B&G Foods, Inc.

Good day and welcome to the B&G Foods first quarter 2021 earnings call. Today's call, which is being recorded, is scheduled to last about one hour, including remarks by B&G Foods management and the question and answer session. I would now like to turn the call over to Sarah Jerome, Senior Director of Corporate Strategy and Business Development for B&G Foods. Sarah? Sarah?

Good afternoon, and thank you for joining us. With me today are Dave Wenner, our Interim President and Chief Executive Officer, and Bruce Wacca, our Chief Financial Officer. You can access detailed financial information on the quarter in the earnings release we issued today, which is available at the Investor Relations section of bgfoods.com. Before we begin our formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to B&G Foods' most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact our company's future operating results and financial conditions. B&G Foods undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. We will also be making references on today's call to the non-GAAP financial measures adjusted EBITDA, adjusted EBITDA before COVID-19 expenses, adjusted net income, adjusted diluted earnings per share, and base business net sales. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release. Dave will begin the call with opening remarks and discuss various factors that affected our results, selected business highlights, and his thoughts concerning the outlook for the remainder of fiscal 2021. Bruce will then discuss our financial results for the first quarter, as well as expectations for 2021. I would now like to turn the call over to Dave.

Thank you, Sarah. Good afternoon, everyone, and thank you for joining us today on the first quarter earnings call. Assessing our results for the quarter, my overall comment is that the quarter played out much as we expected. In total, we achieved record first quarter net sales of $505.1 million, a 12.4% increase from Q1 2020. Net sales on our base business, which excludes the Crisco acquisition completed in December, were approximately $447 million, virtually flat versus first quarter 2020 at a modest 0.6% decline. Within that number, U.S. base business net sales were up 2.1%, while international base business net sales were down 31.8%, virtually all of that green giant sales in Canada due to severe allocation of the brands there. Compared to fiscal 2019, our base business net sales, which for purposes of the two-year comparison also exclude Clabergirl and FarmWise net sales, increased $16.6 million, or 4% for the quarter. Our $447 million of base business net sales were supplemented by the $58 million of Crisco net sales, bringing our total net sales up to the $505 million figure. Adjusted EBIT for the quarter also set a first quarter record at $92.9 million, a 15.2% increase, the result of solid base business volume and earnings and a fulsome Crisco benefit in our first few months of ownership. Those are the highlights. I'll turn the call over to Bruce now for more detailed comments on the quarterly performance, after which I will add additional color on our performance. Bruce?

