Q2 2020 Earnings Call
At this time, all participants are in listen only mode.
The speakers presentation, there will be a question answer session.
To ask a question. During this session you will need to press star one on your telephone. Please be advised today's conference is being recorded.
If you require any further assistance please press star zero.
Now I'd like to turn the conference over to your Speaker today, Steve One quick Vice President Investor Relations. Thank.
Thank you. Please go ahead Sir.
Good morning, everyone. Thank you for joining us and unified second quarter fiscal 2020 earnings conference call.
And now you should have received a copy of the earnings release issued earlier. This morning. The press release web cast and a supplemental slide deck are available under the investors section of the company's website at Www Dot you identified dot com joining me for today's call, our Steve spinner, our chairman and Chief Executive Officer.
Sean Griffin, our Chief operating Officer, Chris Test the President of you identify John Howard, Our Chief Financial Officer, and Jill Sutton Unifies Chief legal officer.
Steven John will provide a business update after which we'll take your questions.
Before we begin I'd like to remind everyone to comments made by management. During today's call may contain forward looking statements. These forward looking statements include plans expectations estimates and projections that might involve significant risks and uncertainties.
These risks are discussed in the company's earnings release and FCC filings.
Actual results may differ materially from the results discussed in these forward looking statements.
And lastly, I'd like to point out the during today's call management will refer to certain non-GAAP financial measures definitions and reconciliations to the most comparable GAAP financial measures are included in our press release I will now turn the call over to Steve.
Thank you Steve Good morning, everyone and thanks for joining us on today's second quarter call.
Earlier today, we announced results for fiscal second quarter warehouse expected, both adjusted EBITDA and adjusted EPS improved sequentially compared to the first quarter.
Both would have been higher had we not incurred $33 million were 44 cents per share in charges related to three very public customer bankruptcies in the quarter.
Before we get further into the quarter. When we first comment on the ongoing covert 19 preparedness and general business conditions first our supply chain teams have been exemplary in their execution. During the last two weeks of increased demand operating or facilities safely well meeting but.
The real increases in demand across the network.
In many cases, our teams are working around the clock seven days a week to ensure that our retailers are providing those products most needed by very concerned consumers.
At the outset of Cobot 19 or category management teams identified a core group of products that would see immaterial lift in sales as a result, we were well positioned to satisfy some retailer demand, which however exceeded even our initial expectations second our growth.
Related to cope with 19 has been significant.
You want to fight last two weeks of cells has resembled or prior year Thanksgiving holiday week, what's the difference being we are suppliers and our customers.
Did not have the lead time required to adequately prepare.
While we are still understanding the long term impact of this demand it is difficult to forecast the impact through the remainder of year.
Our response planning food safety and business continuity toward this crisis has positioned us to serve and protect our customers suppliers consumers and associates.
Third with the effects of the last two weeks on our inventory on hand in order to suppliers ability to ramp up production supplier fill rates have been challenged. Additionally, with many DC is now running higher than anticipated growth versus just one month ago, we are allocated resources as needed to achieve.
Just new levels of demand.
At the same time, the retail environment continues to be challenging and the closing of stores by certain of our customers reflects that fact as well as validates you want to five strategic transaction 18 months ago.
We recognize that independent natural format retailers would come under pressure from larger chain retailers with scale as consumers have broader access to these natural brands in supermarkets Masson E Commerce.
While these store closures represented a headwind you want to find the second quarter, we've already begun to see consumers in these geographies.
Move to retailers with similar Assortments that are supplied by you want to buy.
We see this as a sign that demand remains strong for products, we supply and that consumers will find new shopping patterns to meet their needs consistent with our views of the industry and rationale behind strategy. We are executing that we've talked about in the past.
We firmly believe that you want to fight through our expansive offerings and build out the store strategy is uniquely positioned to provide the tailored food solutions, our customers need to remain viable and relevant.
This is what sets us apart from the competition.
Let's move to the corner.
Net sales totaled $6.14 billion flat to last year's second quarter within our sales channels for the quarter, you'll note that year over year present changes now reflect a total company viewpoint for the first time.
Sales in our largest channel the supermarket channel, which represents slightly more than 63% of total sales declined by 1.2%.
This was a combination of lost sales, some intentional and lower sales to existing predominantly smaller customers.
We didn't supermarkets, the challenging macro environment is having a disproportionate impact on our smaller supermarket customers who need scale to compete.
