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Pinnacle Foods, Inc. (NYSE:PF)

Q1 2017 Results Earnings Conference Call

April 27, 2017, 09:30 AM ET

Executives

Maria Sceppaguercio – SVP of IR & Communications

Mark Clouse – CEO

Craig Steeneck – CFO and EVP

Analysts

Andrew Lazar – Barclays Capital, Inc.

Kenneth Goldman – JPMorgan Securities LLC

Bryan Spillane – Bank of America Merrill Lynch

Matthew Grainger – Morgan Stanley

Jason English – Goldman Sachs

Robert Moskow – Credit Suisse Securities

Robert Dickerson – Deutsche Bank

Brian Holland – Consumer Edge Research

David Palmer – RBC Capital

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Pinnacle Foods Incorporated Earnings Call for the First Quarter Ended March 26th, 2017. This conference is being recorded and there will be a question-and-answer session at the end of the call.

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

Maria Sceppaguercio

Thank you, Howard. Good morning everyone and thanks for joining us today. Earlier this morning, we issued our press release for the first quarter of 2017, which is available on our website.

As indicated in the release, we delivered a strong quarter and reaffirmed our outlook for full year adjusted diluted EPS in the range of $2.55 to $2.60. This outlook continues to include about a nickel benefit to our effective tax rate from the change in accounting treatment for stock-based compensation.

As we’ve discussed with you previously, this new accounting treatment will create volatility in the tax rate due to a number of factors. And as we saw in Q1, the exercise of stock options, in concert with the strength of our stock price, drove a greater benefit than we expected.

We believe some of this benefit was timing-related versus activity we expected to occur in the back half of this year. We’ll update you on our full year tax rate outlook on next quarter’s call following the significant upcoming vesting period in Q2, which we expect to inform our thinking on the full year rate.

As previously communicated in early February, we refinanced our senior secured credit facilities and in a related follow-on transaction, we terminated and replaced our interest rate swap contracts. These actions significantly lowered interest expense beginning in February of this year and both have been fully reflected in our interest expense guidance for 2017.

Earlier this week, we announced a management reorganization that leverages experienced Pinnacle executives, namely Mark Schiller and Mike Barkley in expanded commercial roles. These changes are expected to enhance our organizational effectiveness and efficiency.

And finally, beginning this quarter, we have incorporated the businesses from the Boulder Brands acquisition into our IRI database and reporting, consistent with our new segment structure.

Here with me to discuss the results of the quarter and our outlook for 2017 are Pinnacle’s CEO, Mark Clouse; and our CFO, Craig Steeneck.

Before turning it over to Mark, let me remind you, that as usual, our release and conversation this morning will include our results on an adjusted basis. The adjusted basis excludes acquisition, merger and other restructuring charges and other items affecting comparability. The company believes that the adjusted 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 that it is a meaningful comparison and an appropriate basis for discussion of our performance. Details of the excluded items are included in the reconciliation table, included in our press release, and are discussed in detail in our 10-Q, which will be filed later today.

In addition, 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 risk and uncertainties is contained in the company’s filings with the SEC.

And with that, I will hand it over to Mark.

Mark Clouse

Thanks Maria and thanks to everyone for dialing in. We had a good start to 2017, delivering Q1 results very much in line with our expectations. We continued to navigate the challenging environment quite well, enabling us to deliver topline growth even excluding the net impact of the carryover benefit of the Boulder Brands acquisition and the shift of Easter.

We also continued to win in the marketplace with our composite market share for the quarter advancing 80 basis points. This represents our 12th consecutive quarter of composite market share growth.

Our share growth has been achieved in an industry environment that at least on the surface looks weaker in early 2017. As you know, there’s no shortage of theories attempting to explain what has caused the slowdown.

I believe that the recent softness has been driven by several factors, none of which alone are large enough to fully account for it, but collectively, I believe, these factors have had an impact.

Starting with the timing of Easter, which shifted business in some categories out of Q1 and into Q2. For Pinnacle, the largest impacts occurred in vegetables, seafood, and baking.

Another factor is the historically warm January and February we experienced this year. While I personally hate to blame the weather, I have seen time and again how that really does affect purchasing behavior. Just think about the stock up mentality in advance of a snowstorm, which we had in March helping then mitigate the warmer first two months of the year.

And finally, I also believe that the continued shift from traditional to unmeasured channels not tracked by IRI or Nielsen has been a factor in the retail data that we all see. We now have IRI data through Easter, which eliminates the noise related to the timing shift. And our composite retail consumption growth exceeded 2% on a year-to-date basis through April 16th. Needless to say, we are feeling pretty good about where we are right now.

Turning to some highlights of the quarter. Net sales advanced 1.6% with Boulder and Grocery segments posting growth, partially offset by the anticipated lower sales for the Frozen and Specialty segments.

We expanded our adjusted gross margin by 120 basis points in the quarter, fueled by productivity totaling 4.1% of cost of products sold, which outpaced inflation at 2.9%. Also benefiting the gross margin performance in the quarter were Boulder synergies, partially offset by investment in our baking portfolio, including the launch of Duncan Hines’ Perfect Size for One.

Total operating expenses declined 1%, largely due to synergies as well as the timing of marketing investment given the Easter shift and our robust innovation agenda that this year more heavily weights to the second quarter.

Our gross margin expansion, coupled with our operating expense discipline, drove a double-digit increase in adjusted pretax earnings. Add to that the outsized benefit we had this quarter from a lower tax rate, which came in at 32.5%.

And adjusted diluted EPS advanced a strong 25% to $0.50 versus $0.40 in Q1 last year. So, all-in, we feel good about how we started the year and we remain confident in our outlook for 2017.

Now, turning to our segments, starting with Frozen. As expected, the segment had a slow start to 2017, with net sales down 2.9% due to the exceptionally strong performance of Birds Eye in the fourth quarter last year as well as the shift of Easter into Q2.

In addition to Birds Eye, the Easter shift also impacted seafood due to the later timing of Lent. We continue to expand our retail distribution for the Frozen segment, posting a 7% increase in TDPs for the quarter. This growth was fueled by a double-digit increase for the Birds Eye franchise and continued distribution expansion for Hungry-Man.

Supporting this growth was the continued rollout of Birds Eye Signature Skillet Meals, Birds Eye Veggie Made Rice and new Hungry-Man Selects varieties, all of which were launched into limited distribution in the fourth quarter 2016.

Market share performance for the Frozen segment continued to be very strong, advancing six-tenths of a share point for the quarter. This growth was driven by Birds Eye Vegetables, which was up 1.7 share points and our Birds Eye Voila! and Signature Skillets Meals businesses, which combined were up 1.9 share points.