Thank you, Dave. Good afternoon, everyone. As Dave just discussed, we had very strong financial performance during our first quarter, delivering company record first quarter net sales and adjusted EBITDA. We reported net sales of $505.1 million in the first quarter, an increase of $55.7 million, or 12.4%, compared to the prior year first quarter, and an increase of nearly $95 million, or 22.4%, compared to the first quarter of 2019. As you know, the CRISCO acquisition closed on December 1, 2020, providing us with a full quarter of net sales in the first quarter. Crisco generated approximately $58.1 million in net sales for the quarter, which is slightly ahead of our internal model. Base business net sales, which excludes the benefit of Crisco, were essentially flat to last year's first quarter, or down 0.6%. Excluding the benefit of Crisco, net sales were up approximately $34.4 million, or 8.3%, from Q1 2019, Approximately $17.7 million of which was due to the May 2019 acquisition of Faber Girl and the February 2020 FarmWise acquisition. And approximately $16.7 million of which was due to base business net sales growth. We generated adjusted EBITDA before COVID-19 expenses of $95.8 million in the first quarter of 2021. an increase of $15 million, or 18.5%. During the first quarter of 2021, we incurred approximately $2.9 million in incremental COVID-19 costs at our manufacturing facilities, which primarily included temporary enhanced compensation for our manufacturing employees, compensation we continue to pay to manufacturing employees while in quarantine, and expenses related to the precautionary health and safety measures. As discussed on our fourth quarter and full year 2020 call, we expect to see a continued reduction in these costs, which average $1.5 million per month during the height of the pandemic. Inclusive of these costs, we reported adjusted EBITDA of $92.9 million, which is an increase of $12.2 million or 15.2% compared to last year's first quarter. Adjusted EBITDA before COVID-19 expenses as a percentage of net sales was 19% in the first quarter of 2021. Adjusted EBITDA as a percentage of net sales was 18.4%. Adjusted EBITDA before COVID-19 expenses as a percentage of net sales and adjusted EBITDA as a percentage of net sales were 18% in the first quarter of 2020. as COVID-19 expenses did not fully kick in until the second quarter of 2020. We reported $0.52 in adjusted diluted earnings per share in the first quarter of 2021, an increase of $0.06 per share, or 13%, compared to the prior year first quarter. Leading our brand performance were our spices and seasonings. Net sales of our spices and seasonings, including our legacy brands, such as Accent and Dash, and the brands we acquired in 2016, such as Tones and Weber, were up by $30 million, or 41.2% for the quarter. Net sales of spices and seasonings were up by $17.1 million, or 20%, compared to the first quarter of 2019. Net sales of spices and seasonings reached $397.7 million for the 12 months ended March 2021. The retail side of this business continues to show the strong momentum that began last summer as more and more Americans began to fully embrace cooking and seasoning their meals at home, a trend which continues in 2021. The food service side of this business has also begun to show some momentum with a budding recovery and the away-from-home channel, as many Americans have begun to emerge from a year or more of lockdowns and shelter-at-home safety precautions. Despite the recovery, food service net sales of spices and seasonings remained below pre-pandemic levels for the quarter, but did have an increase for the month of March. Other major brands contributing to the net sales growth include Maple Grove Farms Las Palmas, and Ortega. Maple Grove Farms generated approximately $20.7 million in net sales during the first quarter of 2021, an increase of $2.3 million or 12.1% compared to Q1 2020, and an increase of $2.8 million or 15.5% compared to Q1 2019. Las Palmas generated $10.7 million in net sales during the first quarter of 2021, an increase of $.2 million, or 1.8%, compared to Q1 2020, and an increase of $1.3 million, or 14.4%, compared to Q1 2019. Ortega generated $39 million in net sales during the first quarter of 2021, an increase of $.2 million, or 0.4%, compared to Q1 2020, and an increase of 1.7 or 4.6% compared to Q1 2019. Green Giant, which was one of the largest beneficiaries of COVID pandemic buying of the past year in our portfolio, had approximately $639 million in net sales during fiscal 2020, an increase of $112.2 million or 21.3% compared to the prior year. As we discussed during our last earnings call, Green Giant, as well as its competitor brands, will have supply constraints until we reach the new pack season later this year. As a result, we were forced to make tough decisions and place the brand on allocation with our customers, which will limit sales of Green Giant products until this year's third quarter so that we don't sell out before the pack season. Primarily as a result of those decisions, Green Giant net sales were just $132.5 million in the quarter. a decrease of 25.9 million, or 16.4%, compared to the prior year quarter. However, demand for Green Giant remains strong, and we expect a strong second half of the year, and we expect full-year net sales of Green Giant products to exceed the brand's fiscal 2019 net sales of approximately $525 million. While demand has remained strong and net sales have generally remained elevated, when compared to fiscal 2019, many of our other brands were unable to surpass Q1 2020 net sales. Cream of Wheat, for example, generated $18.2 million in net sales during the first quarter of 2021, a decrease of $.7 million, or 4%, compared to Q1 2020, but an increase of $.8 million, or 4.3%, compared to Q1 2019. Fiber Girl generated $17.4 million in net sales during the first quarter of 2021, a decrease of $1.3 million, or 6.8%, compared to Q1 2020, but significantly greater than the estimated $15 million or so of net sales generated during the Q1 2019 period under prior ownership. Our gross profit was $117.8 million for the first quarter of 2021, or 23.3% of net sales. Excluding the negative impact of approximately $5.5 million of acquisition divestiture-related expenses, the amortization of acquisition-related inventory, fair value step-up, and non-recurring expenses, including the cost of goods sold, our gross profit would have been $123.3 million for 24.4% of net sales. Gross profit was $104.9 million for the first quarter of 2020 for 23.3% of net sales. Excluding the negative impact of approximately $2.3 million of acquisition divestiture-related expenses and non-recurring expenses included in cost of goods sold, our gross profit would have been $107.2 million, or 23.9% of sales. As discussed on our fourth quarter and full year call, we are certainly seeing inflationary pressures in 2021. So far this year, the first quarter has largely played out as expected, with low to mid-single-digit inflation on a blended basis across our basket of goods, with significant increases in agricultural products and commodity-related input costs. as well as corrugate, steel, and aluminum. We are also seeing meaningful increases in freight costs and COVID-19 related customer fines. Our procurement policy has led us to be somewhat aggressive when covering costs in a rising environment, and we have locked in costs for many of our inputs through the first three quarters of the year. We have also continued to be aggressive with our cost cutting initiatives, and we are taking revenue enhancing actions across many of the brands that have been impacted by cost inflation when appropriate in an attempt to maintain margins. Selling general and administrative expenses for the year were $50.4 million or 10% of net sales. This compares to $40 million or 8.9% for the prior year. The dollar increase in SG&A is primarily composed of an incremental $4 million investment in consumer marketing $1.9 million in incremental acquisition-related costs and non-recurring expense, which primarily relate to the acquisition and integration of the Crisco brand, and $4.1 million in increased warehousing costs. The increase in warehousing costs was primarily driven by the Crisco acquisition and COVID-19-related customer fines. General and administrative expenses increased by $1.3 million. These costs were partially offset by decreased selling expenses of $0.9 million. As I mentioned earlier, we generated $95.8 million in adjusted EBITDA before COVID-19 expenses, and after the inclusion of $2.9 million of COVID-19 expenses, adjusted EBITDA of $92.9 million. This compares to adjusted EBITDA before COVID-19 expenses of $80.8 million in Q1 2020 and $75.8 million in Q1 2019. We generated 52 cents in adjusted diluted earnings per share in the first quarter of 2021 compared to 46 cents per share in Q1 2020 and 44 cents per share in Q1 2019. We remain very encouraged by these trends. We had another strong quarter of cash from operations, although it was impacted by the timing of one of our semiannual interest payments and the payout of increased incentive compensation related to the company's 2020 performance. Net cash provided by operating activities was $26 million during the first quarter of 2021, compared to $57.6 million during Q1 2020. The majority of the decrease was driven by the timing of an approximately $24 million interest payment for 2025 notes on April 1st, which happened to fall into our first quarter for this year and our second quarter last year. The remainder of the decrease was driven by a $12.6 million increase in incentive compensation paid in cash as a result of the company's very strong performance in fiscal 2020 relative to the prior year. Our consolidated leverage ratio as defined by our credit agreement and which is calculated on a pro forma and net debt basis was 5.23 times and remains within our long-term leverage target of 4.5 to 5.5 times and well below our credit agreement covenant threshold of seven times. We are reaffirming our 2021 sales guidance that we provided in March as we continue to expect company record net sales of $2.05 to $2.1 billion in fiscal 2021, inclusive of the benefit of a full year of the CRISCO acquisition. From a pacing perspective, we knew that we had a head start in the first quarter of this year with exceptional performance in the months of January and February that would be coupled with a final month of March that would come in well short of last year when we were at the beginning of the COVID-19 shutdown and related pantry loadings. and that is exactly how the quarter played out. Crisco is purely incremental for us at this stage and is performing in line with our expectations. For the second quarter, we expect something similar, with our base business net sales to trend much closer to our 2019 net sales than our 2020 net sales, maybe low to mid-single-digit percentage points higher than what we experienced in 2019. Crisco will again be purely incremental for us in the second quarter, Historically, Crisco generated about 20% of its full-year net sales in the April to June period. And as we discussed earlier, we expect 2021 to present us with a different set of challenges and opportunities than we had last year. Demand for our products remain elevated, but not quite as high as during the pandemic. With the exception of Green Giant and certain of our other brands, We are also in a much better position from a supply standpoint across most of our portfolio than we were late last year, which should enable us to meet much of this demand. We highlighted our concerns about inflation during our last earnings call, and these concerns are certainly proving out as we are seeing inflation across a number of key input costs, including certain agricultural products, other commodity products such as oils, as well as packaging and freight. As in prior years, our experience and expectation is that we will manage these costs through a combination of revenue enhancing initiatives, including pricing and trade spend optimization where appropriate, as well as certain cost savings activities to preserve our margin profile and our cash flows. As a result, we expect to generate adjusted EBITDA as a percentage of net sales of approximately 18 to 18 and a half percent, which is generally consistent with our performance in recent fiscal years. I'll now turn the call back over to Dave for further remarks.

