B&G Food's (BGS) CEO Robert Cantwell on Q1 2016 Results - Earnings Call Transcript

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B&G Foods, Inc. (NYSE:BGS) Q1 2016 Earnings Conference Call April 28, 2016 4:30 PM ET

Executives

Robert Cantwell - Chief Executive Officer

Thomas Crimmins - Chief Financial Officer

Analysts

Andrew Lazar - Barclays

Bryan Hunt - Wells Fargo Securities

Sean Naughton - Piper Jaffray

Jon Andersen - William Blair

Farha Aslam - Stephens, Inc.

Kenneth Zaslow - BMO Capital Markets

Robert Moskow - Credit Suisse

Operator

Good day, and welcome to the B&G Foods First Quarter 2016 Earnings Conference Call. Today's conference is being recorded. You can access detailed financial information on the quarter in the company's earnings release issued today, which is available at bgfoods.com.

Before the company begins its formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

We refer all of you to the company's most recent Annual Report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The company will also be making references on today's call to the non-GAAP financial measures, adjusted EBITDA, adjusted net income, adjusted diluted earnings per share and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earning release.

Tom Crimmins, the company's CFO, will start the call by discussing the company's financial results for the quarter. Next, Bob Cantwell, the company's CEO, will discuss various factors that affected the company's results, selected business highlights, and his thoughts concerning the remainder 2016.

I would now like to turn the call over to Mr. Tom Crimmins. Tom?

Thomas Crimmins

Thank you operator. Good afternoon everyone and thank you for joining us today. Net sales for the first quarter of 2016 increased 62.6% to $353 million, compared to $217.1 million in the first quarter of 2014. Net sales of Green Giant, acquired on November 2, 2016 and net sales of and Mama Mary's, acquired on July 10, 2015, contributed $130.2 million and $10.5 million respectively, to our net sales for the quarter.

Base business net sales decreased 2.2% or 4.8 million driven by a decrease in unit volume. Net sales were also unfavorably impacted by $0.3 million due to the weaker Canadian Dollar during the quarter, but this was offset by an aggregate increase in net pricing for our base business of the same amount.

Gross profit increased 72% to $115.9 million in the first quarter, as compared to $67.4 million for the first quarter of 2015. Gross profit, expressed as a percentage of net sales, increased 180 basis points to 32.8% for the first quarter of 2016, from 31% for the first quarter of 2015.

The increase in gross profit percentage was primarily driven by the acquisition of Green Giant which benefited from lower than anticipated trade spend and input cost particularly from our Irapuato, Mexico manufacturing facility as well as greater than anticipated synergies with our base business. Gross profit percentage was also positively impacted by decreased costs for commodities, packaging and distribution. Gross profit percentage, excluding the results of Green Giant, increased 0.4 percentage points.

Selling, general and administrative expenses increased 73.5% to $39.6 million for the first quarter as compared to $22.8 million first quarter of 2015. With over 90% of that increase relating to incremental operating expenses due to the Green Giant acquisition. The overall increase consisted of increases in general and administrative expenses of $1.4 million, selling expenses of $2.5 million, acquisition related expenses of $2.2 million, warehousing expenses of $1.6 million which includes $0.5 million of restructuring and consumer marketing expenses of $9.2 million.

Expressed as a percentage of net sales, our selling, general and administrative expenses increased 70 basis points to 11.2% for the first quarter of 2016 from 10.5% for the first quarter of 2015.

Net interest expense for the first quarter increased 65.8% to $19.1 million from $11.5 million for the first quarter of 2015, which was primarily attributable to additional borrowings used to fund the Green Giant acquisition. First quarter 2016 adjusted net income was $38.6 million or $0.65 per adjusted diluted share as compared to adjusted net income of $20.5 million or $0.38 per adjusted diluted share in the first quarter of 2015. Our adjusted EBITDA increased 79.4% to $89.6 million for the first quarter of 2016 compared to $49.9 million for the first quarter of 2015.

Moving on to the balance sheet, we finished the first quarter with approximately $1.5 billion in net debt. Our net leverage was approximately 4.8 times pro forma adjusted EBITDA. Our current dividend rate is $1.68 per share per annum or approximately 105.2 million in the aggregate based on our current share count.

Now on to our guidance for fiscal 2016. As a result of our strong Q1 performance and anticipated strength in profitability over the next three quarters we are increasing our guidance for the full year. We now expect net sales to be in the range of $1.39 billion to $1.42 billion, adjusted EBITDA is expected to be in the range of $310 million to $320 million, and adjusted diluted earnings per share is expected to be in the range of $2.05 to $2.15.

It is worth highlighting that the first quarter benefited from the timing of certain expense items and favorable foreign currency activity. Bob will also provide additional detail on the quarter as part of his commentary.

In addition our projected 2016 interest expense is approximately $72 million including cash interest expense of $66 million and interest amortization of $6 million. Our projected 2016 amortization expense is approximately $14 million. Our projected depreciation expense is approximately $23 million and finally our projected 2016 effective tax rate is approximately 37%.

Now I would like to turn the call over to Bob for more details on the quarter and his thoughts on the remainder of 2016. Bob?