On the other hand, we're encouraged that sales to our larger supermarket customers those with annual purchases of at least $100 million increased approximately 5% in the quarter.
Our next largest channel is supernatural representing approximately 19% of total sales where sales increased 10% over last year's second quarter.
This represented a sequential improvement of 180 basis points relative to Q1, driven primarily by higher sales to existing stores as well as the addition of new locations sales within our independent channel fell by 6.5%, which included lost business and store closings, which I mentioned.
Earlier.
Success in our cross selling initiatives that will drive positive future momentum include our professional services proteins protests and assorted wellness categories.
Lastly, our other channels saw a decrease of 6.3%, which was driven predominantly by our strategic decision to exit a portion of our military business over the past 12 months last year, Sean spoke about rationalizing business, where the economics just didn't make sense for you want to fight.
This is one example, where our profitability has increased as a result of consciously eliminating unprofitable volume.
Partially offsetting the military sales decline was growth from several non traditional customers and revenue streams that continue to expand looking across our business. It's clear that are larger customers, who tend to have more differentiated formats, and omni channel presence and the benefit of scale and diversification.
Are doing better than smaller customers.
Wholesale sales to our top 100 customers were up 4.3%.
For customers to through 100, the increase was 2.2% our top 100 customers represent roughly 75% of our total volume.
Our diversified customer base allows us to support the growth of our larger customers who are winning in the marketplace.
Many of whom are taking advantage of the broader variety of goods and services that you want to fight has to offer.
For some of our smaller customers, we believe our breadth of offerings gives them the strongest opportunity for retrieving longer term success and we have begun executing a detailed strategy for these stores.
Operationally, we are making solid progress and or close to completing two important network optimization projects that will improve efficiency service and capacity in several key geographies.
We will officially cease operations in our DC in Portland, Oregon in the third quarter, which will complete the Pacific northwest consolidation, we've spoken about for several quarters.
As a result will have gone from five distribution center supporting the region down to two.
Our new facility in Centralia, Washington is performing in line with our expectations Im pleased to be nearing completion of this multi DC transmission project.
In Southern California, we're nearing completion of our second distribution center in Moreno Valley, which we expect will be operational leader in our third quarter.
This facility adds over 1 million square feet multi temperature capacity. In addition to an automation package that will dramatically improve productivity and accuracy each pick and slow moving environment.
This project will also allow us to consolidate our southern California produce operations into a single facility that will be able to more effectively serve this market.
As we've worked through these projects or supply chain team is delivering results.
I'm pleased that we've reduced wholesale operating expenses by four basis points year over year.
In addition fill rates have improved despite higher levels of supplier out of stocks. We look forward to finalizing these projects, which will help us better serve our retail customers. So that they in turn can better meet the needs of their shoppers.
The marketing side, we recently took a significant step towards our build out the store strategy by making it easier for our conventional customers to purchase the highest performing natural and specialty skews through their current buying system.
For the past 18 months. These have been available through a cost stock program, which we knew would not be a long term sustainable solution for our customers.
We have placed a curated selection of skews into conventional distribution centers, which will be promoted invoice and shipped through the same system and supply chain at these customers use today for buying their conventional items. The program will be supported with attractive pricing and promotions category management custom coin.
Catalogs and point of sale materials.
For many customers. This will be there first foray into natural products and for others, who will provide an avenue for consolidated purchasing through unified. We're also experiencing good growth in our professional services business as many of our natural customers are beginning to see the savings available to them. We sold nearly 300 professional service.
As to natural customers, so far in fiscal 2020, and expect to double that number by the ended the third quarter. One case longtime natural customer will save an estimated $300000 annually on credit card processing by becoming part of our program.
Let me next provide a status report on our efforts to divest retail.
As you know we've announced the sale or closure of 19 shopper stores. This year in the Washington Baltimore market.
And are continuing to market the remaining shopper stores with several potential buyers.
At Cup, we're continuing the sales process for the entire banner.
At the same time and as anticipated we simultaneously working to monetize the owned real estate for 15 Cub stores that represents more than 1.1 million square feet of retail space.
We are currently finalizing the real estate sale, which is part of a competitive bid process that included multiple interested parties. The purchase price is approximately $170 million in gross proceeds with market lease rates for each location.
We anticipate a closing before the end of the fiscal year and we'll apply net proceeds of this transaction to repay outstanding debt.