To maintain our momentum behind Birds Eye, in early April, we began the rollout of five new product platforms. Specifically, we launched Birds Eye Vegetable Pasta, a line of side dishes made from zucchini, spinach and lentils that mimic the taste and mouth feel of pasta while reducing the carbs and delivering a full serving of vegetables.

Birds Eye Super Food Blends, a line of nutrient-rich side dishes that combine ingredients such as quinoa, chickpeas, edamame, spinach, barley and kale, among others, to deliver great-tasting side dishes in a convenient Steamfresh bag that would otherwise be hard to make at home.

Birds Eye Mashers, a line of — consisting of mashed cauliflower side dishes that delivers a mashed potato taste and texture, along with a mashed sweet potato item.

Birds Eye Organic, a limited offering of organic vegetables for mainstream consumers seeking this option. And finally, Disney-themed Birds Eye Voila! meals for kids, extending the Disney license into Voila! meals for the first time.

Adjusted EBIT for the Frozen segment advanced 4% in the quarter and adjusted EBIT margin expanded 110 basis points, reflecting strong productivity, partially offset by the impacts of input cost inflation and the lower sales.

Now, turning to our Grocery segment. Net sales for Grocery advanced 3.4%, driven by double-digit growth on the Duncan Hines brand. This growth was fueled by improved merchandising, leading up to Easter as we continue to strike the right balance of constructive pricing and in-store activity to remain competitive during key seasonal windows.

In addition, momentum is building on our 18-item launch of Perfect Size for One, which began rolling out at the end of February and will achieve national distribution by the end of the second quarter. This ultraconvenient, single-serve baking solution is made with real simple ingredients that are baked in a mug, in the microwave, in one minute.

While still very early in the launch, initial consumer reaction has been exceptionally strong. As this new product taps into consumer needs for convenience, portion control, and individuality, it also eliminates the category challenges related to the decline in household size.

Also posting strong growth for the Grocery segment in the quarter was Armour canned meat, partially offset by Vlasic pickles. Over the past several months, competitive intensity in the pickle category has increased in the form of pricing and innovation putting some pressure on Vlasic. Our innovation and in-store support for the brand is rolling out in the second quarter, which we expect to strengthen trends for the business in the second half of the year.

During the quarter, we also introduced Wish-Bone Avocado Oil salad dressing in three varieties. This new line adds to our presence in the premium segment of the category with on-trend, healthier oils and is a great example of the balance we are working to strike between gross margin expansion and growth.

As you know, the dressings category is extremely competitive and we will continue to be thoughtful in making the appropriate trade-offs between innovation, pricing and productivity to optimize our results.

Market share for the Grocery segment advanced four-tenths of a share point, largely driven by the strength of Duncan Hines and Armour, partially offset by Vlasic and our served brands. This performance was supported by retail distribution expansion approximating 4% for the segment, led by Duncan Hines, Armour, syrups, and Wish-Bone.

Adjusted EBIT for the Grocery segment advanced 14% in the quarter and adjusted EBIT margin grew 200 basis points, reflecting the benefits of the net sales growth and strong productivity, partially offset by input cost inflation.

Turning to the Boulder segment, this segment started the year with net sales up 21%, driven by the three-week carryover benefit from the Boulder Brands acquisition and growth on the base business, despite the ongoing impacts of the SKU rationalization program and the wind down of the Boulder U.K. operations.

Driving the base business growth were gardein and EVOL. The new Hagerstown plant for gardein is now up and running and we are shipping product from the plant to customers. During the quarter, we closed our Range Street facility in Boulder, which produced EVOL and move production to both our Fayetteville facility and co-packers.

Market share in the quarter for Boulder was essentially even with year ago, despite the impact of the SKU rationalization program with gardein, Earth Balance and EVOL posting growth.

Market share for Udi’s and, to a lesser extent, Glutino, were down in the quarter, reflecting the SKU rationalization impact as well as additional competition in gluten-free, given the attractive growth characteristics of this consumer space.

As we have discussed with you previously, we believe the real unlock in key gluten-free categories involves eliminating the compromise on taste and texture to broaden the appeal to a much larger consumer base. We believe we have the experience and the capabilities to make this a reality.

Adjusted EBIT for the Boulder segment advanced 44% in the quarter and adjusted EBIT margin grew 210 basis points, reflecting the benefits of the net sales growth in synergies, partially offset by modest input cost inflation.

Finally, turning to our Specialty segment. Specialty, as expected, posted a net sales decline for the quarter due to a decline in private label canned meats, stemming from the lower sales of USDA stew and the exit of the gardein private label business.

Adjusted EBIT for the Specialty segment advanced 21% in the quarter and adjusted EBIT margin grew 230 basis points, reflecting the benefits of productivity and the reduction in lower margin sales, partially offset by input cost inflation.

With that, I’ll hand it over to Craig.

Craig Steeneck

Thanks ark, and good morning, everyone. Let me start with the results for the quarter and then transition to our outlook for the remainder of the year. Net sales for the first quarter increased 1.6% to $766.1 million, driven by a 2.9% benefit from the three extra weeks of the Boulder Brands ownership versus the prior period, higher net price realization of 0.4% and favorable foreign currency translation of 0.1%. Partially offsetting these drivers was lower volume mix of 1.8%, predominately reflecting the shift of Easter from the first quarter of 2016 to the second quarter of 2017.

Net sales for our Frozen segment decreased 2.9% in the quarter as expected, reflecting lower volume mix of 4.3%, largely due to the impact of Easter timing on the Birds Eye franchise and our seafood brands as well as the anticipated volume pressure relating to the exceptionally strong Birds Eye performance in the fourth quarter of 2016.

Partially offsetting these anticipated downward pressures were higher net price realization of 0.8%, acquisition carryover benefit of 0.4%, and favorable foreign currency translation of 0.2%.

Net sales for our Grocery segment increased 3.4% [technical difficulty] performance of the Duncan Hines brand and acquisition [technical difficulty] drivers was unfavorable net price realization of 0.6%.

Net sales for our Boulder segment advanced 21.4%, largely reflecting acquisition carryover benefit of 19% as well as higher volume mix of 1.7%, and favorable net price realization of 3.8%. Partially offsetting these growth drivers was a 3.1% decline stemming from the previously communicated wind down of the Boulder Brands U.K. operations.

And finally, net sales for our Specialty segment declined 4.5%, reflecting lower volume mix of 4.4%, and lower net price realization of 1%, partially offset by acquisition carryover benefit of 0.9%.