Thank you, Bruce. As I said at the beginning of the call, the quarter played out much as we expected, with substantial sales gains in the first 10 weeks and then tough comparisons in the last few. The first two weeks of, excuse me, the last two weeks of Q1 2020 essentially saw four weeks of normal sales volume compressed into two as COVID-driven panic buying commenced. Nearly all of our brands benefited from this phenomenon as consumers loaded their pantries with anything and everything, and in our case, especially canned goods and frozen vegetables. So it's no surprise that the most challenging comparison we have for the quarter is in the canned goods brands. As Bruce described, the largest dollar decline we saw in quarter-to-quarter sales was in green giants. down 16.4%. Virtually all of that happened in the final two weeks of the quarter, making total brand sales for the full quarter similar to first quarter 2019. An additional handicap is that we have supply constraints on the can side of the Green Giant brand due to unprecedented demand late last year. But even with those constraints, we expect brand sales to continue to track 2019 levels until the new crop arrives. Excluding the Green Giant brand and the remarkable swing in that brand, net sales for the remainder of our base business increased by 8.1% over first quarter 2020. Sales remained broadly strong, especially in areas such as baking and spicings and seasonings. Food service sales strengthened as well, helping the overall performance. First quarter was our first full quarter of ownership of the Crisco brand, and we were very pleased with its performance. At $58.1 million in net sales, its tracking to our expectations and margins were accretive to our overall results. We do face temporary cost challenges with the brands, as the cost of oils used in the products has more than doubled since this time last year. But we view these very high levels as an anomaly that the market will work through over time. Meanwhile, we own what we see as an iconic brand that fits well with our portfolio of products related to baking at home, a revitalized consumer behavior. With the addition of Crisco, we estimate that our baking at home brands would be approximately 20% of our net sales. While much of our business has started shifting back to more normal performance, one area where we see continuation of new consumer behavior is in e-commerce. While there are no complete or precise measures of net sales through this means, we are able to estimate that retail sales of our brands through these various e-commerce venues grew by over 60% to $50 million in the first quarter. At this point, we estimate that e-commerce retail sales for the full year will continue to grow at that rate and reach $275 million this year. I should emphasize that this is not necessarily growth in our factory sales, but instead a noteworthy shift in how consumers are buying our products. We are investing significantly in this area to ensure that we are well represented in the phenomenon which shows no signs of leveling off in the near future. If anything, retailers are upping the ante with one recent article citing plans for two-hour delivery of orders to consumers' homes. Our household penetration has grown substantially in the past year and is up almost 10 percentage points versus 12 years ago, 12 months ago, excuse me. At the same time, consumer purchase frequency and size has also grown. Our job is to retain these new and revitalized consumers as the pandemic eases. We believe the potential to do that exists primarily because work from home is here to stay in one form or another. Our own experience as we return to normalcy is that employees want flexibility in their schedules and work days. Given that, we are orienting our marketing to reinforcing behavior adopted during the pandemic. An example is the new website created for our baking demands, bakingathome.com, where consumers can find a wealth of recipes and baking tips, many, of course, featuring B&G Foods brands. Similar efforts will be taking place across the business as we use the efficiency and cost effectiveness of social media to reach consumers. As encouraging as first quarter results are, there are certainly risks and unknowns to deal with for the remainder of 2021. Rising costs are a significant issue and one that will not be resolved anytime soon. As Bruce noted, freight costs have increased steadily. Capacity issues in the trucking industry in both labor and equipment will continue for the foreseeable future. Packaging and raw materials have seen widespread cost increases as well. We have insulated ourselves in many cases with forward buying positions, but even with these in place, we have also had to announce pricing and manage our trade spending to compensate for these cost pressures. Some of these increases are already in effect, and others will take effect shortly. On the positive side, we are seeing reduced expenses related to COVID as vaccination of our workforce expands. While this was a $2.9 million negative in the first quarter, we should save much of the $13.3 million we spent on COVID-related measures in the last three quarters of 2020. As we continue to grow larger, we are investing more resources towards meeting our responsibilities as a corporate citizen. The Corporate Social Responsibility Committee of the Board of Directors is charged with the overall direction of these efforts and has initiated a broad array of efforts in diversity, equity, and inclusion, as well as environmental and sustainability. During the first quarter, we worked with the Culinary Institute of America to establish a scholarship program for diverse students. The program will fully support tuition for five students as they pursue careers in the food industry. This effort joins the extensive work B&G Foods is already doing with St. Jude Children's Hot Research Hospital. We are also developing further programs around environmental and sustainability goals at our manufacturing facilities and distribution centers and are working towards increasing our public disclosures regarding our environmental and sustainability programs and goals. With the pandemic easing, we are working hard to return to the B&G foods of old, a company that delivered steady, reliable results on a regular basis with exceptional margins and strong free cash flow. That is the model that has served our shareholders well over the years and delivered superior returns. I started my remarks by stating that the first quarter played out much as we expected, and that's very encouraging. But we do expect second quarter to be the most challenging quarter of the year and the largest unknown. Our net sales increased by 38% in the second quarter of 2020 over 2019, reflecting the height of the pandemic pantry loading. We obviously won't match that increase. but we believe that our business will perform favorably versus fiscal 2019 and continue to produce solid results. As a final note, I would mention that a press release went out just before this call, introducing everyone to my replacement, since I am, in fact, the interim CEO of the company, Casey Keller, who, as you will read in the press release, is extremely well-qualified and well-rounded in and should do a fantastic job leading the company when he starts next month. We are all looking forward to welcoming Casey here, and I hope to return over a company that is raring to go when he arrives. With that, we'll conclude our remarks, and we'd like to begin the Q&A portion of the call. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Good evening. How are you doing, Dave and Bruce?

