Earnings Call
B&G Foods, Inc. (BGS)
Earnings Call Transcript - BGS Q4 2020
Operator, Operator
Good day. And welcome to the B&G Foods Fourth Quarter and Fiscal 2020 Earnings Call. Today’s call is being recorded. You can access detailed financial information on the quarter and full year in the company’s earnings release issued today, which is available at the Investor Relations section of bgfoods.com. Before the company begins its formal remarks, I need to remind everyone that part of the discussion today includes forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer you to the company’s annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact the company’s future operating results and financial condition. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The company will also be making references on today’s call to the non-GAAP financial measures, adjusted EBITDA, adjusted EBITDA before COVID-19 expense, 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. David Wenner, the company’s Interim President and Chief Executive Officer, will begin the call with opening remarks and discuss various factors that affected the company’s results, selected business highlights and his thoughts concerning the outlook for fiscal 2020 and beyond. Bruce Wacha, the company’s Chief Financial Officer, will then discuss the company’s financial results for the fourth quarter and fiscal 2020, as well as the company’s perspective on the outlook for 2021. I would now like to turn our conference over to Dave.
David Wenner, Interim President and CEO
Thank you. Good afternoon, everyone. Thank you all for joining us today for our fourth quarter earnings call. It would be a gross understatement to say that 2020 was a year like no other year. COVID-19 brought an incredible amount of suffering, inconvenience, and unfortunately death with it. It’s humbling that our company benefited from such a tragedy, and at the same time it’s a tribute to our employees working in the midst of the pandemic and dealing with their own issues caused by it that we were able to respond as well as we did to the increased needs of consumers as they cope with COVID and the resulting quarantine. Bruce will go through the financial details in a moment. But the headlines for the year are that net sales increased 18.5% to $1.968 billion and adjusted EBITDA increased 19.4% to $361.2 million. This remarkable increase slowed temporarily in the fourth quarter and I will discuss the factors that lead me to use the word temporarily. But first I will turn the call over to Bruce to review the fourth quarter and full year financial results. Bruce?
Bruce Wacha, Chief Financial Officer
Thank you, Dave. Good afternoon, everyone. As Dave just discussed, we generated unprecedented financial results during fiscal 2020 delivering company record net sales, adjusted EBITDA, and adjusted diluted earnings per share for the year. We reported net sales of $1.968 billion in fiscal 2020, an increase of $307.5 million or 18.5% compared to the prior year. Fiscal 2020 net sales included approximately $27.8 million in net sales from our acquisition of Crisco. Crisco closed on December 1, 2020, providing us with a full month of net sales. We generated adjusted EBITDA before COVID-19 expenses of $374.8 million in fiscal 2020, an increase of $72.3 million or 23.9%. During 2020, we incurred approximately $13.5 million in incremental COVID-19 costs at our manufacturing facilities, which primarily included temporary enhanced compensation for our manufacturing employees, compensation we continued to pay manufacturing employees while in quarantine, and expenses related to other precautionary health and safety measures. Inclusive of these costs, we reported adjusted EBITDA of $361.2 million, which is an increase of $58.7 million or 19.4% compared to last year. Adjusted EBITDA before COVID-19 expenses as a percentage of net sales was 19% in fiscal 2020. Adjusted EBITDA as a percentage of net sales after including approximately $13.5 million in COVID-19 costs incurred during the year was 18.4%. Adjusted EBITDA as a percentage of net sales was 18.2% in fiscal 2019. We reported net sales of $510.2 million in the fourth quarter, an increase of $40 million or 8.5%. Fourth quarter 2020 net sales included approximately $27.8 million in net sales from our acquisition of Crisco. We generated adjusted EBITDA before COVID-19 expenses of $77.6 million in the fourth quarter, an increase of $8.1 million or 11.7%. During the fourth quarter of fiscal 2020, we incurred approximately $4.3 million in incremental COVID-19 expenses at our manufacturing facilities. As a result, we reported adjusted EBITDA of $73.3 million in the fourth quarter, an increase of $3.8 million or 5.6% from $69.5 million in the prior year period. We reported $2.26 in adjusted diluted earnings per share in fiscal 2020, an increase of $0.62 per share or 37.8% compared to the prior year. We reported $0.35 in adjusted diluted earnings per share in the fourth quarter of fiscal 2020, an increase of $0.07 per share or 25% compared to the prior year. Fiscal 2020 net sales increased by $307.5 million, which included an increase in base business net sales of $244.5 million and an increase in net sales from acquisitions of $63 million. Of the $244.5 million increase in base business net sales, $209.8 million was attributable to increased base business volume. Of the $63 million of net sales from acquisitions, $33.7 million was attributable to an additional seven and one-half months of Clabber Girl net sales in fiscal 2020 and $27.8 million was attributable to one month of Crisco net sales. Fiscal 2020 base business net sales also benefited from $35.8 million in net pricing, inclusive of our spring 2019 list price increase, our 2019 trade spend optimization program, as well as the impact of COVID-19, which resulted in lower than average daily trade promotions during the height of the pandemic. Keep in mind that our pricing calculation also includes an element of favorable mix as we saw less spices in the foodservice channel, which tend to be priced at a lower margin. FX was a drag on net sales of a little bit more than $1 million for the year. We estimate that the extra reporting week in fiscal 2020, which occurred in the third quarter contributed approximately $35 million to our net sales. Leading our brand performance was Green Giant, which reached approximately $639 million in net sales during fiscal 2020, marking an increase of $112.2 million or 21.3% for the year. Green Giant’s outperformance was largely led by shelf-stable with Green Giant’s Le Sueur shelf-stable net sales up by approximately $64.8 million or 39.7% for the year. Green Giant’s shelf-stable had COVID-19 enhanced sales that led to extraordinary performance that began in the second half of March and carried through to the end of the third quarter. As we hit the fourth quarter, we began to manage sales closely through the implementation of certain customer allocations to ensure we had sufficient product to last us until this summer’s pack season. As a result, Green Giant’s shelf-stable net sales were flat in the fourth quarter, despite elevated demand and double-digit consumption trends that persist