Now, turning to adjusted gross profit. Adjusted gross profit grew 6.2% in the quarter with margin advancing a solid 120 basis points to 28.5% of net sales. This performance was fueled by strong productivity savings of 4.1% and the benefit of net sales growth, partially offset by input cost inflation approximating 2.9%.

We continue to expect to finish 2017 with an adjusted gross margin improvement that positions us well towards achieving our stated objective of 300 to 400 basis point improvement by 2019.

Over the three-year period, it is likely that some quarters will be stronger than others based on a number of factors, including the strength of the base period gross margin comparables, the timing of innovation and related new product introductory expenses, and the relationship between productivity and inflation to name a few of the larger factors.

A great example of these factors coming together in a powerful way would be the second quarter adjusted gross margin improvement we experienced in Q2 last year. You may recall the 260 basis point gross margin improvement we reported in that quarter. This outsized performance was fueled by almost 4% productivity compared to only 1.5% inflation, along with the benefit of favorable net pricing.

The point is that the stars really lined up for that performance last year and while we fully expect gross margin growth in Q2 this year, the comp is likely to keep a lid on the magnitude, while the second half of 27 [ph] gross margin improvement will step back up.

Adjusted EBIT grew 12.8% in the quarter to $120.5 million, largely reflecting the growth in gross profit, lower operating expenses and Boulder synergies. The latter of which remained very much on track with our $15 million synergy target for 2017, split just about evenly between gross margin and SG&A.

Adjusted interest expense for the quarter decreased by 1% to $31.3 million, reflecting the partial quarter benefit of the successful refinancing of the company term loans in early February of this year.

The adjusted interest expense excludes one-time refinancing costs approximating $50 million comprised of the write-off of $29 million of non-cash deferred financing and original issue discount costs as well as $21 million in cash costs for the early retirement of the interest rate swaps associated with the old term loans.

Our effective tax rate in the quarter excluding items affecting comparability came in at 32.5% compared to 37% in the year ago period, largely reflecting the new accounting treatment for stock-based compensation that Maria discussed earlier.

It is important to emphasize that the adoption of this new accounting standard will cause volatility in the effective tax rate based on vesting schedules for which we have complete visibility, and more importantly, for option exercise activity for which we have very limited visibility.

Because the first ever vesting of our long-term equity incentive plan will occur in Q2 this year, which we continue to expect will significantly reduce our Q2 ETR versus year ago, we plan to update you on the full year ETR outlook on next quarter’s call.

Adjusted net earnings increased 27.1% to $60.2 million compared to $47.4 million in the year ago period, while adjusted diluted EPS advanced 25% to $0.50 compared to $0.40 in the year ago period.

Now, turning to cash flow. Net cash provided by operating activities in the quarter totaled $63 million compared to approximately $77 million in the prior year, largely reflecting the impact of the termination of the interest rate swaps in connection with our February refinancing as well as working capital.

Capital expenditures in the first quarter totaled $29 million compared to $34 million in the year ago period. Free cash flow at approximately $34 million in the quarter was down approximately $9 million versus the year ago period, driven by the decline in net cash provided by operating activities.

Turning to liquidity, at the end of the first quarter, our total debt was $3 billion, including the new $2.3 billion secured term loan and $700 million of senior notes. Cash totaled $141 million, bringing our net debt to $2.9 billion and our net leverage ratio to 4.16 times.

And finally, in terms of our outlook for the year, we continue to expect adjusted diluted EPS in the range of $2.55 to $2.60, representing growth of 20% versus year ago at the midpoint of the range. The impact of a later Easter in 2017 is expected to shift approximately 2% of net sales and approximately $0.01 of adjusted diluted EPS from the first quarter to the second quarter.

We expect the lion’s share of this impact to affect the Frozen segment and to a lesser extent, the Grocery segment due to the seasonal nature of those portfolios. The benefit of a 53rd week is expected to add approximately 1% to the full year net sales and $0.03 to adjusted diluted EPS. This impact will be spread across all four segments in the fourth quarter of 2017.

Input cost inflation for the year continues to be estimated in the range of 2.5% to 3%. Productivity for the year continues to be estimated in the range of 3.5% to 4% of cost of products sold. This estimate excludes the $15 million of Boulder Brands acquisition synergies that will benefit both gross margin and SG&A overhead.

Adjusted net interest expense continues to be forecasted at approximately $123 million for the year and as previously mentioned, the effective tax rate for the year, including the benefit of the new accounting standard for stock-based compensation, remains at approximately 35%.

This anticipates that the second quarter rate will approximate the first quarter rate with the second half considerably higher. We plan to provide an update on this during our second quarter call.

The weighted average diluted share count for the year continues to be approximated at 120 million shares with the second half of the year higher than the first half. And finally, capital expenditures for the year are now estimated to be in the range of $115 million to $125 million, reflecting timing of projects.

With that, I’ll turn the call back to the operator to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

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

Andrew Lazar

Good morning everybody.

Mark Clouse

Hi Andrew.

Andrew Lazar

Hi. Two questions, one on Frozen and then one on Boulder. Around Frozen, I know April is obviously a key selling time for the category as a whole. And so I guess on that, I’m just trying to get a sense of with pretty finite Frozen shelf space, if you will, and all the platforms you’ve got coming out, I guess where is all of that space come from? I assume part of it is from less productive Birds Eye SKUs that you kind of proactively take out. But is some of this coming from just increased space and facings for Birds Eye? Could be wearying on that?

And then it is the first selling season, I think, where really the key competitor is potentially able to be a lot more aggressive around some more meaningful new products as well. And I know you’ve talked about that and anticipated it. But anything around that, where it — maybe where that — is it all coming from private label? Or how does this shelf space piece work out? And then I’ve just got one on Boulder.

Mark Clouse

Okay. Yes, so let me tackle the Birds Eye and the Frozen question first. I think there’s three primary sources of distribution or space, if you will, for the innovation that we’re rolling out.

The first one is, as we’ve said before, there is — there remains a variety of redundant items that sit in this space. So, if you’re in any particular outlet, you can see four different types of, basically, frozen corn or peas. And I think the first wave of opportunity is to really help the customer and retailers understand that what is needed to optimize the mix within this section does not require those redundant items.

And that’s — and in many cases, they happen to be very low margin or low profitability. And so the sell in being able to find space at the expense of those items is kind of the first order of business.

I think the second order of business, as we’ve talked as well; I think with the demonstrated success of many of the Birds Eye items we’ve launched, I think we’re making the stronger case now that the adjacent categories to us may also present opportunities.