Hey, Andrew. Good afternoon.

So a couple things. First, I wanted to start off just with the new CEO announcement. I think, Dave, you've mentioned here and there that the focus in terms of the skill set you were looking for in a new CEO is getting back to sort of maybe what has been B&G's core DNA, right, around focus around margin, cash flow, capital allocation and such. And so I'm trying to get a sense of what you saw and the board saw in Casey and his skill set and how you see it sort of fitting that mantra as opposed to just the pure classical marketer that perhaps some other food companies have been more interested in. And then I've got a follow-up.

Well, I wouldn't say that Casey's just a classical marketer. He's had full P&L responsibility in a number of companies. and certainly in the interview process showed a thorough understanding of the operations part of the business as well as marketing and sales. And I think he brings an international flavor to the business that we really haven't had before. So that should be an interesting aspect of his background. I was fascinated to hear that Pete's actually runs a store door business with supermarkets and things like that, which, you know, to run a company that does that kind of thing, you need to be a pretty strong operations guy as well as a marketing guy. So that was certainly, we certainly considered all of that. We understood that that was a very strong need in the company and we felt Casey could deliver that.

And then I may have missed this if I did. I'm sorry. Did you say what you expected from, sort of full year inflation to look like. So it sounded like you've got decent visibility through the first three quarters in terms of what you've locked in. So there's still some exposure in 4Q. But knowing what you've got ahead of you for the first three quarters, can you give us a sense of what that sort of all-in on average inflation looks like? I think the first quarter was up, I think it was low single digit. How does that track from here?

Well, it should stay fairly much at low single digits in the first part of the year just because we've locked in a lot of our purchasing positions. But the wild card really is how much are things going to continue to ramp up and what's going to happen when those positions run out and what will the effect of the new crop on things like commodities be. Freight, we think, for instance, which is a very big inflator – Well, actually, all things being equal, start leveling off as we get to the last three, four months of the year, because we saw those increases last year in the final quarter. So I think that's the good news, if you want to call it that. But commodities, to me, are the wild card. The packaging industry just continues to get worse. Even when you have purchasing hedges and things like that, those run out sooner or later, and it really is a matter of how does it play out in the final four or five months of the year, what will happen. And I don't think anybody knows. My personal opinion on the agricultural commodity side is that this is more than a one-year phenomenon, that this crop is not going to fix the problem, even if it's a good crop. and that we will see elevated costs going into 2022. Thanks for that.

And then just lastly would be, I think you mentioned that base business sales in the first quarter versus 19 were up about 4%. You anticipate sort of low single digit or maybe a little better base business sales versus 19 in 2Q. And then if I've done the math right, the full year sales expectations, suggests base business growth, again, on a two-year basis, up maybe closer to 10% or so. So that suggests kind of a ramp-up and acceleration in the back half on a two-year basis. Maybe you can go through what gives you confidence in what's going to happen. I assume some of that is capacity constraints, lifting for Green Giant. But I would love to hear your thoughts on that if I could.

Yeah, it's not just Green Giant. There are a number of brands, especially in the meal solutions type of brands like Ortega and a few other places where we still have capacity constraints. So we do expect sales to expand as we fix those things, and we'll have them fixed mid-summer or so. So we expect to be able to meet some of the demand that we are still unable to meet. And, of course, Green Giant – Green Giant is huge in the whole thing. I mean, the $25 million decline we saw in Green Giant in the first quarter could have been a much better number had we been able to not have allocation on the canned goods side and even on the frozen side in some areas. So we definitely have unmet demand, and that will help. The other thing that should play out is the fourth quarter actually was a fairly flat quarter to 2019. So to the extent we can exceed 2019 in the fourth quarter, that should help a lot in terms of upping the performance as we go forward. And we really were very constrained in the fourth quarter. The way the year played out last year was the inventory positions we had helped tremendously. in the second quarter to meet the huge demand we saw, but then we started having capacity issues in the third quarter and the fourth quarter, and hopefully we can flip that around as the year plays out here.