today. Net sales of Green Giant frozen products were up double digits for the year, plus $47.4 million or 13.1%. Among our other larger brands, Cream of Wheat had one of the best performances in fiscal 2020 with net sales up by approximately $12.9 million or 21.6% for the year. Cream of Wheat continued to outperform in the fourth quarter with net sales up by $2.7 million or 16.1% compared to the prior year period. Clabber Girl also had very strong performance as part of what we believe will be a lasting resurgence in baking. Net sales of Clabber Girl products were up by approximately $10.2 million or 18.9% during the comparable period of time that we owned it following the mid-May 2019 acquisition. We have been very pleased with the performance of Clabber Girl business, which generated approximately $97.5 million in net sales during our first full year of ownership compared to our expectations at the time of acquisition of approximately $70 million to $75 million in net sales. Net sales of Clabber Girl were up by approximately $2.5 million or almost 10% in the fourth quarter compared to the year ago period. Net sales of Ortega were also up double digits during fiscal 2020 with an increase of $17.9 million or 12.7% compared to the prior year. Supply chain constraints driven by industry-wide taco shell capacity constraints limited the upside for the fourth quarter, and as a result, while our net sales growth was impressive with a $2.5 million increase or 7.3% compared to the prior year period, we could have done much more had we added incremental products. Victoria was also one of the larger gainers in the portfolio, increasing net sales in fiscal 2020 by $11.3 million or 26.4% compared to the prior year. Net sales of Victoria reached nearly $55 million in 2020. While consumption remains strong throughout the year, net sales dropped approximately $0.6 million or 4.7% in the fourth quarter, primarily due to the timing shift of a large promotional event with one of our key club customers that moved from fourth quarter 2019 to third quarter 2020. Net sales of Maple Grove Farms were up by approximately $6.1 million or 8.7%. Impressive performance given that a substantial portion of Maple Grove Farms business is sold through the foodservice channel, which went dark for a significant portion of the year. Fourth quarter performance showed nice improvement as well with net sales up $2.1 million or 12.2%, driven by continued strong consumption trends and an improvement in the foodservice side of the business. Our spices and seasonings, including our legacy brands such as Ac’cent and Dash, and the brands we acquired in 2016 such as Tone’s and Weber were up by $13.9 million or 9.2% for the year. Net sales of spices and seasonings reached $367.7 million in fiscal 2020. The retail side of this business began to show strong momentum by June as more and more Americans began to fully embrace cooking and seasoning their meals at home, a trend which continues in 2021. The foodservice side of the business continues to be down, but it’s slowly improving. In the fourth quarter net sales of our spices and seasonings increased by $2.1 million or 2.4%. Despite the outsize performance for the year, our spices and seasonings could have increased even more, even with the drag from foodservice had we had incremental supply. Among our other larger brands, New York Style had challenges both in foodservice and to a lesser degree in the retail deli aisle. Net sales of New York Style were down $1.8 million, 4.5% for fiscal 2020 compared to the prior year. Gross profit was $481.7 million for fiscal 2020 or 24.5% of net sales. Excluding the negative impact of approximately $5 million of acquisition divestiture related expenses, the amortization of acquisition related inventory fair value step up and non-recurring event expenses included in the cost of goods sold, our gross profit would have been $486.7 million or 24.7% of net sales. Gross profit was $383.1 million for fiscal 2019 or 23.1% of net sales. Excluding the negative impact of approximately $22 million of acquisition divestiture related expenses, amortization of acquisition related inventory fair value step up and non-recurring expenses, including cost of goods sold, our gross profit would have been $405.1 million or 24.4% of net sales. Outside of COVID-19-related expenses, including those described previously at our factories and those from our co-packers, inflation remained somewhat benign throughout a significant portion of 2020. However, we did begin to see inflation starting late in the third quarter and accelerating into the fourth quarter, particularly for freight costs, certain agricultural products, and other ingredient costs and packaging. I will discuss inflation a little bit more in our 2021 outlook. But we expect to see inflationary pressures continue in the coming months and we are working to alleviate these pressures in our 2021 budget. Selling, general and administrative expenses for the year were $186.2 million or 9.5% of net sales. This compares favorably to the prior year as a percentage of net sales, which included $160.7 million in selling, general and administrative expenses or 9.7% of fiscal 2019 net sales. The dollar increase in SG&A was composed of increases in selling expenses of $8.2 million, increases in consumer marketing, investments of $7.7 million, increases of warehousing expenses of $2 million and increases in G&A of $10.7 million, increases in SGA including increases in selling, brokerage and incentive compensation that are tied to increasing sales and profitability. These increases were offset in part by a reduction in acquisition divestiture related and non-recurring expenses of $3.1 million. As I mentioned earlier, we generated $374.8 million in adjusted EBITDA before COVID-19 expenses and after the inclusion of $13.5 million in COVID-19 expenses adjusted EBITDA of $361.2 million. This compares to adjusted EBITDA of $302.5 million in 2019. We generated $2.26 in adjusted diluted earnings per share in fiscal 2020, compared to $1.64 per share in 2019. The increase was primarily driven by volumes, including COVID-19 driven demand for our products, as well as the acquisitions of Clabber Girl in mid-May 2019 and Crisco in December of 2020. Adjusted diluted earnings per share were also positively driven by increased adjusted EBITDA margins, despite the impact of COVID-19 costs due to the benefits of our increased sales, as well as lower effective costs of borrowing. We have another strong year for cash, with net cash provided by operating activities of $281.5 million, which more than supported our longstanding dividend policy and helped us reduce our net debt before taking into account debt incurred to finance the Crisco acquisition and our pro forma net leverage. As a reminder, we began the year with net debt to pro forma adjusted EBITDA of approximately 6.12 times. We reached nearly 4.75 times at the end of the third quarter and finished the year with pro forma net debt to adjusted EBITDA before COVID-19 expenses of approximately 5.21 times, which is how our consolidated leverage ratio is calculated for purposes of our credit agreement. Our increase in net cash provided