So, if you think about $0.99 single-serve meals where there’s not a lot of profit or margin in there, the relevance is declining, that becomes yet another source for us to find opportunity within the broader freezer or Frozen section to add space and create room for what we believe are significant trade-ups, if you will, in items relative to profitability, relevance and velocity.

And then the third is, as you mentioned, there will be times where we’ve launched a variety of platforms over the last couple of years. We always will look at the velocity, make sure as good category captains, which we are now in most retail environments, that we’ll make the appropriate trade-offs. And as we think about the destination, always mindful of what the right items are. So, there — although there may be some trade-offs, I do think the first and second sources will be the bigger option.

As far as having another player in the mix, I continue to say and believe that the opportunity on frozen vegetables is big enough that there is room for multiple players. And as one might expect in understanding what they’re lapping, especially on a two-year stack basis, I would expect to see some improvement.

But as we’ve gone through the first quarter and as I mentioned in my comments, we do have Easter now. So for — through three weeks of April year-to-date, our frozen vegetable business is up almost 4% and we’ve added 1.7 share points, we feel good. We feel good about where our position is, and that’s really before the innovation fully rolls in.

So, although we respect all of our competitors as we should, we’ll be in a posture of defense where appropriate. I continue to believe there’s room for players that have the same vision of adding value while we remain the leader with the clear vision and direction going forward.

Andrew Lazar

Got it. That’s really helpful. And then just quickly on Boulder. How much of the $15 million of incremental synergies were realized in the quarter? And if I missed that, I apologize.

And then with the new leadership at Boulder, just would love your thoughts on maybe what the skill set is there that Michael Barkley brings to the table there and how that’s consistent with, I guess, the priorities that you see for that business going forward?

Craig Steeneck

Sure. So, Andrew, I’ll take the first one. The $15 million of synergies, we realized $15 million last year, expectation is that we’ll deliver $15 million for this year, again, split evenly between gross profit and SG&A. That comes in pretty well pro rata throughout the year. So, take 25% of the $15 million and that’s at the ballpark.

Mark Clouse

Yes. So, Andrew, on Mike and our confidence and commitment to him in that role, I think he’s bringing a variety of experiences. So, as you know, he’s been a major player in building the architecture and the framework for Birds Eye, which clearly has been our most successful transformation on the business and has been a key driver of our growth going forward.

And I think it was rooted in a very strong understanding of consumer insight and reading the macro trends to position this brand in the right spaces to have the greatest impact. Very similar to what I would say the requirements are on the Boulder businesses to be successful now as we come through the tunnel of integration and really begin to step back up the innovation and marketing engine to be able to drive growth on those businesses.

I think what Mike also brings uniquely to the party is that he knows the Pinnacle model and the Pinnacle business very, very well. And as we continue to look for opportunities across these franchises so that an enterprise view could unlock what I called horizontal cost, but really, the ability to look across our different franchises and look for places where we can simplify process or drive harmonization and cost savings, I think Mike is uniquely qualified to bring a great set of experiences and perspectives that will help us along on that journey.

Andrew Lazar

Got it. Thanks very much.

Mark Clouse

Thanks.

Operator

Thank you. Our next question or comment comes from the line of Ken Goldman from JPMorgan. Your line is open.

Kenneth Goldman

Hey, good morning and thank you. Kind of a broad question. There’s been a lot of articles in the media lately, been hearing about groceries increasing pressure on some of their food vendors in terms of pricing and terms, et cetera. I’m just curious, is this something that you’re experiencing on a broad basis? We’re hearing some mixed things about how — I guess, true some of these stories are. Just let me hear your thoughts on maybe the situation.

Mark Clouse

Sure Ken. Well, as you know, we’ve been in a period now — I would say, an extended period, where delivering pricing has been more difficult than it had been in previous periods. I think you also have the introduction to a couple competitive dynamics in the marketplace, whether it be e-commerce or whether it be deeper discounters that are in the marketplace today which, I think, has created some challenges for how to match-up with low cost providers and low price providers in the marketplace.

And I do think there’s an added pressure to make sure that as we’re partnering with retailers, that we’re providing these win-win solutions where we understand what the competitive landscape is, we understand what it takes to be to manage our margin and our growth aspirations while also being very mindful of the situation that they’re in.

So, our ability to change some of these paradigms, whether it be through added value and innovation, while being very prescriptive and balanced in our approach on pricing, I think has been a good playbook for us and one that we’ve done quite well with.

If you think about even the most recent launch of Perfect Size for One on the baking in the Duncan Hines business, I think that’s a great example of us continuing to find a way to change the conversation and hopefully make it more, again, as I said before, a bit of a win-win situation.

But I do think recognizing that there will be pressure in this space on pricing really means that we’ve got to be all over the fundamentals of the business, really understand how the price gaps look, I think of where that private label may play a bigger role in these — in some of these categories going forward which we are seeing in certain spaces.

But our formula and the fact that we’ve remained consistent in providing the right support for these brands and categories, I think go a long way in helping us navigate these conversations.

Kenneth Goldman

That’s helpful, Mark. And I do appreciate that. And I guess if I could just follow up a little bit. I guess, more specifically, are we — it sounds like what you’re saying is that as long as you’re running a smart playbook and do what the customers and the end consumers want, that you’ll be fine. But it’s always tougher in a more competitive environment.

I guess I’m just trying to get a sense within that context and I do appreciate what you said. But trying to get a little bit better sense for how severe some of the competition is right now. Because some of the media will make it seem like there’s a “war” going on between Amazon and Walmart. And I’m not trying to talk about any customers in particular. I’m just trying to get a better idea of how severe it is or whether you think it’s — we’re sort of in a normal range of just heightened competition here?

Mark Clouse

Well, yes, Ken. So, I certainly don’t want to oversimplify the answer. I think, again, as we’ve talked many times before, as you’re running a portfolio, you are going to have some places where you’re going to feel a greater level of pressure on pricing than others, whether that comes through competitors or whether that comes through a conversation or position taken by one of our customers.

I think, again, you’re going to have that and I would say it’s a heightened environment as I said in the beginning. And so I don’t think it changes, though, dramatically the playbook that we want to deploy.

Again, we continue to look for these opportunities where we can bring alternatives to just having a conversation about straight pricing. We try to recognize where the right profitability levels are. But in some cases, you may see us making trade-offs or decisions, not to chase price points that we think are not constructive or unprofitable.

But in other circumstances, I do think you’ll see us making choices relative to what’s the right way to remain competitive and being in a position where we can take advantage of merchandising and programming that’s important, especially, in key seasons as we navigate this going forward.

So, again, I don’t want to oversimplify the answer to it. But I don’t think it’s a dramatic change in our strategic direction. It’s probably just a more pronounced moment to really be on top of it.