Robert Cantwell

Thank you, Tom, and good afternoon everyone. We're extremely pleased with our performance this quarter delivering company records for adjusted EBITDA and earnings per share soundly exceeding our internal expectations and achieving an adjusted EBITDA of 25.4%. I would like to spend a few moments explaining a few recurring drivers as well as one-time benefits we received this quarter that contributed to our strong performance.

As Tom highlighted, we had a wonderful performance from Green Giant for the first full quarter of ownership. We far exceeded our initial profitability assumptions, which is a significant reason we are increasing our guidance for 2016.

We are also starting to see a potential long-term benefits as our organization realizes more efficiencies. For example, late last year we merged our snack sales force with our gross resells force and saw an immediate savings of approximately $0.5 million in the first quarter and potentially $2 million for the full year of 2016. We are also starting to see a cost benefit from our transition to a third-party logistic provider for warehousing and distribution which is now complete.

Primarily as a result of our increased procurement leverage we expect to achieve approximately $7 million of savings in commodities and packaging in 2016. We also experienced three significant one-time benefits during the quarter. First, our Green Giant marketing spend is not linear in 2016. Although we still anticipate spending over $30 million this year, only a relatively small portion of that amount was expanded in Q1 as our Green Giant marketing spend will be weighted more heavily in the second half of the year.

Second, due to the strengthening of the Canadian dollar we recognize $1.9 million gain on cash we maintain in Canadian dollars for the purchase of maple syrup in Quebec.

Third, we benefited from the timing of the implementation of our organizational hiring initiatives to support Green Giant as Q1 reflects the cost impact of only approximately one-third of our expected ongoing quarterly costs after our hiring initiative is completed.

Now, moving on to sales, base business net sales were down $4.8 million or 2.2% for the quarter and although there were a number of brands that had positive and negative results for the quarter the two main drivers of the base business sales decline were Ortega and TrueNorth. Ortega net sales were down $3.5 million in the first quarter. The decrease however, was primarily the result of the benefit in net sales Ortega received in the first quarter of last year as customers restocked their shelves following Ortega's fourth quarter 2014 recall. Despite this anomaly the Ortega brand is doing very well as evidenced by the fact that consumer consumption increased for the quarter and we expect Ortega to continue the trend for the remainder of the year.

Despite being down $1.6 million for the first quarter we are excited about our TrueNorth business going forward. Nut prices have declined which has allowed us to reduce pricing since quarter end. We anticipate an immediate volume increase in response and expect that trend to continue as we move through 2016.

Pirate Brand net sales increased 4.5% in the first quarter which was in line with our expectations. Our sales team had been focused on increasing distribution of our core products and that focus has been paying off. Sales of our colder weather products for example Cream of Wheat and Bear Creek were softer than we expected this quarter likely due to the unseasonably warm winter we experienced. Cream of Wheat sales was flat year-over-year but we are still pleased with the customer and consumer response to our To-Go products and expect to rollout new products with that line later this year.

Bear Creek net sales were down approximately 3% during the quarter but we saw positive responses to both our new products and our social and digital marketing campaign. Ac'cent and B&M had very strong quarters up 13% and 27% in net sales respectively. The jump in net sales for Ac'cent was due to new distribution at club stores and increase in B&M net sales were due to the timing of this year's [indiscernible] sale at Shoprite.

As for the competitive environment we have not seen any signs of a pick in aggressive pricing or promotional spending by our peers so far this year and have no reason to expect that to change in the second half of the year.

Switching to Green Giant, Green Giant volume came in as expected this quarter while profitability exceeded our initial expectations. We are extremely exciting about what this brand is going to mean to us when we had into the second half of the year. The Green Giant will awaken in the summer of 2016 with phase one of our marketing campaigns with a complete re-launch of this iconic brand and this iconic figure planned for 2017.

On the product development side we have been presenting a variety of innovative and unique products to key customers and have been getting very positive feedback. Overall the Green Giant transition is going well. We anticipate assuming responsibility for U.S. sales at the beginning of May and the Canadian business at the end of June. We anticipate that all other transition services with the exception of Belvidere, Illinois manufacturing will be complete by the end of September.

And finally this quarter we completed an equity offering of 4.6 million shares of stock at a public offering price of $33.55. We used the net proceeds of the offering to repay $150 million of our Tranche A and Tranche B term loans. During the quarter we also paid down $40 million of revolver borrowings and increased our cash on our balance sheet by $60 million as compared to year end.

So all in, we reduced net debt by approximately $250 million and reduced our leverage to 4.8 times pro forma adjusted EBITDA versus 5.8 times at January 2, 2016. At the moment we are focused on the Green Giant transition and restoring this iconic brand, but this reduction in leverage as well as our recent hiring efforts position us well to take advantage of acquisition opportunities if and when they arise. We remain committed to our acquisition strategy which goes hand-in-hand with our dividend policy. For example we have already been sharing the accretive cash flow being generated by the Green Giant acquisition with our stockholders as evidenced by the 20% dividend increase we announced during the first quarter.