by operating activities allowed us to reduce net debt by approximately $135 million over the course of the year, excluding our acquisition of Crisco. Our 2021 outlook includes an expectation for elevated net sales of our products in the early months, driven by consumption that has remained over 10% higher than pre-pandemic levels on a blended basis across the B&G Foods portfolio for nearly every week of the last 11 months. We don’t expect to exceed our net sales from March, April or May 2020, when there was a surge in sales driven more by pantry loading than by consumption. Our current year is off to a tremendous start, as we have strong expectations for fiscal 2021, especially when compared to 2019. As a result of the challenges faced while trying to forecast COVID-19, we are not able to provide a detailed financial forecast at this time. However, what I can say is that we expect to generate company record net sales of $2.05 billion to $2.1 billion in 2021, inclusive of the full benefit of a full year of the Crisco acquisition. We do expect 2021 to bring us a different set of challenges than we faced in 2020 and these challenges will include a return of inflation across a number of key input costs, including certain agricultural products, packaging and freight, as mentioned earlier. As in prior years, our expectation is that we will manage these costs through a combination of pricing initiatives and cost savings activities to preserve our margin profile and our cash flows. And now, I will turn the call back over to Dave for further remarks.
David Wenner, Interim President and CEO
Thank you, Bruce. As you can see in those numbers, the great majority of our brands grew in fiscal 2020 substantially because of the dramatic effects of COVID on consumer buying and dining patterns. E-commerce was a growing driver of those trends and we invested during the year to follow consumers as they bought more through various online means and we saw sales through those means of buying grow and return. Although, there’s no precise way to measure this, using IRI and other data sources, we believe that our online sales grew by roughly 150%, albeit from a relatively modest base. We expect that trend to continue in 2021 and are investing further in building out our online presence and to marketing with various retailers on their site so that we can be at the forefront of this new way of selling. Our business also benefited from the low concentration of sales in the foodservice channel versus retail. Before COVID roughly 13% of our net sales were to foodservice customers. In 2020, that number decreased to 9% as foodservice sales softened and retail sales grew. We are seeing modest recovery in the channel and expected to strengthen as the year progresses. But in general, declines in brands such as Regina and softness in Wright’s, New York Style and Maple Grove are the result of a higher proportion of their sales to foodservice. Several other trends in our business in 2020 are encouraging as we move forward in 2021. Household penetration of B&G Foods brands grew by 900 basis points and the average sale of B&G products per purchase grew by 25%. As we expand our digital capabilities, we are able to track the consumers involved in these trends and invest more specifically and reinforce their purchases. Our consumption trends consistently showed double-digit increases to place us at near or at the top of comparable food companies and those trends continue in 2021. We increased our marketing spending by approximately 20% for the year last year and over 50% in the fourth quarter to reinforce those gains and speak to all consumers about our brands that are driving growth. Despite all the positives, the year’s performance does not reflect the full potential of changes in consumer behavior. We saw serious supply chain capacity issues in the second quarter and third quarter, and we are unable to fully meet demand on brands that offered meal solutions such as Ortega and Bear Creek. Spices and seasoning sales were also affected by manufacturing capacity issues, packaging outages, and absenteeism due to COVID-related quarantines. Our policy at our facilities has been to be very aggressive in terms of quarantining employees with pay, who had any type of exposure. That has paid valuable dividends in terms of employee safety, but often left the facilities short-handed and increased our costs. Early on in the fourth quarter we realized that due to crop conditions and co-packer capacity issues, the supply of Green Giant shelf-stable products would not meet the elevated demand we were seeing and placed those products on allocation, resulting in relatively flat sales for the quarter. We will not see meaningful relief in this area until the summer when the new crop arrives. Since we took that action we have seen competition take similar action. Not surprising, since we are all affected by a relatively poor crop last fall. Turning to a closer look at the fourth quarter, it would be easy to say that the business returned to a more normal footing, with base business sales up just 2.5%. Frankly, we don’t see it that way. One thing I have remarked on since returning is how closely consumption trends track the actual demand we see in the business. That’s more true now than it was six years ago. As noted earlier, our consumption trends remain very strong. What we saw in the fourth quarter was a relatively soft November and December, and in factory sales do we believe to retailers stocking up late in Q3 in anticipation of strong demand over the holiday season. That demand did not materialize to the extent they anticipated and inventories had to be worked off. At the back end of the quarter, there was a shift in timing of the typically soft sales week at year end. In 2019 that week fell in our financial January, while in fiscal 2020 it fell at the end of December. The effect is easy to illustrate, January 2020, excuse me, 2021 base business sales were up 35%, the year-over-year difference accounting for roughly 5% of fourth quarter net sales. Adjusted EBITDA for the fourth quarter was handicapped by $4.3 million in COVID-related expenses that were not compensated for by increased sales and an additional spend of $4.5 million in marketing. Given that we remain very optimistic about 2021. Our sales continue to be strong, a reflection of the consumption trends and our service levels continue to improve as we add capacity and our workforce strengthens and returns. While we are still experiencing COVID-related expenses, the rate of spending is trending downward and should not be near the $13.5 million costs we saw in the last three quarters of 2020. Our growth through innovation was handicapped in 2020 as retailers canceled resets and focused on maintaining inventory of existing products. Despite that, the limited launches we managed to do in 2020, combined with incremental sales of 2019 new products accounted for roughly 2% of our net sales or $45 million. The successful items in that group will see further expansion of their distribution in fiscal 2021 and will be joined by new product introductions in a variety of brands with special focus on Green Giant frozen and Ortega products. 