Kenneth Goldman

Understood. Thank you.

Operator

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

Bryan Spillane

Hey, good morning everyone.

Mark Clouse

Hey Bryan.

Bryan Spillane

Two quick ones for me. First, Craig, can you just remind us on phasing. When do we sort of lap or the out negative effect of the wind down in the U.K., the USDA stew business and also the exiting of the private label? Just where — what points in the calendar do we begin to kind of lap that? They’re not a drag anymore?

Craig Steeneck

Sure. So first, on the private label, stew and canned meat in the Specialty segment. We exited that business in the second quarter of last year. So, the first quarter of this year has got the negative comp in it. That should start to even itself out for the rest of the year.

And then the wind down of the Boulder U.K. business occurred really kind of late Q3, early Q4, so you’re going to have a little bit of a drag on that for the next couple of quarters, but it’s kind of fully out of the results in Q4.

Bryan Spillane

Okay. And then the second question. Just in terms of the Birds Eye platforms that are rolling out, I think maybe you touched on this in the answer to that last question. But are those all priced at a premium to sort of your baseline on Birds Eye?

And where are they in terms of price points relative to some of the other sort of value-added Birds Eye products you have now? I guess it sounds like they’re more premium products and I’m just trying to sense as to whether or not that’s going to be reflected in the price point.

Mark Clouse

Yes, you’re correct. And I think, again, although it sounds like a lot of platforms coming into the section, you are starting to see us really shape the category with a couple tiers of price points added value sides as a broader frame of reference where we now have protein blends, we now are introducing super foods.

These will — we believe they will operate as kind of a destination with similar price points, all of which that operate at a premium level relative to core steamed fresh veg or base frozen veg.

And again, that is part of — the strategy is to bring greater relevance for consumers, but also increasing the profitability of this category and section for customers is one of those big enablers, as I was answering Andrew’s question earlier, for making the case on why eliminating some of these base redundant items makes sense for the customer as well as for the consumers.

Bryan Spillane

Okay. Thank you.

Mark Clouse

Great.

Operator

Thank you. Our next question or comment comes from the line of Matthew Grainger from Morgan Stanley. Your line is open.

Matthew Grainger

Hi, good morning everyone. Thanks for the questions. First question, a few of your competitors talked about the fact that the number of assets and brands becoming available for sale is broadening out a bit. So just, from your perspective, curious whether that’s the case and how you’d assess the quality of the opportunities that are out there at the moment?

Mark Clouse

Well, I think as we talked a couple of different times over the last year, I think there was a fair amount of expectation that this year would bring some movement in the industry as you think about last year being a relatively quiet year.

I think you’re beginning to see that and I think that across the range of offerings that are out there, of course, as you might imagine, I think they all have different strengths and weaknesses. I think from where we sit, the way I would kind of categorize our position right now and the best way to describe it, I think, is kind of three things; vigilant, ready, and disciplined.

And on the vigilant side, those assets, as they become available, as you would expect, we’re going to evaluate. Now part of the power of bringing Michael Levitt onboard to strengthen our team and, really, our point of view in making sure that if there are assets that meet our criteria, count on us to be looking closely and understanding the value and the quality of the assets.

I think on the ready side, as we’ve said multiple times, we are through the integration of Boulder. Craig has done a masterful job on leverage, and we’re in a great position of readiness on all fronts to be able to take advantage of the right asset which kind of leads me to the third bucket, which is disciplined.

And again, I think we start from a position where we feel really good about our organic plan that doesn’t necessarily force us into a need for a deal, especially one that we might overpay or stretch beyond where we should.

So, you’re not going to see us do that. We’re going to use the same criteria that we’ve been using all along where we’re looking for adjacencies in our categories, we’re looking for number one or two brands, we look for things that we can integrate efficiently, effectively and quickly.

And so we will be aggressive when the right elements are there, but disciplined in how we approach it. And I think that’s probably the best way to kind of categorize our take on the situation right now.

Matthew Grainger

Okay. thanks Mark. And just one follow-up, I appreciate the commentary on consumption trends through mid-April. Just curious if you could give us a little bit more color on what consumption looked like during the quarter through April in the Frozen and the Grocery segments, how shipments were tracking relative to consumption? And in Grocery in particular, was there any meaningful inventory build from the Perfect Size for One launch that could unwind a bit next quarter?

Mark Clouse

Yes. So, it’s a great question and anytime you’ve got a holiday that kind of falls the way that it did, it becomes a little less scientific about exactly where the pipeline sits between Q1 and Q2. Here’s the way I would describe on broad strokes. And now with the consumption and the better part of April shipments, I can give you a pretty good perspective.

So, I think if you’re looking at Q1 in isolation, what you would’ve seen is perhaps a little lighter Easter shipments on Birds Eye than we might have expected. But as you see April unfold, you see that true up. And with consumption year-to-date running at around 4% and our Voila! business approaching closer to 9%, we feel great about that.

And I think you will see a little bit of a benefit as we had pointed out on where the shift of Easter is. I think the combination on the Grocery business, in particular, the Duncan Hines brand, I do think you saw pipeline beginning to increase a bit, the shipment number in the first quarter.

But when you see the consumption in April on Duncan Hines on both the base and the new product item which is double-digits, you’re going to see that although there may be a little bit of pipeline build that was in the first quarter, we’re feeling good about that not necessarily impacting that franchise going forward.

However, I think overarching where we were a little lighter on Frozen, a little bit higher on Grocery in Q1; you may see that balance a little bit as we get into Q2. Does that help?

Matthew Grainger

It does. Thanks again, Mark.

Mark Clouse

Thanks Matt.

Operator

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

Jason English

Hey guys. Thanks for [Indiscernible]. Congratulations on sort of defying gravity this quarter in a pretty tough environment out there. A couple questions, kind of housekeeping-oriented, the core is pretty clean, there’s not a lot of pickup. But in cash flow, there were some working capital leakage that was bigger than we are expecting. Can you give us a sense if it’s just timing or not and what your outlook is for free cash flow for the full year?

Craig Steeneck

I would say, Jason, it’s mostly timing-oriented. Obviously, there was some cash out in the quarter associated with the refinancing activity. We are carrying a little bit more inventory as we go into the seasons around the vegetable business, obviously, with all this new innovation that’s coming out. But I don’t see it being materially different from a year ago. And the overall cash flow kind of forecast, we had an enormously strong performance year ago at free cash flow, and our expectation is we’ll get pretty close to that in 2017.

Jason English

That’s a lot of cash, but you’re not buying back shares. You’re allowing sort of the stock or the option creep to come in with share count grinding higher. Why not deploy some of that to, at a minimum, offset some of the option creep?