So in closing I am very pleased with the strong start to the year. Based on the results to date we expect the Green Giant brand to deliver adjusted EBITDA and adjusted EBITDA margins significantly higher than originally anticipated. We also expect our base business will see stronger year-over-year sales comparisons, because we believe that Ortega and TrueNorth will see a return to growth in the second half of the year. Again, as Tom mentioned we are changing our full year guidance on net sales to $1.39 billion to $1.42 billion and increasing our full year adjusted EBITDA guidance by over 5% to $310 million to $320 million and our adjusted diluted earnings per share guidance to $2.05 to $2.15 per share. Our excitement about the Green Giant acquisition continues to grow and we look forward to sharing more of our thoughts around new products as well as our new marketing campaign throughout the year.

With that, I would like to open up the call for questions. Thank you. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll now take our first question from Andrew Lazar with Barclays.

Andrew Lazar

Good afternoon, everybody.

Robert Cantwell

Good afternoon, Andrew.

Andrew Lazar

Just a couple of questions from me if I could. First off, just at least relative to how we modeled the quarter, I guess sales for both Green Giant and the base business were I guess a bit below what we had modeled and yet you were raising the low end of the sales range for the full year. So first off, just trying to get a sense of what gives you the visibility to go ahead and do that at this stage?

Robert Cantwell

Well, from the Green Giant perspective, Green Giant sales actually fell right in line to where we expected for the first quarter. So internally it's kind of hitting the numbers on the base core business. We do see lot of opportunities in the second half of the year as we expect to get some distribution and have gotten some new distribution on existing core items going in and kind of third quarter but we think some real positives are to come on some of the new innovation that we hope to get accepted here and start shipping in August and September. So, really comfortable on where the sales are headed and we are really comfortable that we can flatten out the base business if not be up a little bit for the year even after the small shortfall in the first quarter.

Andrew Lazar

Got it, that's hopeful. And then in terms of I think you mentioned in the release in your remarks as well, a bit less on the trade spend part on Green Giant than you had thought. I think last quarter perhaps there was a mention of having to ramp it up a bit just to kind of halt some of the distribution losses in the near-term until you could get some of the innovation in the marketplace and things like that. Was that determined that trade spend to be less necessary as you are starting to gain some distribution on the core or trying to get a sense of what led to the less than anticipated trade spend?

Robert Cantwell

I think as we looked at trade spend and we are newbie to this brand, five months into it now of ownership, but we - the distribution that's been lost has been lost. We are fighting to get some of it back. So we are not seeing further distribution losses as we speak heading further into the year, and we basically looked at some of the trade promotions, I mean it's not a lot that really just won't move in the needle and did pull some of those back and got some of the benefits of that. That doesn't mean that we're actually looking and told to kind of reduced trade spending on this brand and as we see fit and what makes sense we actually might get potentially little more aggressive with some accounts in the later part of the year and offer some more money to drive some more volume and kind of build this ramp back. But the EBITDA margins and the margins on this brand is just way more profitable to us then kind of we model when we bought business so we have room to put money back to support this brand as the year goes on.

Andrew Lazar

And that's great Segway to my final question which is the move around your thinking around the ultimate profitability of this brand clearly seems to be quite a bit higher then perhaps you had initially expected and I didn't, I guess my initial perspective wasn't that cost energy was necessarily a very big part of the story, it's more of a getting the revenue synergies and then marketing and advertising back behind some of the innovations and things. So what is that's driving this increased profitability so soon in the integration process, what is that you are seeing that is allowing you to sort of feel that way and obviously be comfortable enough at that this stage to flow that through the full year?

Robert Cantwell

Again then we've gotten very comfortable with our feeling on this profitability and where it's going. We are looking at a business now when we model it the belief coming out of the box is the EBITDA margin were going to be in the high teens, 18%, 19%. As we've gotten into it and have run this, for example run this plant in Mexico we are seeing lower cost coming out of that facility on what we're doing versus what was kind of in historic General Mills' allocation to that facility and just overall in our plan we're just making a lot more money coming out of that plant. And we are seeing synergies.

So, one of the other things is we're actually seeing some very positive synergies. We've actually been able to reduce cost on packaging on this brand because we've been able to add to that brand all the packing and B&G has with certain suppliers and has gotten cost reductions across the board including lower cost on the Green Giant business as we head though, as we had into the new seasonal pack that kind of kicks in June, July here. So, we are seeing that and we are just seeing overall lower operating cost across the board. We are really looking at a business with spending kind of in the low 30s of marketing that will generate EBITDA percentages very close to historic B&G margins in the kind of 22%, 23% range, so very consistent with our existing base business and we are very pleased with that outcome.

Andrew Lazar

All right, thanks for your help, thank you.

Operator

And we will now take our next question from Bryan Hunt with Wells Fargo Securities.

Bryan Hunt

Bob and Tom, good afternoon.

Robert Cantwell

Good afternoon.

Thomas Crimmins

Good afternoon.

Bryan Hunt

Thanks for taking my question, I guess my first question is kind of figures [ph] to the base business, you said you felt after a slow start to the year in Q1 that the base business could finish the year flat and possibly positive. Could you talk about the drivers behind that, is it increased shelve, new customers, or is there some innovation driving kind of same shelve sales here for you?