2021 will also see a full year of ownership of the iconic Crisco brand, which we acquired on December 1st, and which made significant accretive contributions to our fiscal 2020 results in just one month. We are integrating the brand into our company as we speak and expect to have it fully integrated by the end of the summer. The brand brings with it strong sales reinforced by COVID trends and very attractive margins. The acquisition profile fits our model perfectly in terms of purchase price, financing costs, tax advantages, EBITDA margin, and free cash flow from EBITDA. We believe that there are good opportunities for the brand to grow in both new distribution and new products, and we will be working to execute both in 2021. As Bruce mentioned, this year is not without the challenges. We are seeing significant cost pressure on a variety of fronts including transportation, packaging, and commodities. Our operations group has done a good job of protecting us where possible, but there is still exposure that we must cover. We plan to do that through a combination of pricing, rationalization of trade programs and an enhanced cost reduction program. We have already taken some of those actions, price increases on the Underwood brand and Green Giant shelf-stable products went into effect last month, more are necessary and will follow. In my opinion cost relief on some elements of costs such as commodities is uncertain. There will be significant competition for what crops get planted this year and the outcome is in doubt until the harvest this fall. Progress in 2020 that’s well worth noting includes a heightened recognition of the corporate responsibilities of B&G Foods, as we approach the threshold of $2 billion in net sales. The year saw the formation of a new corporate social responsibility committee at the Board of Director level. Its mission is to direct and oversee our efforts to meet our corporate social responsibilities to our employees, customers, communities, and other stakeholders. During 2020, we also adopted and published on our website, a new human rights policy and a new environmental health and safety policy. And most recently, we have established an employee-directed Diversity, Equity, and Inclusion Council to help understand and meet the needs of our employees, while achieving appropriate workforce diversity, equity, and inclusion throughout the company. While we have already had efforts in place on these fronts, the company has more completely formalized those efforts and is committed to increasing all of our efforts and investments. When we look at fiscal 2021 and try to estimate how we will perform, I have to admit that it’s a major challenge. The year has started off with very good momentum, but we will soon reach the sales weeks when consumers were loading their pantries in 2020, with everything and anything, and we cannot expect to match those weeks. But as 2020 stabilized in the third quarter and fourth quarter, we saw more of the quote new normal trends that we think will continue and could support increased sales versus fiscal 2019. There is no doubt that many people will continue to work-from-home for at least part of their workweek. We would like to believe that consumers have discovered or rediscovered the satisfaction of cooking and baking at home, and the savings that they can reap from doing so. We are investing to foster more baking at home in particular, very appropriate since approximately 19% of our sales are in brands that are involved in baking. We believe that we can retain many of the new customers who have discovered our brands and will market in the traditional way and online to do so. All of that leads us to estimate that we will have base business net sales that will exceed 2019 net sales by approximately 10%. With 11 months of Crisco net sales incremental to that. I wish I could call out fiscal 2021 with more precision than that, but we obviously are in very uncharted waters in many ways. We continue to believe that our shareholders are best served by the operating model that we have had in place since we went public in 2004. Strive for modest organic growth in our base business of well-established brands, layer on a larger growth component via creative acquisitions and return a meaningful proportion of free cash flow to shareholders through dividends. This strategy has resulted in a net sales compound annual growth rate of 11% since our IPO in 2004 and an adjusted EBITDA CAGR of 11.9%. Since our IPO, B&G Foods has paid out $1.073 billion in dividends. We believe that we have served our shareholders well by making those payments. On average, over the years dividends have represented approximately 60% of free cash flow. In 2020, that payout ratio was about 54%, lower than normal due to the remarkable surge in operating results. I’d like to conclude with a final shout-out to our employees, all of whom have made this company successful in an extremely challenging year, and in particular to the workers who have been on the frontline in our manufacturing facilities, distribution centers, and offices on a daily basis, making sure we can supply the food that consumers need. Other workers have made important contributions as well even while working from home, a less than ideal scenario in many cases. Without all of their dedicated efforts, we could not have achieved the records that were set in fiscal 2020 or have begun 2021 with the prospect of another successful year. This concludes our remarks and now we would like to begin the Q&A portion of our call.
Operator, Operator
Thank you. Our first question is from Andrew Lazar with Barclays. Please go ahead with your question.
Andrew Lazar, Analyst
Good afternoon, Dave and Bruce.
David Wenner, Interim President and CEO
Good afternoon, Andrew.
Andrew Lazar, Analyst
Hi. To start, can you quantify the different factors that explain the significant double-digit consumption we observed in the fourth quarter compared to the organic sales growth of only about 2.5%? It seems this may have benefited the third quarter more, so I'm looking to understand if first quarter consumption is expected to align more closely with shipments, and I have a follow-up question.
David Wenner, Interim President and CEO
As I mentioned earlier, we experienced a double hit. There was a significant spike in the third quarter, particularly in September, as retailers increased their orders. Sales in October were decent, but the quarter slowed down as inventory levels were adjusted. The trend we observed was similar to what we saw during the 4th of July and Labor Day holidays; we did not experience the typical holiday surge that usually benefits this business, resulting in a lackluster holiday season for these products. Additionally, there was a lull after the holidays, with retailers feeling exhausted and facing a short shipping week. In 2019, that lull week occurred in the first week of 2020, whereas this year it fell in the last week of 2020, leading to a strong start in January. This timing shift is why our January base business sales increased by 35%. Overall, while shipments were present, the timing at both the beginning and end of the quarter impacted our overall results.
