% of our retail execution and we have our direct people with – responsible for sales slightly over 50% of our headquarter sales. So that means Acosta is still responsible to headquarter level for slightly less than 50% of our sales.

In addition to making that transition successfully in 2013 and really enjoying the benefits of that we were able to bring in in-house a number of capabilities that didn’t exist before. So we always talked about the headquarter representation, but there are a number of really good people behind this headquarter representation arming them with data and presentations and category stories and pricing strategy. So we build capabilities in category management, shop or marketing, pricing, trade analytics etcetera that were part of that initial move that kind of – we didn’t talk a lot about that but it was really important.

So that’s part of why we feel good, so good about the sales organization we have today. I’ll anticipate the question because typically we get that which is would you consider adding more customers direct maybe. It really depends on two things, do the customers want us to do that and many of them do, but is there enough of a partnership with that customer that it warrants that additional investment and that’s something it’s an ongoing conversation and I could tell you the construct we have right now we’re really happy with what we’re doing as a dedicated team and we’re really happy with the partnership we have with Acosta. Craig, you want to talk about the logistics side.

Craig Steeneck

Good morning, Jason. Our philosophy is always when we own our manufacturing site so all one of our manufacturing sites are owned by us. The entire logistics network is 3PL, third-party logistics managed. So all of our warehouses we don’t own, they’re owned by 3PL operators and we don’t own any of trucks or fleets so those are also we manage them but they’re operated by third-parties. So the entire logistics network is 3PL providing.

Jason English - Goldman Sachs

That’s helpful. Thank you for that. And yesterday I was talking to somebody who operates in the industry or consults in the industry. And he was mentioning about lots of changes in terms of routes and marketing and selling organization that were led by Chris Boever. Is that allowed you to free up some cost to reinvest to get more shelf space, get more market share, some of the stuff that’s feeling your success in market today. Can you elaborate more on those details?

Bob Gamgort

Sure. I mean look first of all thank you for the shot out there. Chris has been a tremendous addition to the team; he has been on board for about two and a half years or so. And part of his vision in coming on board with the transform to sales organization and I don’t remember having a conversation with him before he started. The big piece was improving our repetition and partnership with key retail partners and Chris is really skilled and passionate in that area and saw tremendous opportunity in doing that.

And so what you’re seeing is I just – again armed with a lot of data provided by our category teams and our marketing teams talk about the opportunity of retailers and by the way we talk about share growth, retailers don’t care about share growth, they just care about category growth. And so when we talk to them we’re trying to show how our innovations are bringing new users into the category or minimum helping them with their profit mix in a very slow growth environment. And Chris has got his area of passion and he has been operating his organization and training people and giving them the ammunition to go out there and have a more robust story.

And he also I think has done a nice job with our whole leadership team and being not only consumer focus but very customer focus and that cuts across not only how you talk to customers but these are customer service level, good, we deliver products on time, it’s your billing right. No body ever talked about that stuff but it’s critical in building that relationship. So it couldn’t be happier with the performance of our sales organization and Chris’s leadership has been terrific.

Jason English - Goldman Sachs

Great. Thanks a lot guys. I’ll pass it on.

Bob Gamgort

Alright. Thank you, Jason.

Operator

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

Bryan Spillane - Bank of America

Hey good morning.

Bob Gamgort

Hi, Bryan.

Maria Sceppaguercio

Good morning, Bryan.

Bryan Spillane - Bank of America

Hey and thanks for taken the time to do the essay portion of this conference call.

Bob Gamgort

Sure.

Bryan Spillane - Bank of America

If I’ll add just a question and I guess ties back to the M&A question, to the M&A. Just your perspective on public versus private companies, if we – with Hines being a private company now and there are being some I guess thought that you might see more LBO private type transaction. If that were to go – if that were to become more of a factor in the industry, is there anything that from your perspective having done both that makes one versus the other being advantageous. So is there some advantage to being a private company versus being the public company?

Bob Gamgort

Yes, it’s interesting to have because I’ve worked in public companies and private companies both private equity owned and private family owned and they’re all very different. And I’ll probably do an article on it at some point when I retire, but there are pros and cons to both and I won’t list all the pros and cons. But what I’ll say is the one opportunity is being a private company is you could be more aggressive in taking actions to fix things or to drive opportunity without worrying about the short term impact. And I think that’s the real attractiveness. If a company needs you realize an opportunity faster or needs to be “fixed” to be honest it’s easier to do it in a private situation than it is when you have to the balance out all the quarterly expectations.

I think that Pinnacle is a great example of that. Under Blackstone’s ownership I set a core they never pay themselves a dividend, they never sold a share up until the secondary offering last year and they did it fairly reluctantly and we invested everything back in this business. We were able to take a business it needed work and turn it into something great and that’s why when we were ready to go public we were able to deliver really good performance. I don’t know what’s happening in Hines and you guys may have more insight in that than I.

But I think that that’s the way to think about private, I don’t necessarily believe that the long-term advantage condition maybe there are some cases if it’s family ownership and they plan on holding it forever but it presents it’s own problems in terms of how do you incent management and how do you provide an ownership mentality. But I think that private as an opportunity to accelerate the performance of a company before it’s in the public eye again is a really good thing.