Thomas Crimmins

Well there is always some innovation within the brands, but what we are really seeing is when we get you strip out of everything that happen in the first quarter, there is always going to be plus or minuses to our brands and we are hoping that the net affect that will drive kind of 0 to 2% kind of volume increase on the brands. And really the shortfall here was very specific overall to two brands. Ortega we knew was going to happen because we had a load in somewhere between $3 million and $4 million on sales late last year. It's hard to be precise on the load in and we were down $3.5 million in sales in this first quarter.

Consumption trends, consumer consumption trends are up about 4% on Ortega, it was up all year last year. We are seeing it in the first quarter. Ortega is going to have a very strong finish to this year, so we're not going to see those declines as the quarters go by here. And TrueNorth was a real big drag on our business. It was a very positive little brand for us. We bought a brand that was $15 million in sales. We grew to around $22 million and it was growing for us every year and then nut cost - cost of almonds and specifically almonds but pecans too went kind of crazy coming out of California. And cost really doubled on us and we increased prices dramatically and our volume really shut down in a big way and we would add another $1.6 million in the first quarter. Almond prices had dropped back to historic lows, which is great news and we've been able to roll back prices here as we begin the second quarter, working through that all of that with all our customers to get our selling prices back to where they were two years ago, and we expect that volume to just come back.

So we expect - we might have a little issue here in the second quarter as we're getting prices reset with customers but it won't be that large on TrueNorth and then once the third quarter starts we shouldn't see any of those declines that will drag our base business down anymore. So and then we have innovation, we certainly have more innovation coming on Bear Creek and Cream of Wheat and certainly Ortega among others, that we expect to be able to keep all those pluses and minuses now that we eliminate those drags on the first quarter and hopefully be up for the year but certainly at least be flat in total.

Bryan Hunt

Okay. And help me with the, thanks, just for the quick on TrueNorth. Is this a promotional spin-driven price reduction or is this a list price reduction for you all?

Thomas Crimmins

No, this is a list price .we're going back to customers to lower list price. We had to raise it substantially. Put in perspective the main part of the product is almonds. Almonds went from kind of three years ago $2.30, $2.40 pound to $4.80 per pound was our last purchase. Today almond pricing is about $2.10, $2.20 a pounds so it's back to where it was historically actually little lower and we are rolling prices back and we had the taken major price increases to cover those cost increases and we weren't covering in total but we put retail price points at certain key customers so high that consumer pull off the shelf really dropped off and we were no different than anybody else who was selling nuts. I mean nuts - almond prices went crazy everybody raised price but we now we're able - we just rolling the list price back.

Bryan Hunt

Got you. And my last question and I'll hand it off. When you look at, you talk about getting the balance sheet back in the correct kind of shape that you wanted it in like 4.8 times pro forma leverage. I guess the question is and you said you feel like getting back to acquisitions or you could. How big of an acquisition will you all feel comfortable sticking your teeth into considering that there is still some integration and there is execution left on the Green Giant?

Thomas Crimmins

Well there is certainly integration acquisition left. From the integration point of view by the end of June here we are 80% on our way to be fully integrated with the Green Giant piece. We got a lot of execution work to do and there is a lot of still fixing on some of the poor results that we took on from the seller here but we are seeing one opportunity after another. Financially we were set to go and organizationally we're set to do an acquisition. When you look at our balance sheet we have a $500 million revolver with nothing drawn on it. We are sitting with today $65 million in cash and we certainly have excess to the capital markets and we've got leverage below 5 times at 4.8 times and we are also a business just today that's generating cash flow of approximately - after EBITDA less interest CapEx, cash taxes.

We are generating approximately $180 million and only paying out a little over $100 million in dividends. So, that leverage just naturally is going to come down also with your cash generation. So, we are smart buyers. Hopefully we continue to be smart buyers and we are going to look for deals and deals can be as big as Green Giant or it can be a small as Mama Mary's, things that where we can buy things that are accretive to shareholders day one because we are buying them for a substantial amount lower than where we trade and then increasing the dividend because we are a cash flow buyer and that cash flow will just allow us to increase the dividend. So, it's always hard to say, we are going to look at what's available. We buy another Mama Mary's tomorrow if it was available, because it's been a little home run for us and we'd buy another Green Giant if it was available.

So, it's really a matter of what comes to market and we can get our disciplined price range that fits us either in grocery, snacks or now frozen. We can be in each piece of that store today.

Bryan Hunt

Thank you for your answers. I appreciate it, thank you.

Operator

And we'll now take our next question from Sean Naughton with Piper Jaffray.

Sean Naughton

Hi, good afternoon.

Robert Cantwell

Good afternoon, Sean.

Sean Naughton

On the base business obviously down a couple of points but can you talk a little bit about the improvement in a little more detail on what drove the gross margin improvement and then should we still be thinking about some potential benefits with your agreement with the DSC Logistics as we get into the back half of the year?