Andrew Lazar, Analyst
Would you anticipate in the first quarter as a whole, consumption to be more in line with shipments or are there still some things that you know today that would make those to diverge meaningfully?
David Wenner, Interim President and CEO
At the end of two months, I can confidently say yes. However, I had three very large sales weeks at the end of March when COVID really impacted our performance. Our typical sales week is between $30 million to $35 million, but we experienced $60 million sales weeks at the end of March last year. We won't reach those levels this year, but I believe we will continue to be significantly ahead, with double-digit growth compared to 2019 sales. We can see this trend because 2020 wasn't particularly strong in January and February compared to the rest of the year, so we are pacing ahead of 2020 as well in the early part of this quarter. Nevertheless, we face a substantial challenge at the end of March that we need to overcome.
Andrew Lazar, Analyst
I understand. Dave, you were on the Board when the Crisco deal was announced and approved. I'm trying to gauge whether you and the Board viewed this acquisition as typical for B&G, focusing on assets with strong margins and cash flows, even if they aren't necessarily growth brands. Alternatively, was this deal more about reinforcing the belief that a segment of consumers returning to brands like Crisco will remain loyal long-term, which could also benefit other B&G brands? I'm interested in your confidence in the lasting demand for Crisco and whether this acquisition reflects your conviction or is simply aligned with B&G's historical deal-making strategy. If there's a lasting demand, would that be seen as an additional benefit?
David Wenner, Interim President and CEO
So a little bit of both, I mean, if COVID hadn’t happened and we were looking at Crisco. I think we would have been very attracted to it for the reasons you just said, very good margins, very good free cash flow out of those margins, and an asset deal that gives us tax advantages and a fairly modest purchase multiple, all basics in the B&G formula for acquisitions. Were sales declining? Yes. But we bought any number of brands like that and proved that we can stabilize sales if not grow sales by paying more attention to the brand, so it fits that formula. Now is COVID a bonus, if you will, in terms of buying a brand like this? Absolutely. COVID has reinvigorated the brand and reinvigorated what the brand is used for in terms of cooking and baking, and we think we can hang on to that and are going to work hard as I said in the remarks to really foster. I mean, some of our great brands that are very profitable are things like Clabber Girl & Co and Crisco, and about 20% of our sales are involved in that kind of business. So, it behooves us to go out there and convince consumers and it is fun to bake at home and keep that trend going.
Andrew Lazar, Analyst
Okay. I have one last quick question. I understand that there are many factors influencing your ability to provide a full year guide at this time. However, many companies have been confident enough to give guidance for the next quarter. Since you are already two months into the first quarter, which started off well according to your comments, I would have expected at least some specifics on the first quarter guidance. Is there a reason you chose not to do that? Is there still some uncertainty that you are unable to address? I'm trying to understand the visibility at this stage. Thank you.
David Wenner, Interim President and CEO
It’s all about the end of March. I mean, we are comfortable. What we are basically saying for the year is we are going to be up about 10% versus 2019 on our base business sales and that the Crisco is incremental to that. Now that’s a best estimate, I won’t use the word guess, but that’s a best estimate and because nobody knows exactly how this is going to play out, but to try and nail down the quarter is very, very challenging given those last few weeks. I think we can tell you that the quarter is off to a very good start and if you compare us to 2019, we are going to be comfortable saying we are going to do much better in 2019. I don’t know that we are going to be able to totally match those last few weeks of sales in 2020.
Operator, Operator
Our next question is from Tim Perz with Stephens, Inc. Please proceed with your question.
Tim Perz, Analyst
Thanks for the question, guys. Could you just provide a little bit more detail about how you are thinking about gross margins this year? More specifically just kind of what you expect for inflation and what you are expecting to do from a price mix standpoint? I know you have already announced some of the pricing actions on Green Giant and Ortega, but should we be expecting to see any more of that this year?
David Wenner, Interim President and CEO
Yeah. You will definitely see more of that. We are reviewing all brands and looking at price opportunities and trade opportunities. A lot of times it’s much more efficient to rationalize your trade spending than it is to take price. So everything is on the table, because we see substantial inflation that’s already here in a number of places and I mean brands like Crisco you can see, just go look at what the price of vegetable oil or soybean oil has done in the last number of months and you can see that all of these commodities are ramping up very quickly. And frankly, I don’t expect any relief until the new crop rolls in, but the market will do what the market will do obviously. So we are looking at substantial inflation even with the positions we have taken on a number of things. And we are definitely looking at, yeah, doing what we can in terms of price and trade and cost reduction at the facilities to mitigate that. So I think our gross profits are going to be fairly consistent but it’s going to take some work to do that.
Tim Perz, Analyst
Okay. Can you tell me how far in advance you have purchased your edible oil needs for the Crisco business and explain how the pricing typically works for your products? Specifically, how long is the delay in passing through costs, is that a straightforward process, or do you need to approach the retailer to request a price update?
David Wenner, Interim President and CEO
Yeah. Well, I will start with the back-end there. The pricing these days take 60 days to 90 days and you can push it to 60 days but then you have a bunch of retailers that will just deduct off the invoice until you hit the 90 days. So it’s 90 days. We have already done that work with Crisco and there should be a price increase effective the end of April on Crisco. So as far as the position on oil goes, we have our costs locked in well into the summer right now and hopes that the new crop will take the pricing off of an extraordinary high that it’s at right now.
Tim Perz, Analyst
Okay. Thanks. I will pass it along.
David Wenner, Interim President and CEO
Thank you, Tim.
Operator, Operator
Our next question is from Brian Holland with D.A. Davidson. Please proceed with your question.