As mentioned the Cup banner sale process continues as we explore alternatives that provide the greatest value for this market leading asset and we currently expect this process to push out beyond fiscal 2020 and towards the end of calendar 2020, finally before I turn the call over.
John I want to make a few additional comments regarding cobot 19.
This continues to be in evolving situation that we are of course watching closely.
As we continue to navigate this situation, we believe that retail demand will remain elevated in the near term.
Especially in regions in metropolitan areas, where there are escalating numbers of cases.
As demand will likely remain high.
Our nationwide distribution network and supply chain.
His prepared to take care of our customers in a timely and safe manner.
Our broad response plan has incorporated a recommendations issued by various public and private health officials.
With the purpose of protecting our associates and customers as well as maintaining our high quality food safety standards.
With more than a year since our transformative acquisition and despite industry headwinds for the last 12 months.
I'm extremely proud of our integration efforts, we've now moved beyond integration and towards execution, our strategic pillars have taken hold and we are seeing the results with that let me turn the call over to John.
Thank you Stephen Good morning, everyone I will cover our second quarter financial performance balance sheet capital structure and updated outlook for fiscal 2020.
As a reminder, we've now fully cycled the supervalu acquisition, which means quarterly year over year results will be more directly comparable and not influenced by the mix impact of adding the acquired business.
Let's start with sales for the 13 weeks second quarter, which totaled $6.14 billion approximately equal to last year's second quarter.
Steve provided color on our sales by channel. So I'll move to gross margin, which was 12.63% of net sales up approximately 10 basis points from last year's gross margin rate when excluding last year's inventory fair value charge.
The improvement in gross margin was driven by lower year over year freight expense, partially offset by the dilutive impact of the growth rate of our largest customer.
Promotional funding was largely in line with fiscal 2019 second quarter.
Including in this quarters gross margin rate was inventory reserve expense of approximately seven basis points or $4.2 million associated with the three customer bankruptcies, Steve spoke about earlier.
Inflation into second quarter was 1.4% down slightly from last quarter.
Second quarter operating expense was $750.8 million or 12.23% of net sales the same rate as last year's second quarter.
Included in this quarter's operating expenses were $28.9 million in bad debt expense from the three customer bankruptcies.
Or approximately 47 basis points as a percent of net sales.
Prior to this bad debt expense, our cost reduction efforts and incremental synergy realization led to a 4% reduction in operating expense dollars.
As a result of this quarter's bad debt charges were taking additional incremental measures to monitor the credit risk profile of our customers.
Placing a greater emphasis on controlling customer delinquency migrations.
Making every effort to keep customers current on their obligations to unify.
Within operations, we saw lower labor in trucking expenses, partially offset by higher occupancy costs as we move out of and expand into various distribution centers.
We expect our operating expense rate to improve as we move throughout this fiscal year as the projects Steve spoke to our completed and the benefits begin to be realized.
Second quarter consolidated adjusted EBITDA was $131 million, including $33 million, an expense related to the three customer bankruptcies compared to $143 million in last year's second quarter.
Discontinued operations contributed less this year, mainly due to the expected continued wind down of shoppers compared to last year when it contributed to a consolidated adjusted EBITDA.
Had the quarter not included the bankruptcy related expenses adjusted EBITDA would have increased by the low double digits over last year's second quarter.
Net interest expense in Q2 was $48.6 million compared to 55.2 million last year, when excluding $3.5 million related to the now retired supervalu senior notes and certain accelerated unamortized debt issuance costs.
The decline was driven by both lower outstanding debt balances and lower average interest rates.
The effective borrowing rate for the second quarter was approximately 6.1% unchanged from Q1.
Q2, GAAP EPS was a loss of 57 cents per share which included the following significant items.
First we incurred restructuring acquisition and integration related expenses of 55 cents per share.
Second as I previewed on our last call. We took a 19 cents per share noncash pension settlement charge for the lump sum payout program completed in the quarter.
You'll recall this reduced the number of participants and associated assets and liabilities in our single employer pension plan by approximately 30% and lowered the present value of future PBGC premiums and playing administrative costs by $17 million.
And third we had 58 cents per share in expense for store closures within disc ops, primarily related to the initial group of shopper stores that have been or will be sold or closed.
Together with two smaller items the tax treatment of these items and the GAAP tax rate.