Thomas Crimmins

Well we're seeing - I mean as we mentioned we're seeing a number of gross margin improvements. One is a little bit more one-time. I mean we did generate $1.9 million in the first quarter, not so much margin but EBITDA on the exchange rate that we made in Canada, having money up there and the exchange rate moving in our favor. So that's not really gross margin. We're really starting to see the DSC savings so that's absolute. We're completely done with that transition and starting. And we've been seeing the DSC saving and as each month goes we expect that to pick up. We're seeing a lot of synergies across the broad in purchasing. We've been able to lock in, in the last couple of months, kind of a number of deals that has created and we're locked in at over $7 million of cost savings on purchasing now the base business for this year. We saw some of the benefit in the first quarter and we're going to see that through the rest of the year as we make those buys.

Those are the two biggest pieces from the base business that's driving the upside. And then we have a much better margin profile on Green Giant and we're just seeing that in the input cost and we're seeing that in some lower costs than what our original expectations were from logistics to kind of just some G&A costs. And also some of those expectation for cost whereas also being a little conservative I mean this certainly was our largest acquisition ever and you want to make sure you are right and feeling really comfortable we were more than right on this acquisition because the margin profile is better than we announced when we bought it and we're really seeing, we've still got months go here but we're really seeing some real opportunities on the sales side and really excited about really supporting it with a real marketing campaign not just this year but for future years to come to really drive this business.

I am really proud of what this team has done here in this transition and the amount of innovation that we've been able to bring to the table to customers when we bought a business that had nothing in the pipeline that we were taking on to kind of finish we had to start to scratch. The amount of different platform innovation on the frozen side that we've been able to bring to customers has been just very impressive here and very exciting because we got some really what I think very unique ideas with some of our customers are real excited about. We're still scrambling to the fish line to make sure all those are done because we don't want to miss the fall opportunity because frozen is all about fall and early winter and then you kind of away almost next fall to get stuff in. So we're working hard to get this stuff through and get it into to distribution in late summer.

Sean Naughton

And then I guess just a follow-up on the base then I do have a question on Green Giant as well. Very consistently between 2010 and 2013 for about four years you guys kind of ran the gross margin between about 33 and 35. Is there anything structurally on this, on the base business assuming that it's a relatively down 1 to plus 1 that would prevent you from getting back to those levels of profitability based on the mix of the business that you have today?

Thomas Crimmins

No, I think we - as we look at the base now, with some of the savings and some of the absolute synergies crossing over from Green Giant ,we - I think that as we look at our internal projections ,we're getting back to those kind of numbers again.

Sean Naughton

Okay, that's helpful. And then I guess just on the Green Giant business, can you talk about some of the performance in the business relative between canned and the frozen business. And then a follow-up there is, what have you built into the plan for Green Giant in the back half of the year for any of that - any of the innovation that you talked about?

Thomas Crimmins

In kind of our solo - I'll kind of take that in coupled of pieces. So as we look at the marketplace on Green Giant the canned business is solidified, it was never as better as the frozen but it seems to be solidifying faster than the frozen. When you look at Nielsen kind of numbers on frozen, it's for the first quarter year-over-year it's down about 10ish, little over 10%. We knew that coming in. We certainly knew that when we bought the business. There was certainly a lot of lost distribution at key customers and we weren't going to be able to fix that overnight. So the frozen piece what we've really been more active on.

The canned piece is more about, at the end of the day what you can sell on promotion during the holiday season and just making sure you have your fair share. And we're working hard to do that. Part of who we are, is we are grocery centers and store guys and that's a little bit of a natural for us. The challenge on canned very honesty though is some of the competitors get priced, take price points down way lower than we want to play in. So, we are being very careful there, but we are feeling relatively solid that business is solid where our larger emphasis has been on in frozen, and really it's about getting some of that distribution loss back and we've been very aggressive on doing that. And we know a lot of that distribution loss needs to come from the core items back but it needs to come from innovation and that's why we were very aggressive on the innovation piece. So, we are not building.

As we look at kind of our sales modeling of kind of $1.39 billion to $1.42 billion we are not modeling large incremental growth from new innovation at all. This is more of a status quo Green Giant of where we are today and where we think the business is. Without any further distribution losses and without any real distribution gains that kind of just, if it just runs locks steps for the rest of the year we kind of know where it's going to kind of finish out. So, new distributions opportunities this year and next year and certainly bigger gains with some of the innovation if they work and we think some of them have real opportunities to big ideas only add to the top line in Greet Giant. But I think this year on Green Giant were still, we know the profit is there, we know profit is much bigger than we thought, when we bought the business for a lot of the reasons I talked about but we're being very conservative on where the sales is and the run rate and really not building on top of that for this year.

Sean Naughton

Okay, that's helpful. Thank you.

Operator

And we will now take our next question from Jon Andersen with William Blair.

Jon Andersen

Hi, Bob and Tom thanks for the questions.

Robert Cantwell

Hi, sure.

Jon Andersen

What are you modeling for Green Giant this year in terms of sale, obviously you've bumped the revenue guidance for the full year, it sounds like that's driven more by green giant and then it is the base business. Can you help us understand maybe kind of current thinking on the revenue this year for that business?