And, Andrew, CRISCO purely incremental all the way through up until December of last year, so also adds a substantial amount of that and very much tracking in line with our expectations and our plan.

Thank you.

Our next question comes from the line of William Reuter with Bank of America. Please proceed with your question.

Hi. Good afternoon. My first question is the 18% to 18.5% EBITDA margin, I think that's for fiscal year 21 in total. Correct. I'm making sure that that's okay. Does that imply – do you have any – I guess when you were just speaking about some of these – agricultural commodity inflation challenges. It sounds like you think those are going to go into the fourth quarter as well. Is that what's priced into those margins? Because I guess I was impressed that the margin declines weren't higher given the inflation we're seeing.

The margins would be inclusive of those cost increases.

Yeah, we have taken price. We continue to examine our trade promotions to increase net pricing, if you will, out of that We do have a decent cost reduction effort underway that should help mitigate some of the cost increases we're seeing. And we reserve the right to increase price further depending on how different costs go. We're seeing more of that in the industry, and I think you're going to continue to see it just because the drumbeat continues on cost increases, and it just seems to be getting worse.

The low to mid single-digit inflation that you're expecting, I guess, for the remainder of the year, for the next couple quarters, if you had not have hedges in place, do you know on a spot basis what that would be?

No, I don't think I've ever looked at that because it'd be just too ugly to look at, frankly. I mean, oil alone for Crisco, we have insulated ourselves from the cost of oil, which is by far the biggest piece of the cost of goods of that line. We've insulated ourselves from that cause doubling, not entirely, but to a great degree. And that's a huge number. That's tens of millions of dollars.

Okay. And then just lastly for me, with regard to Green Giant being on allocation and the supply disruption there, have there been any conversations with customers where you feel like they have reallocated shelf space based upon the supply chain challenges?

No, not reallocated shell space, no.

Great to hear. Okay, I'll pass to others. Thank you.

Our next question comes from the line of Carew Martinson with Jefferies. Please proceed with your question.

Hi, this is actually Oliver Grossman on for Carew. I was wondering if you could expand on your outlook for the food services business as we start to see the easing of restrictions and higher vaccination rates.

I mean, we're pleasantly surprised at how much it's recovered so far, but it's one of those things you're feeling your way through as far as how much the restaurants are going to open up, how fast consumers are going to switch to going out to eat. I don't think we have any magic crystal ball that tells us exactly what's going to happen there. Like I said, we're encouraged by how it's gone. Do we think it's going to be fully recovered towards the end of the year? That's certainly possible. But there's all sorts of, you know, I mean, it's not even all about just economic conditions and everything. It's about the restrictions that government places on these things, too.

Okay, and then what are you seeing on the M&A front, I was wondering? Are valuations in line with what you've seen historically?

No. A lot of what we see is people taking the sales from the COVID bump, which is significant in a lot of cases, and applying a very significant multiple to them, and then saying, oh, and by the way, I'm going to continue to grow like that going forward. And, you know, so we're very patient acquirers, and we'll wait for the market to get back to reality before we would execute on something like that.

Okay, sounds good. And then just lastly, what are your thoughts on the current capital structure, given that the five and a quarter of 25s are callable in June?

Yeah, we love our current capital structure right now, and we're benefiting with a substantial portion in term loan and a little bit in revolver that are very, very low rates, just given where LIBOR is. And we got our two tranches of bonds, one of which you mentioned is callable. You know, we're fine with the capital structure until we do something different.

Yeah, it'd be nicer if they were closer in so the call premium wasn't so high, and I'd love to do some long-term calls. financing at these rates, but the premium is too high at this point. Okay.

Thank you very much.

I'll pass it on. Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Thank you. Good afternoon. Hi, Michael. Just wondering if you could give a little more color on how you're positioned for input costs. And, you know, I guess specifically, can you start with just some of your assumptions for what sounds like mostly the fourth quarter on, you know, what your planning stance is that supports the 18 to 18.5? Is it that you revert from the hedges to current spot prices? Do you make any prediction about where they go? How should we think about your approach there?

I think the assumption is that we'll be able to save or price to hold our own, depending on where it goes. I don't pretend to know where it's going to go in the last three, four months of the year, because I don't know what the crop's going to be on the case of commodities. I don't know what demand is going to be for packaging. You know, it just... There's so many unknowns, and I think we're looking at it and saying we will continue to execute on savings, and we will continue to execute on pricing and trade as we need to to hold our margins.

So I just want to make sure if I'm hearing that correctly, you obviously get visibility on the cost that you've hedged and locked in. And then after those, beyond that, you're assuming – no headwinds, that it's just a manageable environment. Is that right?

Yeah, but we're assuming that there's going to be elevated costs throughout the remainder of the year.

Yeah, like I said, the only thing that we're looking at and saying, well, we're going to be flat on our last year results is freight. You know, I mean, we don't think freight's going to expand beyond where it was in the fourth quarter of last year. And so that will give us a good year-to-year comparison from that point of view. And hopefully, you know, that's one where Economics 101 might work. And as people get higher wages and can make more money doing trucking, there'll be more trucking capacity come on. I can see that solving itself a lot more quickly than I see commodities solving themselves right now.

Okay. And the... Second question, I guess, flows right out of that, because if I'm hearing you right, you're assuming the elevated costs, but with offsets from savings and pricing. Are your pricing assumptions higher? And if the green giant allocation is worse than you had been expecting, and it would seem to suggest a reduction in your sales guidance, is the offset that keeps you whole from the pricing down? from a greater level of pricing to cover the stronger inflation?