Brian Holland, Analyst
Yeah. Thanks. Good evening. I think you have done a better job of getting price during the past than perhaps is realized or appreciated. But this time around, can you cover both cost headwinds and what presumably will be an increasingly promotional environment this year than part? So can you talk about that added layer to maybe the gross to net adjustment next year?
David Wenner, Interim President and CEO
I can't predict how much trade will grow in the areas where we operate. For example, Green Giant is a significant brand, and I would be surprised to see any trade promotions for canned vegetables in the first half of the year due to insufficient inventory to meet demand. Other competitors have already indicated they won't engage in trade promotions, and we have done similar allocation work. It wouldn't make sense to sell limited inventory at lower prices too quickly, as that leaves us with nothing available until late summer. For Green Giant alone, I expect trade promotion activity to be mostly limited for frozen products and nearly nonexistent for shelf-stable items. This situation applies to several of our other major brands as well. For our Ortega brand, the demand is extremely high. General Mills had faced supply challenges, but I believe they have improved somewhat. We still encounter supply issues and are actively working to boost capacity to meet demand. Considering the current environment, promoting doesn't make sense and it will take time before we navigate these challenges. The same goes for seasonings; competitors still face supply difficulties. While our supply has been generally stable, we are experiencing issues with packaging suppliers affecting container availability for our sales needs. I anticipate that many will pull back on trade early in the year, particularly in our business, although not necessarily in the entire food sector, leading to limited trade overall. We are evaluating what constitutes an effective trade promotion, assessing what works and what doesn’t, and why we invest in areas that aren't yielding results. We will focus on this to achieve effective price adjustments without simply raising list prices.
Brian Holland, Analyst
Yes. Thanks for the color, David, and queuing up my next question. So the prior CEO had more of a marketing background, loosely translates to more brand investment, like, under your stewardship going back several years, B&G prioritized maximizing cash generation. I presume your focus will be the same as it ever was, I think you alluded to that in your prepared remarks. So can you talk about to what extent improving free cash flow at B&G as an opportunity and specifically where they are?
David Wenner, Interim President and CEO
There are several ways to enhance cash flow. For instance, selling more of our profitable brands can lead to an increase in free cash flow, which is definitely a priority for us. In terms of my experience compared to my predecessor, we are not reducing our marketing budget. In fact, we increased our marketing spending in 2020 and plan to keep doing so. We will also continue to launch new products as opportunities arise. Currently, we are still in the early part of the year, and retailers haven't fully re-established their resets yet, so that part remains limited. However, there are many strategies to improve cash flow. With the addition of Crisco, our inventory is expected to peak around $0.5 billion. There is cash to be unlocked in that inventory, and my experience is useful in examining why we maintain the current inventory levels necessary for our service. Can we continue to deliver strong service with reduced inventories? Additionally, we are looking at our capital expenditures and various expenses. There are numerous actions we can take to further optimize our cash position, which is already strong. I believe we have solid cash generation from our EBITDA, but there is always room for improvement.
Brian Holland, Analyst
Thanks, Dave, and I will leave it there.
Operator, Operator
Our next question is from William Reuter with Bank of America. Please proceed with your question.
William Reuter, Analyst
Hi. I just have two quick ones or hope that they are relatively quick. Do you know what amount of sales from the fourth quarter would have been, I guess, kind of reduced based upon the supply chain disruption that you experienced, do you have a number for that?
David Wenner, Interim President and CEO
That’s a very hard number to extract. Partly because if you were able to ship a full order this week, would you see the same size order next week, where when you don’t ship a full order, you get a bigger order next week because you didn’t ship it the prior week. So it’s a very hard number to extract. Yeah, I won’t to even guess at it, I am sorry.
Bruce Wacha, Chief Financial Officer
It’s a real number, but hard to put on it.
David Wenner, Interim President and CEO
All I know is things like Ortega only grew 12% for the year. I think Ortega could have been double that had we had the supply easily.
Bruce Wacha, Chief Financial Officer
Yeah. And Green Giant is another one where applying...
David Wenner, Interim President and CEO
Green Giant we were seeing very significant increases in sales in second quarter and third quarter, and fourth quarter was flat because we put customers on allocation. So that’s the kind of thing...
William Reuter, Analyst
Yeah. Okay. My second question is, do you have a mid-point of expectations in terms of inflation for this year based upon your outlook or do you have a range that you could say we think cost of goods sold will be up between X and Y percent?
David Wenner, Interim President and CEO
No, that's very difficult to ascertain. We are experiencing cost increases that we hope are somewhat temporary for the first half of the year. It depends on how much we can reduce costs in our manufacturing and distribution. Any reduction would need to come from inventory to balance out the cost savings. Therefore, I can't specify what the net effect would be.
Bruce Wacha, Chief Financial Officer
Part of this is operating in the world of COVID. It just makes some of these things so much more challenging right now. But as Dave said, the point is to cover these costs with price increases both list, trade, and cost savings.
William Reuter, Analyst
All right. Okay. All right. Just thought I’d try. Thanks a lot.
David Wenner, Interim President and CEO
Yeah. Good try. Hey, Operator, I am assuming there are no more questions, is that correct? Hello. We lost the line.
Bruce Wacha, Chief Financial Officer
All right. Chemoli, are you still there?
David Wenner, Interim President and CEO
Yeah. Are we still on?
Operator, Operator
I apologize there were technical difficulties. If we can continue, our next question is from Ken Zaslow with Bank of Montreal. Please proceed with your question.
Ken Zaslow, Analyst
Hey. Good evening, everybody. Is everybody on? Hello?
Operator, Operator
Hello, Bruce?
Bruce Wacha, Chief Financial Officer
Yes.
Operator, Operator
Yes. If you would like, we can still continue, if you would like, but...
Bruce Wacha, Chief Financial Officer
Sure.