Robert Cantwell

Well again I think when we announced the transaction we said Green Giant could deliver about $550 million for us. Green Giant in the first two months of our ownership November and December of our last yearend really had a very difficult time kind of volume wise kind of worse than we thought it will get to and worse than were the seller guided us to a little bit. So we've internally taken our goal on Green Giant down. I mentioned it in the last conference call without of giving a number book but we are at a number of Green Giant of about 510 to 520 okay. That's pretty rock solid based of where - we know where distribution has gone, we know we haven't really lost any distribution since pretty rock solid in that number. So, we are very comfortable in this sells range of the $1.39 billion to $1.42 billion.

Jon Andersen

Okay that's helpful. You mentioned earlier in your prepared comments that you've only implemented a small portion of the marketing spending that you plan for the year. Can I just clarify do you still expect to spend $30 million on Green Giant in 2016 and how should we think about that the cadence of that spending from Q1 through Q4.

Robert Cantwell

So basically in Q1 we spend about $4 million, Q2 we'll spend give or take $4 million or $5 million and the rest is third and fourth quarter, pretty equally shared in the third and fourth quarter and yes we will spend $30 million if not a few million dollars more because with the profitability levels on Green Giant we've built in a buffer here that if we want to spend some more. And believe it when you work with a large advertising agency you can easily spend $30 million very quickly. But the exciting part of what we're going to launch here in the summer as a start launch is just they are working what they are putting together so it's really exciting as we build this brand but we're going to put a lot of effort into spending and not just spending it because we have it in the plan but to really spend this money to drive this business and really incrementally increase this money as we drive this business in the years to come because we just think there is just a huge opportunity because of the Green Giant iconic figure to really move the needle in a big way over the next few years on those brands.

Jon Andersen

I wasn't quite sure I followed. You had commented on organizational hiring and I think in the past you've talked about maybe 45 maybe 50 people. Where are you with respect to that hiring and what kind of total cost burden are you looking of adding and how far along are you in that process?

Thomas Crimmins

So if we look at the kind of estimate I think it's 58 people, but we're actually adding plus some more office space, some more we opened a corporate office in Canada now because we have a full blown business. That number was about $10 million in total. Today we're about 60%, a little over 60% of our way there on people and as the weeks goes on here by the end of the second quarter we'll probably be 90%. I think what happened though is probably coming into this year at the end of December we might have been 20% toward that to where we were and then in the next quarter we added the other 40% to get to basically 60%, but the 40% didn't come from day one, so we didn't experience the level of cost.

So it’s kind of - if you just look at a quarter-to-quarter cadence that $10 million we should be spending about $2.5 million a quarter. We probably spent a third of that in the first quarter. So second quarter we'll probably spend, well we will be spending about 60%, probably little over 60% to $2.5 million quarterly change and then by the third quarter I would expect we're kind of pretty much fully there. So but it's about a $10 million spend and we get a little benefit but still when you kind of put the spending $30 million and a little bit more this you still get a Green Giant kind of EBITDA percentage kind of 22%, 23% not 18% or 19% and that's where we're looking at today going forward.

Jon Andersen

Okay, last one from me is, on the other income line, I think what you said was currency related the Canadian. Is that an income that you expect to persist as you move through the year, is that one quarter thing?

Thomas Crimmins

It's really a onetime thing. We spent $40 million buying maple syrup in Quebec, maple syrup all gets bought kind of April, May, June and a little bit into July. We saw the opportunity early this year when the exchange rate was ranging between $0.68 to kind of $0.71ish to more the $40 million up there and just kind of lock in. Last year we moved money on an average exchange give or take $0.77 so it was an immediate savings to us by doing that. And what has happened is the exchange rate in Canada today is over $0.79 on $1. So, it's really kind of more than anything else, just a kind of one-time we were either very smart or very lucky here and we made about $2 million of money up in Canada in January versus putting it up here in April.

Jon Andersen

That's helpful. Can I ask one more, just, I think you've touched on it and talked about already but just for my clarification, you owned Green Giant for two months in the December quarter and obviously for a full quarter in March, the gross margin rate in the business in aggregate was up 600 basis points sequentially, and I know in the base business probably there was some growth here on a year-over-year basis, about 40 bps or so. So, the drive of that changed sequentially from Q4 to Q1 I am assuming is Green Giant driven. What was so dramatic, what changed there that really allowed that kind of change in the profile of the business?

Robert Cantwell

The biggest change reason is not so much what we did and we've done a whole bunch of things is the nature of this business is very heavy trade spending October, November, December for Thanksgiving, really it's a Thanksgiving driven business plus some Christmas and then to a lesser extent Easter. But really it's about Thanksgiving and the volume that goes out the door October, November so margins naturally on this business are lot lower in the fourth quarter. So, it's not just we just did so much better.

We bought a business at the worst margin comparison which is really November, December but then subsequent we've done some really good things. We are seeing some synergies, we are seeing some positives and we are seeing the benefits of us getting in and managing this business where you had a former seller who wasn't strategically important to them where it's very important to us. So when you look at the fourth you think about the fourth quarter of 2016 you are going to see those kind of margins on Green Giant and actually a little last then what was experienced last year because we'll be spending more of marketing money then we certainly spent last year which was pretty much nothing in November and December.