Well, green giant allocation isn't worse than we expected. It's actually a little better than we expected, and we're easing the allocation, and we're getting very close to the first of the crops. You know, these come in in June, and that's one of the bigger lines that we sell in the brand. So, you know, we don't foresee, as I said, Earlier, even with allocation, we thought Green Giant will be at the 2019 level, and we're easing the allocation more quickly than we thought we would so that the demand situation is clearing up from that point of view. Part of that's because we reduced trade promotions and actually are making more profitable sales from that point of view. So I don't really see that as compromising our forecast.

Okay, that's helpful. Maybe just to sort of clarify the thinking on the top line, is there more pricing assumed in your guide? And if so, how do you think about the elasticity related to that of demand? And is it just a weird environment with stimulus and things that make it maybe – either hard to predict or just better than normal?

Well, I guess we're counting on our competitors to price as well, which would help solve any elasticity issues. But we have pricing in place on a broad array of products that's going to take place in June. We've already done pricing on Green Giant and the Underwood brands early on this year because of cost. Crisco, we did pricing on And it was effective just a couple weeks ago. So we anticipated that and took that and announced that early this year. So we've been pretty proactive on the pricing front. And, you know, as things develop, we would certainly continue to be. And I'd be surprised if our competition didn't follow or lead, hopefully.

All right. Thanks so much. Yep.

Our next question comes from the line of Ken Zaslow with Bank of Montreal. Please proceed with your question.

Good afternoon, everyone.

Hi, Ken. Afternoon.

I just have two questions. One is when you're on allocation and then you get your crop back, how easy is it to get your shelf space back? What happens to your shelf space? What is the process to which you get it back?

I'm not sure what shelf space you're referring to. I mean, we've lost small amounts of distribution here and there, mostly because we discontinued products to make our manufacturing more efficient where we had shortages. I would expect the retailers would be more than happy to let us pay them slotting to put those products back in if they were decent selling products.

But from a green giant perspective, We're not suggesting that we put people on allocation and then therefore went dark on the shelf and lost shelf space. The purpose of the allocation was so that didn't happen.

Okay, so your shelf space is completely unchanged at that point.

No, I wouldn't go as far as to say it's completely unchanged. As I said, we've actually, in some brands, discontinued some products, flanking products, if you will, so that we could make enough of the large-selling products large volume products and maintain sales on the most important products. In the case of Green Giant, as Bruce said, the allocation was purely intended. If we had let retailers buy unconstrained, we would have had several months of nothing on the shelf. This way we maintain a shelf presence.

So I think we did the allocation to prevent that scenario that you were referring to.

I see. Okay. And then the second thing is, on the commodity side, you said two different points, and I'm not sure which one you believe. You thought that it's an anomaly that should get reversed, but then you said that it may last beyond this year. How do you think about it? Is it an anomaly, or how do you think about it going into not just this year, but once your head is rolled off? How do I think about that?

Okay. You can think about it as I said this would be a multi-year, I think, and this is me, and if I knew everything about commodities, I'd be home trading commodities instead of doing this. But I think that the crop this year is not going to completely solve the problem. But if you look at the history of things like soy and corn oil and things like that, this kind of thing happens every 8, 10 years. And it takes a year or two of good crops to shake it out back to normalized levels. There is a long-term normalized level of pricing in the market for these kind of commodities. Shortages drive those up, and it may drive it up for more than one year, but at the end of the day, it is an anomaly that rights itself and gets to a more normal level which was the assumption when we bought Crisco, for instance, is that this business is going to have costs of this level because on average over 20 years, that's the level they've been.

Perfect.

Thank you very much.

When you talk about that inflation, there's obviously different pieces. There's the agricultural piece. There's the freight piece. There's packaging. And so things have different cycles.

Thank you.

Our next question comes from the line of Gina Gianelli. I'm Jenna Gianelli with Goldman Sachs. Please proceed with your question.

Hi, thanks so much. I just had a follow up question around your cost reduction efforts. Can you just speak a little bit more to the nature of some of those efforts? Is it headcount? Is it marketing related? And are you thinking of them as sort of more permanent and structural or maybe just kind of temporary to help offset some of the inflationary pressures? And then I have a follow-up. Thanks.

It's very much oriented towards manufacturing and distribution. We're not looking at headcount right now. But it's all about rationalizing where we manufacture products. We've repatriated some products into our facilities. A good example would be Las Palmas. We used to co-pack the enchilada sauces, the red and green enchilada sauces. They're in a factory in Maryland now. It's our factory. We reduced cost in doing it, lowered the operating cost of the total plant in doing that. We've consolidated some facilities, and we'll continue to do that. In the case of transportation, In response to the higher freight rates, we've started using more intermodal, and we were unable to do that last year simply because everything was rush, rush, rush, get it to the consumer or the customer as fast as you can. Now, with things slowing down some, we can do better in terms of using intermodal, which is a significant cost savings. It's a variety of things, but very much oriented towards manufacturing and distribution marketing is not going to be cut our plan is to spend as much marketing this year as we spent last year as I said in the call in the script we are orienting more of it towards e-commerce than we did last year right thanks for that color and then I just had one more

on the kind of product innovation pipeline. Just generally speak to that, how it might compare to, you know, 2020 when things were maybe a little bit more or just a little slower in terms of innovation. And is that perhaps an opportunity to drive sales higher this year, whether through mix or more value-add products? Just how you see that evolving in 21. And that's it. Thank you.