Operator, Operator
… we have lost those that were in the queue.
Unidentified Company Representative, Unidentified
Maybe you can just re-prompt?
David Wenner, Interim President and CEO
Yeah.
Operator, Operator
Sure. Our next question is from Ken Zaslow from Bank of Montreal. Please proceed with your question.
Ken Zaslow, Analyst
Hey. Good evening, everyone. Glad to be back.
Bruce Wacha, Chief Financial Officer
Ken, thanks for your patience. Appreciate it.
Ken Zaslow, Analyst
All right. Let me ask you on this capacity, are you guys building capacity, what constraints will be eased by when, and yeah, if you don’t mind answering that.
David Wenner, Interim President and CEO
Well, I don’t want to get real specific, because I really don’t need my competitors understanding where I have a lot of issues. But, yes, we are building capacity on some things and the capacity will come on this summer, so some there’s some significant CapEx that’s being spent to add capacity on a few of the product lines that we have. Some will come on sooner than that, especially in seasonings, but it will take a few months to get some of these manufacturing lines running.
Bruce Wacha, Chief Financial Officer
Ken, for the most part this isn’t like a lack of capacity to sell things. It’s a not unlimited capacity to sell unlimited demand. But sales could have been bigger if we had more capacity. But at the end of the day, we have got to manufacture the products that we are selling and that’s just where kind of in certain categories maxed out.
David Wenner, Interim President and CEO
Yeah. We have done any number of things to keep in supply through 2020, including pulling some product lines back into our facilities to make them in our facilities, because co-packers were unable to make them. And one of the big issues we had in 2020 was that it seemed like our co-packers were hit very hard by COVID and lost a lot of capacity just because they didn’t have the bodies to run the factories.
Ken Zaslow, Analyst
I was a bit unclear about the relationship between pricing and commodities. Will EBITDA grow faster or slower than sales if there's no need for promotions and we can maintain price stability while controlling commodity costs? Does that suggest your EBITDA could actually outpace sales growth, or are you implying that the lack of marketing and promotional spending is a factor?
David Wenner, Interim President and CEO
That's a good question. For example, with Green Giant shelf-stable products, we are limiting sales due to allocation, but even with that, we expect sales to be modestly higher than in 2019. If everything remains equal, those sales should be more profitable due to the lack of promotions and our price increase. Therefore, in this case, EBITDA would grow at a faster rate than sales. However, in other situations, not promoting can affect volume, and we aren't sure how that will play out. We anticipate some decline in demand, but we don't know how much and how the reduction in trade will impact that. It really varies from brand to brand.
Ken Zaslow, Analyst
Okay. I will follow up on that later. My final question is, what insights have you gained from the recent pricing increases for Crisco compared to its competitors over the past five to seven years? It seemed that typically, when one competitor raised prices, the other would not, and they would adjust again, almost like a game. Now, however, we find ourselves in a situation where the price of vegetable oil is likely only going to rise. Are you confident that your competitors will respond similarly, and that you won't lose market share in the process? Do you believe consumers will eventually have to pay full price for this? I'm trying to understand your perspective on this situation, as it appears to be a unique environment with an unclear dynamic between the two competitors. I'm feeling quite puzzled.
David Wenner, Interim President and CEO
Yeah. Well, one of the things about pricing in the oil part of the category is that private label is a big factor in the whole thing, private label is about half of the sales. So your price differential to private label is almost more important than it is to your competitors. Because this is a category where people promote all the time and as I learn more about the category and look at all the pricing customer by customer, it really is the Wild West in terms of what’s going on with pricing and promotion and all of that. Smucker hadn’t done a price increase in quite a while. And when they did it and I am thinking that was about four years or five years ago, nobody followed. So that was a big misstep and they had to accommodate that with trade promotion and things like that. We would hope that everybody has to buy the same commodity. Now they may have hedged better or not, but you would think people would increase price to accommodate the very high commodity prices you are seeing now. But we will have to wait and see how that plays out and we will have to adjust trade promotion accordingly to accommodate what’s going on with price. So it’s new territory, very different scenario than it has been in this category in a while and we are going to find out what happens here.
Ken Zaslow, Analyst
And what about elasticity?
David Wenner, Interim President and CEO
Well, that’s the question. I mean, if everybody follows you then you are fine. If not and again what I think I have noted is that your price differential to private label has more of an elasticity effect than anything else. So it’s a question does private label raise price, if all the brands raise price, you would argue private label would be crazy not to raise price, but I don’t know.
Ken Zaslow, Analyst
Okay. Fair enough. I appreciate it.
Bruce Wacha, Chief Financial Officer
Thanks, Ken.
David Wenner, Interim President and CEO
Okay.
Operator, Operator
And our next question is from David Palmer with Evercore ISI. Please proceed with your question.
David Palmer, Analyst
Thanks. Good evening. Hey…
Bruce Wacha, Chief Financial Officer
Hi.
David Palmer, Analyst
Hello, Bruce and Dave. I have a strategic question regarding the long-term outlook. Reflecting on the past, Dave, you've had a successful career with smaller acquisitions under $100 million that have supported consistent free cash flow growth, maintaining a conversion rate above 100%. However, you've also observed some deals and businesses that have led to fluctuations in free cash flow, which at times have created misunderstandings in the market, particularly concerning your dividend commitments and cash flow flexibility. Considering these experiences in the context of the post-COVID environment, what insights have you gained from these transactions? What types of businesses will you focus on moving forward, and how can you achieve more stability in free cash flow conversion and delivery?