These adjustments totaled 89 cents per share, which when added to our GAAP EPS results in adjusted EPS of 32 cents per share.
This adjusted EPS figure includes the negative impact of approximately 44 cents per share an after tax expense, resulting from the three customer bankruptcies.
Capital expenditures for the quarter totaled $43 million or approximately 71 basis points as a percent of net sales with the largest spending gordon toward completing the Pacific northwest consolidation and adding capacity to our distribution center in Marino Valley, California, where we see strong growth opportunities as Steve outlook.
Right.
Total outstanding balance sheet debt in capital lease obligations at the end of Q2 net of cash and cash equivalents and excluding operating lease obligations was $2.97 billion, a decrease of $149 million compared to the end of the first quarter.
The reduction in outstanding net debt was driven by $108 million from lower levels of net working capital following the holiday selling season as expected.
Turning to our full year outlook for fiscal 2020, I am pleased to reaffirm the original range. We provided in October for net sales, which is $23.5 billion to $24.3 billion.
Our updated outlook for adjusted EBITDA and adjusted EPS takes into consideration the three customer bankruptcies that impacted the second quarter and their anticipated impact for the balance of the fiscal year.
We don't foresee any meaningful direct impact to our business from the Corona virus as presently assessed and have not made any adjustments to our outlook based on its potential spread however, as Steve stated we are monitoring the situation given that any change to consumer traffic levels and our customers stores could result in changes to our sales.
As well.
We now expect full year fiscal 2020, adjusted EBITDA to be in the range of 522 $560 million and adjusted EPS to be in the range of 85 cents to $1.45 per share with the only changed from our prior adjusted EBITDA and adjusted EPS guidance being the impact of three customer base.
Currencies.
Said another way absent these bankruptcies our expectations for full year results would have been unchanged.
As to the balance of the year fourth quarter adjusted EBITDA is expected to be stronger than the third quarter, driven primarily by lower operating expenses as we complete the Pacific northwest consolidation and the southern California capacity expansion as well as benefit from the continued build of cost synergies, we're also including the increment.
Total rent expense, we'd be paying following the Cubs sale lease back for the partial year. Following the sale of these properties.
As a reminder, the adjusted EBITDA and adjusted EPS guidance includes a full year contribution from club.
While unlikely should we divest that banner prior to fiscal year end will provide an update at the appropriate time.
We regularly evaluate our capital spending plans and now expect capital spending to come in at approximately 90 basis points as a percent of net sales.
Down from our prior guidance of approximately 100 basis points.
This modest reduction in anticipated spending is not expected to impact our operating results, but will contribute toward achieving our year end debt reduction targets.
Finally, we continue to prioritize debt reduction and still believe will reduce net outstanding debt. This year by the $200 million to $300 million. We previously provided.
A portion of this will come from cash provided by operations, which includes approximately $150 million in restructuring acquisition integration store closures and other costs.
In addition, the Cubs sale leaseback as Steve stated is expected to generate approximately $170 million in gross proceeds.
And the sale of the Tacoma distribution Center also expected to close this year will provide another approximately $40 million.
Finally, as I mentioned on the last call our net debt balance was reduced in the first quarter by about $45 million for certain previously reported capital or finance leases.
Better now reported within operating lease liabilities under the new lease accounting standard.
Overall and despite the bankruptcy charges. This quarter, we're encouraged by the underlying operating performance this quarter and remain optimistic for the balance of the year and beyond with that let me turn the call back to Steve.
Thanks, Sean.
As I close the call today I'd like to share a few points around unifies environmental social and governance efforts often referred to as yes G.
Given the importance. This has for US earlier this year unify released its 2019 corporate social responsibility or CSR report.
Which outlines the progress we've made on sustainability issues.
Well aware of our footprint and the impact we have on the planet and we're committed to making future incremental improvements.
One of our significant initiatives to reduce waste, particularly food waste across our operations in our proud to say than an estimated 48% of the food waste generated by our operations now gets diverted away from landfills you want if I was named food logistics 2019 top grow.
Mean providers list for the six consecutive year, an honor that recognizes companies that enhance sustainability within the food and beverage industry through products services and exemplary leadership.
Our CSR report also disclosed that unified CDP climate change response.
Actions improved our score over the prior year, a reflection of our increased focus on evaluating the environmental impacts of our supply chain and a higher level of oversight towards sustainability topics.
Our teams remain excited and energized and they're focused on creating a better you identify for all of us.