Sure. There will be increased innovation in 2021, first because a lot of the innovation that we had slated for 2020 is rolling into 2021, either in terms of absolutely launching it at all or expanding the distribution, which was very modest in 2020, as most retailers were not resetting shelves and were not really accepting new products. So there's a lot of things that are rolling in from last year, and there's innovation that was in the works to do in 2021 that will be done as well. You know, we're looking at something that would generate probably 3%, 4% of sales if it succeeds in terms of incremental selling with innovation this year.

Thank you.

Yep. Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Thanks. Just a clarification on, I think it was Andrew's earlier question on revenue guidance. That back half improvement in your organic sales trends, X, Crisco, is that basically canned green giant coming back and that's basically it? Or is there another factor or two that are giving you confidence in that improvement in the second half? And I have to follow up.

Well, the green giant definitely will hopefully turn from a negative to a positive, especially in the last quarter of the year where it didn't perform very well and was part of the reason we were basically flat to 2019. But, you know, we're very encouraged by what's going on in the portfolio. As Bruce was saying, our seasonings business is just rocking and rolling. our baking business is doing extremely well and our meal solutions types of brands like Ortega, like Las Palmas, like Bear Creek will, we would hope, do even better as we solve some of the bottlenecks we have in those brands. We are not able to meet the demand in some areas in those brands. So There's a lot of positives as we look at the rest of the year. Now, I'm not saying we're going to match 2020. Second quarter is a tough quarter from a 2020 point of view. Our sales in second quarter were up, you know, darn near 50% in the quarter. And you're just not going to match the kind of performance. But we should do well versus 2019.

Thank you for that. And a question on free cash flow or just how we should be thinking about free cash flow conversion this year after Crisco. Any thoughts on that?

In terms of an actual guidance number, we didn't have, but it should be pretty strong.

And I was thinking just perhaps a percentage. Yeah. Yeah.

Yeah, I mean, it won't be a big year of inventory increase. And taxes from a cash tax were usually pretty efficient. I mean, it should be typical B&G, strong cash from operations and what we like to produce.

Great. And then just one just general comment. There was – There's obviously people that invest in the food space that saw the 2017-18 cycle of inflation and wonder if it's foolish to think that things are going to be different this time in terms of an inflation cycle. Perhaps you can talk about that, Dave, a little bit, about why, if it does feel different now in terms of price receptivity and perhaps preserving gross margins over time, perhaps with a little bit of a timing risk. you know, why that would be different than 2017 and 18?

I think this inflation cycle is broader and deeper than what you saw a few years ago. That was not a, you know, this is pretty dramatic. And, you know, it doesn't seem to be having any hope of abating anytime soon. So, you know, I just... In fact, every article I read, it's just getting worse. I mean, now the latest one I read was wood pulp's now a problem, and they're going to have to increase prices in toilet paper and things like that. It's kind of remarkable because, you know, I don't, you know, we didn't have supply issues before COVID, and now suddenly we have broad supply issues. And part of it, certainly in agriculture, a lot of it's driven by demand from China and places like that. So, I just think it's a much broader, deeper inflationary cycle that's not going to go away very quickly.

And that is making the conversations with retail different?

Well, no retailer likes you to come in with a price increase, let me say that. But usually they also have one of their people responsible for purchasing private label and all that with them. sort of as a logic check for what you're telling them. And I think they're hearing from their own people that, yeah, this is a problem, and what they're telling you is right. And we've actually had one customer ask us, can you take positions for me on my private label oil business because we need coverage? So I just, you know, it's – As I said, customers don't like price increases, but the reality is a very strong reality right now. Thank you.

Our next question comes from the line of Rob Dickerson with Jefferies. Please proceed with your question.

Great. Thanks so much. A lot of questions have been asked, so I'll keep this short. I guess just, you know, commentary today, a lot of it's kind of based off of that, you know, 2019 level, or at least, you know, the reference to Q219. I feel like historically, you know, at least in the base business, it seems like maybe Q2, there is some seasonality, like Q2 usually comes in a little bit lower relative to Q1, you know, speaking of sales and also to EBITDA. So, like, when I look at Q2-19 right that came in a little bit relative to Q1-19 but obviously like you know we're lapping the big Q2 from last year so as we think about that Q1 to Q2 like do you want us all to kind of go back to that kind of more traditional seasonality and cadence that we usually see from Q1 to Q2 or is there you know other stuff in there let's say that may not cause that standard cadence.

No, I think it's appropriate to say it's going to be, the sales are going to pace more similar to 2019. I mean, you talk about 2019 first because that's the last normal we had. I mean, you can't even start from 2020 and say, okay, well, here I can make judgments versus 2020. You can't. It was just, it's so extraordinary a year that you, you know, you have to go back to, well, where's some firm ground I can stand on to start doing this? And I think 2019 and the pace of sales of 2019 is probably as good a place as any.

And as we said earlier on the call, expectation would be that Q2 looks like 2019, probably low to mid-single digits as a percentage higher, plus Crisco. Crisco Typically, that period is about 20% of a full year's net sales. And EBITDA margins, I think we're telling you, are generally going to look similar than what they have in the past.

And it's a little bit of an informed decision because we have four weeks under our belt. Right. Got it. Okay, cool.

And then just in terms of the SG&A line, I know you call out some – COVID-related costs and fines from retailers, but kind of overall for SG&A, SG&A was almost flattish, let's say relative to Q4. Is there anything within that SG&A line that would cause SG&A to kind of be up or down as we, I'm just speaking to the near term, because again, traditionally, sometimes it's up, sometimes it's down on a sequential basis, just trying to get a feel as to you know, some of these levers you can pull, are they also potentially SG&A related such that, you know, SG&A may have been up a little bit in Q1, but maybe it gets better as we go through the year.