Jon Andersen

Great thanks for the color, really helpful.

Robert Cantwell

Sure.

Operator

And we'll take a next question from Farha Aslam with Stephens, Inc.

Farha Aslam

Hi good evening.

Robert Cantwell

Hi good evening.

Farha Aslam

A question on the base business, I believe you said that procurement savings were $7 million and I think that the DSC savings are expected to be $8 million this year. So just to be sure we can count on sort of $50 million or $0.7 in EPS on that base business coming to us in the way of cost savings for 2016. Is that the right way to think about it?

Thomas Crimmins

Well two things, one is we've look it on the 7 we know that's there and hopefully it ends up begin a little more as we do some further locks. And one of that 7 just to go is there is some real synergies we are getting on packaging consolidated buying just because we are bigger. We're also in general across the board almost all commodities have kind of retrenched even further so we are not the only ones who should be seeing from commodity benefits. We are learning every day what that DSC savings is. And I don't want to say it's a total of $8 million for the year. We also were saving some of the money in the fourth quarter of last year. So it's not a pure year-over-year, we've got another $8 million.

We're certainly seeing the total piece from the delivery side of what our expectation was. We're still working through with them the warehouse part of the savings on it. What we're getting from them is wonderful efficiencies and way better customer service and inventory management and I am very happy that they're adding - we're actually adding a fourth warehouse under them as we speak to handle the Green Giant canned volume, but I don't think we are there today saying that's an $8 million number, it's probably a little less than that for this year.

Farha Aslam

That's helpful. And then just a final question on that $30 million. What's included in that number, if could you break that down for us, does that include trade spends...

Thomas Crimmins

No, no.

Farha Aslam

Does it include couponing. What's included in the $30 million?

Thomas Crimmins

We'd include couponing. Historically there's been almost no couponing done on this brand. Well, at least certainly for the last, I want to say, four years. I don't want to say longer term historically. You'd have to look back. Couponing on this brand hasn't been much more than $1 million a year. It does not include trade, it does not include slotting. So it's real consumer marketing, which would include couponing, and really advertising and marketing and the people running the brand from a marketing point of view. So there is a little bit of salaries in there but mostly of this is consumer marketing that's going to be in the form of social media, TV, the whole gamut. We're going to - we're building a full blow campaign that we're really excited about.

Farha Aslam

And usually trade and slotting et cetera, it's about 25% to 30% of sales. Is that for a standard consumer brand? Is that for Green Giant we can assume as well?

Robert Cantwell

Yes, Green Giant historically runs in, I want to say in the high 20s when you look at those pieces.

Thomas Crimmins

But you'll start to see a real peak in November December.

Robert Cantwell

Right, so it's higher in the fourth quarter than it is in the second quarter just by the nature of frozen and can vegetables, sell on promotion basically Thanksgiving, Christmas and into Easter and a lot less in kind of the spring and summer.

Farha Aslam

Okay, that's helpful. Thank you very much.

Robert Cantwell

Sure.

Operator

And we will now take our next question from Kenneth Zaslow with BMO Capital Markets.

Kenneth Zaslow

Hi, good evening everyone.

Robert Cantwell

Good evening.

Thomas Crimmins

Hi, Ken.

Kenneth Zaslow

I just have two quick questions, one is you have a Green Giant business it's $100 million EBITDA, if you think out two to three years what do you think that will be?

Thomas Crimmins

While hopefully we've grown sales a whole bunch and as we think about it as we grow sales 100 million just a number, the EBITDA and $100 million is in the low 20s, so you are looking at another $20 plus million for every $100 million in sales.

Kenneth Zaslow

Okay, and just to understand you said that the underlying profitability was significantly higher than what you expected, is it like $105 million to $110 million or are you just over a magnitude of what you because used the word significant, I just wanted to make I understood what you were talking about?

Thomas Crimmins

Well, certainly when you look at where just using street consensus of where EBITDA was at $74 million, $75 million versus those coming in just right around $90 million our base business EBITDA is up a little bit because of some of the synergistic savings and whether its purchasing and just pure synergies most of that growth came from Green Giant. So Green Giant is higher than certainly going to be - for us to be at 310 to 320 Green Giant is the bigger driver of that to get to that number.

Kenneth Zaslow

Okay and my last question is, I think somebody asked about it just wanted to clear. You didn't start thinking that this was a synergy a cost synergy opportunity. Does this mean you can open up new doors and then you can start saying, hey look, maybe we weren't really on the wall in terms of the cost savings but maybe there is a lot more to do that we can actually explore here. Are there are new avenues that you are going to take a look at?

Robert Cantwell

No, I mean think from the synergy point of view what we are seeing is truly lower cost that are not totally synergistic from Green Giant. I means that's piece of the input cost and certainly the facility in Mexico is running at a much lower cost than kind of what represented to us by the seller. So we are getting, we are reaping the benefits of that but from a synergy point of view we are truly seeing synergies is the power of us just begin $1.4 billion company when we call on a glass guy or a can guy or film guy any kind of packaging we are a lot more meaningful to them across the broad and it goes all the way down the line. So we are seeing the benefits of begin that much bigger.