Craig Steeneck

Well, as we’ve been clear all along in terms of our priorities around cash management, I mean as part of the refinancing, we also paid off about $200 million of debt. So, our priorities were to de-lever post the Boulder acquisition, which we’ve now done and in the process of doing.

With the balance sheet reloaded, to articulate Mark Clouse’s point, we’re certainly ready as it looks to M&A activity. We’ve continued to increase the dividend to give shareholders riding along with us in terms of the improvement in profit. But at this point, in time, we do not have a share buyback program authorized by the Board. Perhaps something to consider down the road, but we certainly want to deploy it against debt and kind of M&A activity.

Jason English

Thanks. Last question then I’ll pass it on. Gross margins for the full year, you gave some color in terms of quarterly cadence. What’s your expectation for the full year?

Craig Steeneck

Well, consistent with what we said that we want to generate 300 to 400 basis points over the next three years, which would imply around about 100 basis points of improvement on an annual basis, maybe a little bit more, that — 2017 is consistent with that three-year program.

Jason English

Thanks a lot guys.

Craig Steeneck

Thank you, Jason.

Mark Clouse

Thanks Jason.

Operator

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

Robert Moskow

Hi, thank you for question. I’m trying to forecast out Boulder’s growth rate. And I guess what surprised me a little bit in the first quarter is to see pricing up 3.8%. That’s good news. But I understand there’s — like you said, there’s not a lot of pricing going on in the industry. So, did you take a price increase on items within Boulder?

And also, just going forward, should I think of this as a good volume story because of the strong demand for the healthy products and for what you’re launching? Or is it really like 2018 that maybe you’re going to be able to come to the market with more innovation for the — for what you acquired? Thanks.

Mark Clouse

Yes, great. So, let me first start on the pricing side. Part of what, as you know, our strategy has been is to kind of turn off the faucet on some of the proliferation of a variety of SKUs that weren’t adding profitability as we’ve been executing the SKU rationalization.

In Q1 of last year, we are getting to lap a little bit of the slotting and the costs associated with that, which is helping improve the outlook a bit on pricing. So, I wouldn’t think of it as a lot of list price increases that are going on in the business today. I would just say it’s a more thoughtful approach in deployment of how we’re managing the business going forward.

To talk — now to answer the bigger question which is, okay, how do we feel about Boulder and where are we on the journey. I would tell you that I think you’ve got a variety of factors that are going on right now that will kind of shape the outlook for 2017 and begin to set up the runway as we exit the year into 2018.

Clearly, executing and completing the SKU rationalization initiative is something that we believe is really important and it is really shaping the base business now in a way that we’re beginning to get ready to move on, expanding distribution on the core items that we’re keeping while also kind of redirecting our attention to good profitable innovation.

I don’t think you’ll have to wait to 2018 to begin to see that, right? I don’t think we’re moving now. And how that phases in as we cycle the SKU rationalization, certainly, I think you’ll see more of that as you get to the latter part of the year.

And as you look at the portfolio today, I guess I would just say the good news is you’ve got a gardein business and an EVOL business that are very, very healthy and that are growing rapidly and we’re going to continue to fuel those while we address where some of the bigger needs are, which is really in the gluten-free space and addressing some of the competitive pressure there and really orienting around the strategy of eliminating compromise.

One of the things that, as we continue to dig deeper in the business, there’s really four areas in gluten-free that if we can truly eliminate that trade-off, I see tremendous road ahead. And we’re not going to wait around to begin to address these areas. It’s snacking, its bread, its pizza and its pasta. Those four areas make up the lion’s share of dollars within gluten-free.

And across each one of those, we’ve got some great either products that exist today or initiatives in place where we believe we can meaningfully change what the expectation should be for what gluten-free is.

And I think with that in place, we see a much broader appeal across consumers and also a better position competitively, which is where we’re feeling a lot of the pressure right now.

Craig Steeneck

And Rob, one thing for sure–

Robert Moskow

Go ahead, Craig.

Craig Steeneck

I just want to add, Rob. That was all the commentary relative to the top line. I mean the EBITDA for the business remains nicely ahead of what the acquisition model had anticipated. The Boulder business in 2015 had around about $60 million, $62 million of EBITDA. We said we’re going to add $30 million of synergies at 50% improvement. We’ve updated that guidance at 85% improvement.

So we’re looking at a Boulder business EBITDA for 2017 in the range of $110 million to $115 million. So it’s delivering on all cylinders relative to the overall profitability model.

Robert Moskow

Okay, I’ll have to pass it along. Thank you.

Mark Clouse

Okay.

Operator

Thank you. Our next question or comment comes from the line of Rob Dickerson from Deutsche Bank. Your line is open.

Robert Dickerson

Thank you very much. Just two housekeeping questions. The first is just on the topline. I know obviously there’s the Easter shift to Q1 and there’s the SKU rationalization on Boulder. But is there any way to give us some kind of clear, more defined guidance as to what you think the normalized organic sales growth rate could be this year?

And given long-term guidance is always in line or a little bit better than the categories, but considering the pressure we’re seeing in the first quarter and increased competition, just in general, you’ve discussed, just trying to get your feel as what you think you can do it. Is it kind of like a flattish year? Or maybe this is more around like 1%, 2%?

Mark Clouse

Well, as you know, we do steer clear of giving a lot of direct guidance relative to growth numbers. I think as you look at the second quarter, you are going to have a variety of factors that are at play.

On the one side, you’re going to have the benefit of the Easter shift, no question, and building momentum on Duncan Hines Perfect Size for One, along with the innovation platforms we just announced on Birds Eye. All of those are going to support the business in a positive way.

I think on the other counter position, I think that as you might imagine, part of what influences these numbers tends to be where your concentration of innovation is at least from a slotting standpoint. We’ve got a lot of innovation that’s rolling out in Q2. And that’s — that will have a — or play a factor in it as well.

And it is an environment right now that has a lot of competitive pressure. It’s — again, I would tell you that as we see April come in, we’re feeling certainly better about the overall industry. But as I mentioned in my comments, I think it will be a tough environment.

So, I guess the best way I would tell you is we don’t expect to take any quarters off here. We’re going to continue to drive performance that we believe is exceeding the run rate of our categories. We like that share position that we’re driving in our categories. And I think, again, you should expect to see that as more of a consistent delivery through the year.

Craig Steeneck

And Rob, just as a reminder, and we’ve laid it out in our guidance obviously, there’s 3 extra weeks of Boulder performance in the first quarter and then we do have the “luxury” of the 53rd week in 2017. So those will affect the reported net sales.