Bryan Spillane - Bank of America

Thank you.

Bob Gamgort

Sure.

Operator

Our final question comes from Eric Larson of C.L. King. Your line is open.

Eric Larson - C.L. King

Good morning everyone.

Bob Gamgort

Hi, Eric.

Maria Sceppaguercio

Good morning.

Eric Larson - C.L. King

I promise I won’t ask an M&A question.

Bob Gamgort

Thank you.

Eric Larson - C.L. King

I think we’ve kind of beaten that one to death. Mine is a little bit more boring. And you may have talked a little bit about this in the quarter, the innovation and you talked when you released your fourth quarter earnings, Bob, about things like Recipe Ready and what you expected with ACV distribution for the year on that of incremental sales. Can you give us a little update on some of the performance of your innovation in the quarter I think we’re seeing it in the numbers but could you give us a little more detail on some of that?

Bob Gamgort

Sure. I think innovation by the way we look at innovation is kind of on a three year rolling cycle. So when we talked you about our renewal rate because I don’t believe that innovation is the one-and-done mindset because it’s easy to get initial distribution and shipments but what really matters is do the consumers buy it in repeat purchase and then continue to drive the business overtime. So as you know our renewal rate went from about 5% or so pre Birds Eye to about 9% to 10% let’s call it 8.5% to 10% in sort of the post Birds Eye world. It’s been a big driver not only of growth but it’s a big driver of our profit mix because all of our innovation is margin accretive.

We’ve got a whole mix of our portfolio of innovation, some of them are line extensions and you got to do that. And it’s really easy to say look how big they are but it’s much harder to show how incremental they are. We’ve always mixed in what I’d call new platform, so I think Farmer’s Garden from Vlasic is a new platform, Recipe Ready is a new platform, Decadent is a new platform for Duncan Hines. They tend to take slower to get up and running because it’s a new behavior for the consumer and you have to continue to invest in them and drive it. But when they work they’re really incremental not only to your business but typically to the category.

So Decadent has been around longer that’s probably a good one to take a look at, it’s about 4% share of the market highly profitable for us, good for the retailer, completely incremental. Farmer’s Garden will be next, Farmer’s Garden is about little over 2% share, same comments on that and Recipe Ready is about 1% share, it’s the newest of our item. The most important metric that we look at is how strong is the repeat rate because if you have high trial and no repeat you have a flash in the pan. If you have high repeat and you continue to invest in trial and I would tell you the reason that we have the fortitude, the cyclical of these businesses is to get all three of these I’m just using a example how incredible repeat rate so we just keep investing and marketing.

And it’s a slow and steady build, we don’t have the budget to go out and we’re not going to be doing a Super Bowl ad on Recipe Ready and I’m sure you’d be disappointed by that. But it will continue to build and we know that it sticks once a consumer tries it. We did television advertising for Recipe Ready for the first time in the first quarter and we’ll continue that. We’ve been dialing up our Decadent line on Duncan Hines doing a lot of online marketing which is really the place for that and increasing a lot of displayables particularly in the form of limited additions we got customers excited and then Farmer’s Garden we’re advertising that continues on that one we continue to build trial.

So that’s – I hope I’ve answered your question, it’s a way we look at innovation. I forgot to mention one thing I think in the script I’d say now Wish-Bone advertising also starts this month and if you recall it has been really dormant with regard to advertising for a long period of time and part of our acquisition piece is to restore advertising to Wish-Bone and we’re doing that this month. And we’ll be really interested in seeing what happens there because there’s really only one competitor in the dressing category it’s been consistently advertising and we want to make sure that we’re in that list. But hopefully that addresses your question.

Eric Larson - C.L. King

Yes, it does. Just a little one follow-up.

Bob Gamgort

Sure.

Eric Larson - C.L. King

You mentioned that Recipe Ready was about 80% incremental sales to the franchise at the end of the fourth quarter. Are you still finding that, that sort of the incremental sales rate for Recipe Ready?

Bob Gamgort

The incrementality of it is not only very high for the Birds Eye brand it’s really high for the frozen and vegetable category, it’s bringing in a new behavior. There’s nothing really like it in the frozen section you’d have to either buy multiple bags of frozen and combine them yourself as people weren’t doing or you’d have to buy fresh chop it yourself and then you end up with a lot of waste because you need varying quantities for different recipe. So this is what – this is like Farmer’s Garden, this is why we stick with these innovation because they are slow to build, when every establishing new behavior takes time but they’re sticky and they’re incremental because of what we just talked about there. So yes we continue to see high repeat rates and we continue to see high incrementality.

Eric Larson - C.L. King

Alright. Well thank you and congratulations everyone.

Bob Gamgort

Thanks, Eric.

Maria Sceppaguercio

Thanks.

Operator

Thank you. That concludes the Q&A session. I’d like to turn the call back over to management for any further remarks.

Maria Sceppaguercio - Senior Vice President, Investor Relations and Communications

Thank you everyone for your participation on today’s call. As usual I’ll be round or day today to take any questions that you may have. So don’t hesitate to reach out.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. And everyone have a great day.

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