So that's nice to have, I don't think that there is today as we think about what we own. There is huge amount more synergies that we are going to distract. We're going to get better and better every day but one thing it shows is being a little bigger, it really makes a difference and it’s kind of took us to the next level with our vendors and with our customer. Being bigger we are more meaningful. We doubled our business at Wal-Mart for example. This business at Wal-Mart is $150 million. We were $150 million at Wal-Mart prior to that. We are more meaningful supplier to Wal-Mart. We are meaningful supplier to number of our other customers and it's getting us better customer calls. We were always good at that.

We are now bigger and more meaningful and they are very willing to talk to us about this brand Green Giant and we've been able to correlate that and taking about some of our other brands too. So, it's only been a benefit to B&G as we've added this. Lot of work, a lot of transition and a lot of integration, but an exciting evolution to B&G to make us bigger and better to go forward and I think organizationally we've come a long way here in the last five months.

Kenneth Zaslow

Great, I appreciate, thank you very much.

Operator

And we will now take our next question from Robert Moskow with Credit Suisse.

Robert Moskow

Hi, this might sound a little bit odd ball but you say the plants are running less expensive than you expected, but the pack doesn't really start until harvest, is that right. So, what element of the plant cost are you seeing that make you comfortable or are they operating at full capacity right now or are they getting ready for the full capacity period that's coming?

Robert Cantwell

It's a fair question, different business. So the can piece of the business is as vegetables come, are harvest did, they go right into the cans and they are considering cans for years to come basically. Frozen business is different. Some of the vegetables are in frozen and are in inventory, but not in package. So, it's frozen in bulk and it has to be packaged. Our facility in Mexico there is some of that in some of our mixes but their packing fresh as every day as we speak. So the area of Mexico that we're play in is a big broccoli and cauliflower area among other things. And they basically get seven crops a year and that's why the plant sits there. So the plant is active pretty much all year long. It doesn't go into semi shutdown mode. And we're seeing the benefits coming out of that facility in a big way.

Robert Moskow

Okay. And a follow-up was on the platform, innovations platform that you talked about. You barely gotten control of the business and you're talking about new innovation platforms already. It seems like it's on the accelerated kind of timeframe, maybe that's a function of your firm you're working with is moving faster than you thought. But does it feel a little compressed to state that you get something out in the fall like that. Like I would have thought in the fall you would have maybe new varieties of things, but to say you can get a new platform out sounds a little more ambitious?

Robert Cantwell

Now the good - it sound ambitious to me but I can tell you, we're where they are on the new platforms specifically a couple as we speak. As part of when we signed the contract, before we closed, we knew how important it was, not to just come out with a, I don't know a poultry [ph] corn that you can just flavor up some frozen corn and come out with that, which is relatively easy. Some of that kind of stuff is easy, which we're also doing. But we wanted to be able to walk into the key customers with new platforms that nobody else was selling in frozen today and that was an important part of our strategy. What I'm coming into, as we bought this business we though we can get the platform we were actually consent with our ability to potentially get it in the fall because a lot of those freezer cases get pretty lock down but our customers have open up the door to us and we've been into four or five large customers now with some of these new platforms and they are very excited about it.

We expect to be in full production on those products here in July and August and assuming we get acceptances which we're really hoping and believe we well we'll be able to start shipping that in September. And that was a very important part of our story to the customers now we are supporting - we are going to support this brand consumer wise but we are going to be innovative where the seller has really stopped because of it wasn't strategically important to them anymore. And as part of that we'd like to get some of those core items that we might have that seller had lost previously so the new platforms where extremely important to us. And I guess as I said early, I am really proud how those organizations has gotten as far as it has and we've used. So one of the things is, we went outside to some every large guys who can help us with this and we have some very strong partner relationships here who've made a difference in getting us where we are today there is a co factors.

Robert Moskow

Those are co-packers?

Robert Cantwell

No not so much I mean we're using I mean and we said we said it last time and we said it we are using Carry Foods really as our innovation partner in a big way and they have really helped us and using therefore resources of their organizations have really helped drive this process as we have added internal capabilities but using really them to help us drive their process and they've certainly been a big leader in getting us where we are today and now we are going to get the customers to take it in and we got to get consumers to buy it and we think both will happen and we are really excited about what we are going to put in place.

Robert Moskow

All right, thank you so much.

Robert Cantwell

Okay.

Operator

And ladies and gentlemen, that concludes today's question-and-answer session. Mr. Cantwell, at this time I would like to turn the conference back over to you for any additional or closing remarks.

Robert Cantwell

Okay. I want to thank you for your support in our company and being able to join the call today. We look forward to a very successful 2016 and are excited about sharing additional news on Green Giant as the year progresses and thank you everyone and have a good evening.

Operator

Again ladies and gentlemen, that concludes today's conference call. We thank you for your participation.

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