Mark Clouse

That’s true, yes.

Robert Dickerson

Okay, great. And then just quickly on the Grocery segment. I know you had mentioned that there are some innovation being pushed in Q1, coupled with some of the deceleration of the Easter shift in Frozen and we’re seeing a little bit of the mix shift — kind of a seasonal mix shift in Q1.

But do you expect that to be a little more balanced as the year goes forward? But just overall, with the innovation you have on Duncan right now, it sounds like you’re saying that even though it’s a little bit more balanced going forward that maybe the Grocery segment relative to, let’s call it, the past two years, the expectation is it actually does better and actually could be a higher margin business for you than we’ve seen historically and potentially be a higher contributor to overall profit. Is that true? Or is it still probably a little bit more heavily weighted on Frozen going forward? Or is Grocery kind of bringing up the tail end, so to speak?

Mark Clouse

Yes. It’s a great question and again never a simple answer. It’s a pretty broad portfolio, as you know, in Grocery. I think if you kind of peel apart the pieces a bit, I would tell you that we feel very good about the Duncan Hines brand for this year.

I think the innovation and the fact that we’ve got what I would say a little bit better balance this year in the merchandising and kind of, let’s call it, key seasonal window participation, I feel very good about the outlook for that business going forward.

As I mentioned, we do have some competitive challenges in a couple of areas. We’re working hard on the Vlasic and the Wish-Bone businesses to make sure that we get the right balance between appropriate competitiveness while not chasing price points that are going to hurt us on margin.

So I would expect as those are from time to time, you’ll see some volatility in that space, continued strength on our Armour business. I think in totality, what I would tell you is I still think our Frozen business, if you look at it top to bottom, is where more of the growth and the strength will come from.

But I do think a more balanced approach in Grocery is part of what we’re working on. And certainly, we expect that to come with some profitability as we continue to add good margin-accretive innovation.

And guys, I think one of the things that I don’t talk a lot about that I do think is really a point of difference for Pinnacle is the strength and the ability of our selling organization. As we have built that capability over time, I think it’s given us a real position and an advantage in navigating some of these choppier waters, whether it’s the relationships, and customer planning that we’ve been able to do or truly the blocking and tackling that we’re doing at store. I think that gives us an advantage, even as the waters become choppier in being able to navigate it and I would put our capabilities up as really best-in-class.

Robert Dickerson

Okay, great. And then very quickly, Craig. Just on the tax rate, I know Q1, Q2 a little bit lower than expected. Guidance doesn’t changed. You said the back half will be up much higher. But is there an expectation that maybe there could be some tax benefits for the year relative to original guidance? Or are you sticking with the guns at the back half just weighted will be high enough that there isn’t?

Craig Steeneck

Yes, Robert. It’s a little bit kind of too early to call. I mean the new accounting for the stock-based comp, it’s the first quarter, we’ve had to account for it that way. It certainly came in at 32.5%, a little bit better than our expectation. The second quarter is a big quarter for us, a meaningful quarter with a big equity vest. And the accounting standard was always going to have some variability and volatility to it.

So, we’re going to see how Q2 comes in. We’re going to analyze it at that point in time. There’s no doubt the second half will be higher than the first two quarters and we’ll take a view relative to the full year guidance on the Q2 call.

Robert Dickerson

Okay, great. Thanks for all the time.

Mark Clouse

Thank you.

Operator

Thank you. Our next question or comment comes from the line of Steven Strycula from UBS. Your line is open.

Steven Strycula

Hi good morning. Two questions. The first would be a private label question for Mark and I have a follow-up for Craig. You mentioned on Ken’s question that you’ve seen private label share encroach in a few select categories. When we fill back [Indiscernible] and Nielsen, what are those categories?

Mark Clouse

Well, it’s — we have 19 categories that we participate in. And we’ve seen some improvements in private label across 13 of them. So it’s pretty broad reach. However, what I would say is that in many cases, it may be off a relatively small base or in most of those, as you can do the math of our composite share growth, we’re growing share at the same pace, if not faster.

So, I think the reality is that our engagement or our interaction with private label, as I look in the course its category by category is the way you have to go about this, overall, I feel good. There’s a couple places where I think we’ve got some work to do to make sure that we’ve added the appropriate value that we’ve been able to separate and create the right price sized architecture to be in a stronger position.

But I do think you will continue to see the private label presence and, in some cases, increasing in certain categories. But the great news is our game plan for how we’ve gone about reinvigorating these iconic brands puts us in a better position than maybe some of the other players who have really been focused on taking pricing or trade out or not innovating or not supporting the brand.

So, again, this is going to have to sharpen some people’s pencils competitively on what you’re doing. But I feel very good about the work that we’ve put in place to do it. And count on us to be looking, again, at each of these categories individually to make sure we’ve got the right strategy in place.

Steven Strycula

All right. And then a quick question for Craig. You’ve done a series of acquisitions in both Frozen and shelf-stable categories. Can you discuss which temperature class offers greater synergies opportunity given your supply chain and why? And why — when you kind of take a look at the pipeline that’s coming down, how do you think about the difference in longer-term for the portfolio between synergy-rich deals and then revenue-enhancing deals that take you to a higher net revenue growth rate?

Craig Steeneck

That’s an interesting question and I mean the answer is both. Look we’ve said all along, the Frozen space scale is really, really important there. You have a fixed cost space in that temperature class with freezers in your plants and having to use trucks that are frozen, et cetera, et cetera, et cetera. So, Frozen is an absolutely right area for us to be able to get synergies from acquisitions.

We saw it a bit ago with Birds Eye. Obviously, you’ve seen it with Gardein and, to a lesser extent, with Boulder. But the center of the store Grocery business also scales important there. We have a very good portfolio there with Duncan Hines and Wish-Bone and syrups and Vlasic.

So, adding scale there is also helpful. And look as we’d articulated before, there are a lot of assets on the market at the moment and we’re going to look at them all and we would be happy to be able to add business in Frozen or Grocery or in our Boulder health and wellness portfolio.

Steven Strycula

All right. Thanks.

Craig Steeneck

Thank you.

Operator

Thank you. Our next question or comment comes from the line of Brian Holland from Consumer Edge Research. Your line is open.

Brian Holland

Thanks good morning. I wanted to ask quickly about the Wish-Bone business. You rolled out the avocado oil dressing recently. Consumption, you can’t really tell. I don’t think through the scanners I understand and I appreciate there’s typically a lag sometimes when you bring the new items in. So maybe if you could maybe clean up what you’re seeing in the trade on your end there and kind of how that — this is evolving, a year past from sort of the reset?