David Wenner, Interim President and CEO
The formula remains the same; at times, it simply hasn't been adhered to. You should focus on acquiring brands with higher margins, as higher margins indicate that the business is not a commodity and is more defensible. Additionally, these brands should have relatively low working capital and capital expenditure requirements, and be priced reasonably while offering favorable tax treatment for income sheltering. When you consider these factors, both Crisco and Clabber Girl exemplify this model. Together, these elements drive cash flow efficiency from EBITDA. If you look back at our acquisitions, you'll find some brands we've taken on that don't meet this standard, and we've learned from those experiences. I completely agree that B&G Foods has built its reputation over the years on making successful, accretive acquisitions, leading to consistent operating results that instill confidence in our strategy and delivery. Our aim is to continue on that path and remain committed to this plan.
David Palmer, Analyst
Thanks for that. And just two small ones, the Crisco, the guidance originally when you did that deal or announced the deal was $270 million in sales and $65 million to $70 million in EBITDA in ‘21, is that still your thinking? And then I will just squeeze in the second one, COVID-related costs, you said, was $13.5 million in 2020, do you think you can be half that in ‘21 and I will stop there.
David Wenner, Interim President and CEO
Yeah. I think we will be below half that COVID cost in ‘21. I mean we are praying that the states get their act together enough to vaccinate our workers soon and that would help tremendously in terms of controlling cost. Obviously, the safety of the workers is first until that happens.
Bruce Wacha, Chief Financial Officer
And then one piece in there is, we had COVID costs for three quarters of 2020, so...
David Wenner, Interim President and CEO
We don’t expect to see changes soon. Ideally, vaccines will be available at manufacturing sites early in the second quarter, allowing people to remove their masks, but I'm not sure we will reach that point. However, having more vaccinated individuals will create a safer environment. Regarding Crisco, maintaining margins will be difficult due to current commodity prices, which relates to pricing, trade, and competition. We certainly aim to achieve our targets. If anything, I believe sales may exceed expectations, although the EBITDA margin could be lower; nonetheless, it may still yield the same EBITDA at the bottom line.
David Palmer, Analyst
Got it. Thank you.
Operator, Operator
And our next question is from Karru Martinson with Jefferies. Please proceed with your question.
Karru Martinson, Analyst
Good evening. Just wanted to touch on the limited new launches that you had in 2021 and then kind of get a sense of what the schedule is for launches in 2022?
Bruce Wacha, Chief Financial Officer
The schedule relies on retailers. We are prepared to proceed, but we need retailers to be willing to reset and adopt the products. Right now, we are waiting for this to happen. I should point out that we prefer to introduce new items in the fourth quarter, as that’s when we see a return on investment. However, we hope for some flexibility with retailers before that time. Ultimately, we are dependent on the retailer resets, and there has not been much activity in that area thus far.
Karru Martinson, Analyst
And generally speaking, what is the feedback that you are getting from the retailers, I mean, most of them grocers have seen as they we are still going to have elevated consumption. But certainly like you said there is going to be those weeks in March that were just not going to replace. I mean is there a point where we take a breather here and you get those resets? Have they communicated anything to you all?
David Wenner, Interim President and CEO
No. I mean, I haven’t heard anything specific from retailers about when. Yeah, I guess from a retailer point of view, the saving grace for them in terms of sales in March and April and into May maybe that their shelves were bare. I can still remember walking into Walmart and seeing literally aisles with nothing on the shelves. So if they get in stock they may have a better shot at matching their consumption sales out of and maybe that will benefit our sales.
Karru Martinson, Analyst
Once Crisco is fully integrated into your platform, what do you anticipate will be the next challenges in mergers and acquisitions? You've mentioned some opportunities and characteristics. Are you aiming to expand further into the baking category, or should we focus more on frozen foods? What are the key areas that B&G intends to develop?
David Wenner, Interim President and CEO
I believe it's important to focus on what aligns with our strengths in infrastructure efficiencies. We see potential in various categories such as frozen foods, seasonings, meal solutions, and baking, as long as they fit our M&A strategy developed over the years. One advantage we have is our willingness to consider brands that may be flat or declining in other portfolios if we identify growth potential. For instance, Crisco has significant distribution gaps that can be addressed. This positions us favorably against larger companies that typically avoid smaller brands not currently on a growth trajectory. We also believe we have an edge over private equity firms due to our established infrastructure, which allows us to integrate new brands cost-effectively. Ultimately, it comes down to having the right brands and products that meet our financial criteria. We value seasonings, meal solutions, and baking, and with the right brand, we also appreciate frozen offerings. Our infrastructure supports all these categories.
Bruce Wacha, Chief Financial Officer
And the other part obviously is you need a willing seller. And so there’s got to be assets out there that people want to sell and we are hopeful coming out of COVID, maybe people will look differently and start to divest some of their cash flow brands that people have been rumored to be interested in doing, but we got to see what’s out there.
David Wenner, Interim President and CEO
After 17 years in this field, I am not particularly concerned about the availability of assets for sale. There have been a few instances where there was a pause for about a year, and at most two years. Overall, I have lost count of how many acquisitions we have completed. It is not an acquisition desert out there.
Karru Martinson, Analyst
Thank you very much guys. Appreciate it.
Operator, Operator
And we have reached the end of the question-and-answer session. And again, I do apologize for the technical difficulties. I will now turn the call over to Dave Wenner for any closing remarks.
David Wenner, Interim President and CEO
Hey. Thank you, Operator. I appreciate everyone joining us on the call and I appreciate your questions. That helps us clarify what we believe is happening in our business and we are very excited about how the business has started 2021. We definitely have some hurdles here in the next couple of months in terms of the sales that we did in 2020. But we do believe that we will be solidly ahead of 2019 sales and hopefully we can offset the cost pressures we see and turn in another great performance. So, again, thank you very much.
Operator, Operator
This concludes today’s conference and you may disconnect your lines at this time. Thank you for your...
David Wenner, Interim President and CEO
Thank you.