Well, SG&A was up in Q1 to some degree because versus in 2019, we hadn't done a lot of accruals for incentive bonuses and long-term incentives and things like that. And we've basically accrued at target levels in 2020, and that's worth a couple million dollar year-to-year difference. So that's one factor.

And then advertising and marketing, we're going to be flat is the expectation on a full year basis, but the pacing of that is a little bit different. So if you look last year, we're higher in the first quarter. this year than we were last year. We'll be higher in the second quarter this year than we were last year. And to get to the same number, then it's a little bit lower. So the pacing will be a little bit more even this year, whereas last year is back-end weighted.

Yeah, I mean, and when you look at the EBITDA swings year to year, there's about $9 million of these kind of factors in the first quarter that wasn't in 2019 EBITDA. One is the marketing, as Bruce said. We spent about $4 million more in 2021 than we did in 2020. I misspoke and said 2019. I'm sorry. 2020, the comps, another couple million dollars. And then the COVID expenses of 2.8, which really is more in our manufacturing and distribution and to some extent SG&A, but more in the cost of goods area. But that was... That was $2.8 million. So it's the better part of $9 million of things that we incurred in 2021 first quarter that we didn't incur in 2020, all of which will fade away as the year goes on because we're still at normalized levels of marketing. Compensation will come back. The accruals were much heavier in the latter part of the year than they were in the early part of the year last year. And the COVID expenses are bleeding down rapidly as people get vaccinated.

Got it. Perfect.

Thank you so much. Yep. We have time for one last question. That comes from Eric Larson with Seaport Global Securities. Please proceed with your question.

Yeah, thanks. Good afternoon, everyone. I'll make this really quick. One question. Maybe you've answered part of this, but obviously your inventories are depleted, you know, for sure, you know, at Green Giant. And I'm curious if you were able to actually, you know, get more acreage planted this year, procure some higher supplies, rebuild those inventories. And then with that being said, are there other product lines? So, you know, your shipments – will your shipments be sold greater – right now versus retail takeaway because you've got to rebuild some of this at retail. And then, you know, what's the cash impact? Obviously, that's probably been a cash tailwind, whereas if you start rebuilding those inventories, it might be a bit of a headwind. So if there's a way to characterize that whole idea concept, it would be a great thing.

OK, that was not a short question. But on the green giant front, we don't contract the acreage. Our co-packer does. But we have certainly worked with the co-packer to envision rebuilding the inventories to appropriate levels as the crops come in. And that would imply more acreage. Where will it end up? Only God knows because it's so dependent on things like weather that we're hoping there's a good crop. But frankly, we haven't had a good crop on the green giant side for three years. But we're kind of hoping we do this year. That would help a lot. There really isn't a lot of pipeline to be done. And most of the products we're talking about that we're short of capacity on, Yeah, there's some inventory that needs to be rebuilt, but not remarkably a lot because there are products that we're making every day, unlike the seasonal pack. So you're going to see an increase in inventory on Green Giant at the end of the year, all things being equal. But there's also a lot of work being done to reduce inventory in a lot of other areas because that's another area of opportunity for us to free up working capital. And we would hope that we would end the year, as Bruce said earlier, at least flat year over year.

Okay. Thank you, Dave. Yep.

We'll take one more question from Ryan Bell with Consumer Edge Research. Please proceed with your question. Great. Thanks for signing in.

I know you touched upon this a little bit in your plan remarks. Could you highlight some of the initiatives that you've taken to retain the incremental households and kind of talk about the importance of incremental work from home in terms of longevity of expectations around baking and cooking increases?

Well, we've done a lot of work with a company called Numerator to try and very specifically identify who these households are and try and reach them through social media and other means to communicate with them. And as I said, we're really trying to use social media and the Internet and websites and things like that to provide people with solutions. You know, I've been working for a long time and I'm trying to get used to the whole work from home kind of thing that has really blossomed in the last year. But there's no doubt that the sentiment in our office workforce is that, you know, people want to have X number of days a week that they can work from home. And that implies they're going to eat at home, they're going to cook at home, and implies continued demand that will be higher than it was pre-COVID. And so we just need to make sure that we are part of that with our brands like Ortega, like Bear Creek, like Green Giant, and all of our seasonings that are used at cooking at home. And we're digging as hard as we can to figure out, okay, how do we do that? And e-commerce is a good example of how you do that. because these people are using e-commerce to buy the products more and more. So you want to be first and foremost on the retailer sites that they go to to order the products. And you want to work with that part of the business. You want to work with all the various delivery services and everything that go out and pick those orders from the retailers. That, to me, is how you track the household penetration and hopefully hold serve with it.

Thanks. That's helpful. And in terms of your expectations for private label landscape over the balance of 2021, do you have any comments on that?

I really don't know what private label is going to do. You know, as a branded business, we're working as hard as we can to have them not do well. But, you know, I'm frankly a little surprised at how badly private label has done during the COVID era. People have come back to brands, and that makes us very happy. Hopefully we can prove to them that that was the right decision. Okay, thanks a lot. That's it from me.

I'd like to hand the call back to management for closing remarks.

Okay, thank you. I appreciate everyone's interest in the company. You know, we think we had a very solid first quarter with very good results given the added expenses I talked about that we'll mitigate as the year goes on. It's certainly a challenging year on comps the last year. And as I said before, we're trying to just use the firm footing of 2019 and make progress versus that as we go through the year. But again, thank you very much for your interest and support.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.