Mark Clouse

Right. Yes. So, I think we continue to feel very good about the healthy oils platform. It’s a place where we think like we’ve done in a variety of other categories, it’s a chance to bring something that is very relevant to consumers, do it at a better margin and kind of insulate a bit from what is an incredibly competitive segment.

And after a lot of years of being around salad dressing core category, it is a tough one. And I think as you look at results right now, you see a lot of competitive activity, some aggressive pricing.

And I think we’re continuing to look to balance the right trade-offs between innovation, pricing and merchandising, and making sure that we’ve maintained our margin agenda which we have been very successful on in expanding those margins since the integration.

I will tell you that if you’re looking specifically at some of the syndicated data that’s in the marketplace right now, one of the things that is not an accurate portrayal is we are executing a downsizing right now on a major part of our business. And sometimes, the IRI and Nielsen databases miss new items in the first read or they also can miss downsizes which operate like new items.

And so the reality is, if you look at our — the Wish-Bone business through the first quarter plus those three weeks in April we have, we are off about 3% or so, which is generally in line with the category, a little bit below the category which, of course, we don’t like, but is also reflective of kind of that competitive environment.

So, it’s one that I realize is a little difficult to read. And certainly, we all had to gasp a second when we saw the data come out. But as we’ve clarified that and really understand it, we feel like we’re positioned where we would expect to be and then as the innovation continues to help contribute along with good management. We’re going to make good decisions and good trade-offs to make sure that at the end of the day, we optimize this business.

Brian Holland

Thanks. That’s helpful. And then just I’ll get out of here on this one. Can you frame for us; we talked about Green Giant coming back on consumption turning positive against significant year-on-year decline.

But more broadly speaking, obviously, as Pinnacle has renovated the Birds Eye platform and added several branches off of that tree over the past several years, how much of an impact — and I certainly appreciate that that’s an iconic brand that’s getting some renewed investment focus.

But can you sort of frame how far you’ve moved away from that core such that any real uptick there on the core business or maybe one wave of innovation that, that — I mean, is that — can that even be a meaningful impact? Are you guys comfortable with how far you’ve taken Birds Eye such that you don’t feel that as much?

Mark Clouse

Yes, so what I would tell you is — and as you look at the entire franchise, there is no question that we’ve got a lot of avenues for growth and contribution on this business beyond core veg.

But the reality is that it is very important that you keep your eye on the ball on both the innovation and the added value and the core as well, especially as you go through key seasons where you see the mix shift on the business to more core veg as you go into key holiday windows.

So, this is not a category where you can afford to walk away from the base and we’re not. I mean, we continue to look for opportunities to improve. I think, as we’ve talked about before, the Steam Fresh bag and technology is a tremendous tool for us in creating differentiation.

We will continue to support to support that part of the business, make sure that we’re appropriately positioned competitively and that we’re in the right spot, both across the core business and the innovation going forward.

Brian Holland

Thank you.

Operator

Thank you. Unfortunately, we only have time for one additional question. Our final question or comment comes from the line of David Palmer from RBC Capital. Your line is open.

David Palmer

Thanks good morning. Two follow-ups and thanks for squeezing me in. First one on the Boulder Brands segment. Just wondering what — how you see that playing out this year. The all channel consumption is usually different than just what we see in the measured channels, and obviously, you’re doing a lot with SKU rationalization now.

The timing of that and that impact, I would imagine that will be a diminishing impact perhaps later in the year. You talked about renovation, which I assume is about taste improvements, maybe some of the timing of that. How do you see that portfolio playing out this year?

Mark Clouse

Yes, so let’s kind of tick down. I think the first thing I — just to give you the broad answers to the question. I do think you will see the SKU rationalization initiative begin to diminish as we run through Q3 and into the exit of the year.

Again, we’re — we’ve taken a big chunk of that out. We’ve got a little bit more work to do. You do still see some impact, especially on our gluten-free business. And that will likely continue but begin to mitigate as we get through the third quarter and into the fourth.

So — and again, if you’re — how to kind of bridge that, in general terms, the difference between what we would call the underlying base, excluding the discontinuations, you’re about three to four points of impact on our overall consumption that’s related to that. So, that gives you a little bit of a handle on it.

As far as how to think about our innovation and the ramp up, again, I think as you go through our brands, the great news is we have Gardein now with Hagerstown open. We’ve got supply. We’ve got a lot of excitement building, the opportunity to drive distribution and continue to drive growth on that business is a priority that we’re not waiting around to do.

So that’s a business I would expect to continue to see strength behind as the year moves forward. We also were a little faster through a lot of the SKU rationalization work on EVOL so we’ve got a great core business now there and we’re — the sales organization’s done a wonderful job driving that distribution into a variety of channels and outlets that it wasn’t in before.

So, again, I think you should expect to see continued strength there. And then I think on the gluten-free side, that’s where a lot of the renovation activity will occur. I don’t think you’ll have to wait till 2018 to get it, but I don’t think it’s something that you’re going to see meaningfully impacting 2017. But I think you’ll certainly get to see some of that benefit as you roll into the fourth quarter.

David Palmer

And then squeezing one more follow-up and that is about the Frozen vegetables. Latest consumption data does suggest that the competitor has returned to growth. And maybe the big picture is that they’re going to be managing the business differently than the previous owner, not just now and benefiting from those comparisons, but it’s just going to be different in that they’re going to be spending to grow probably trying to follow your blueprint and then trying to extend the veggie brand into other stuff, the sides, the unique forms that seems to be more of an extendable category than it has been in the past. Do you feel like this is the beginning of a new era in this space and the energy in the category and what — and the type of growth that it will get?

Mark Clouse

Yes, I believe this is — that we’ve begun a transformation of this part of the Frozen category and with vegetables being kind of the tip of the spear that’s now expanded out into other areas. I’m very confident that there is a relevance and a growth trajectory in Frozen that can be enabled by continuing to move down the path and the strategy that we’ve put in place.

And when you look at the section, again, just to kind of reiterate the point, you see opportunities to eliminate redundancy to improve relevance and profitability. And I think with one or more players in this space supporting that agenda, I think there is a very positive outlook for this category going forward.

David Palmer

Thank you.

Operator

Thank you. I’d now like to turn the conference back over to management for any closing remarks.

Maria Sceppaguercio

Thank you, everyone for joining us today. I know we went a little longer, sorry about that. We tried to take as many of your questions as we possibly could. I’m around all day, so if you have any questions, just give me a call and I’ll be more than happy to help you. Have a good day.

Mark Clouse

Thanks everyone.

Operator

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

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