Before I turn the call over for questions I'd like to reiterate that we're encouraged with the first half of fiscal 2020, and the underlying operating performance and trends of the business.
We began this year with a great deal of learnings that came out of fiscal 2019, and we entered the back half of this year in a stronger position than we were just six months ago.
We're focused on maximizing the value of combined companies to drive further operational and financial improvement and we're encouraged by our new business pipeline.
This quarter was indicative of the inevitable changes that are influencing this industry scale and differentiation are becoming more important than ever and we continue to believe that unify is well positioned to capitalize on the ships that are taking place and that will continue to take place.
As John and I have both mentioned our guidance has changed only because of the customer bankruptcies that impacted this quarter's results.
We remain optimistic about the future and look forward to updating you on our progress we'll now take your questions.
At this time I would like to remind everyone in order to ask a question.
Press Star then the number one on your telephone keypad.
The first question comes from refresh Perry.
Hi, Mark your line is open.
Good morning, Thanks for taking my questions, Steve I wanted to go back to some of your comments on the current or virus. Those I was wondering if he can provide maybe more color in terms of what you're seeing from a cans first perspective did you see initial surge love an author Jimmy I just wanted to get a sense of how how that material increase in van looked like I guess, there I guess, maybe the last few days there and it also with that.
Recent demand what's the what's the mix impact on your business related to both the product side and from a customer perspective.
Sure.
Cash.
Yes, let's keep in mind a couple things.
Answer that question number one obviously we're not.
Got it.
You know, we're still kind of watching to see what happens.
As I said in my comments were seeing a lot of increased demand throughout the country.
And.
Yes.
When you plan for Thanksgiving six months to ramp up cost you hire people trucks.
Okay.
19.
We did not happen luxury.
So.
When you look at year over year growth over the last two weeks.
Double digit.
That's a big number.
Whether that continues or not I can't even weekend.
How are we going to see.
More and more people.
Leaving the restaurant.
Yeah.
Well.
Our consumers loading or pantry possible.
I think were seen with double digit growth because customers trust the products that we sell.
[music].
Free from.
And that's why we're seeing.
Significant increase in demand.
It's very early.
We certainly are uncomfortable making any predictions.
At this time.
For the rest here given the fact that right now our primary focus.
Okay.
Sure.
Turning to customers.
Making sure that our distribution centers are operating.
Yes.
Very very clean.
Yeah.
Yeah.
Obviously, making sure we get the product.
Retailers.
Focused right now.
I think the answer to your first question second question on mix you know like I said in my script.
We identified.
Three 400 items.
I would have.
Again lift across categories that you would expect.
Vegetables.
General April.
Not.
Currently we have seen.
But.
We've also seen in general.
Across the balance of stores as well.
I think in the near term, it's we're just going to have to wait.
We are doing everything at our power.
Product.
Quickly.
Sure.
Yeah.
Great. Thank you one one quick question when additional question just just on the independent side, because we look out for the balance here is the decline we saw in Q2, the right way to think about excluding corona bars, and the fact that.
No just how to think about the decline in the independent segment.
Yes.
Yes.
I would say that.
Oh.
Our largest customers are are doing the best Stephanie.
Our top 100 customers are growing by 4.3%.
Scaled lands and we do expect that we would see some rebound from independent perspective, but.
It's a difficult macro economic environment out there and is particularly.
Our independent customer base.
Great. Thank you Paula color and buses.
First he did you have something you want to add on that.
No Sean headed I think.
No the independent base is certainly the.
The most challenge in this environment.
There are ones that are differentiated that are thriving and the rest of on that is where we're going in with our solutions.
Regarding category management building out the store cross selling operating and products and services that we traditionally didn't have to make sure that remain viable.
Yes, just refresh I would add one thing.
The bankruptcy three bankruptcies.
Channel.
Okay, great. Thank you.
Okay.
Your next question comes from Chuck Cerankosky of Northcoast Research. Your line is open.
Hey, good morning, everyone, Jim solar on for Chuck.
First just a quick housekeeping item when we're looking at the $170 million that you guys are expecting from real estate sale at club is that net come out of the 200 to 250 million that you guys were expecting for the overall sale. So should we still be looking for just an additional 30 year or 80 million on that.
Or is that and in excess like you guys expect to get more out of that.
I think the answer to that John It's there's a certain degree of that will come out, but we fully expect to receive.
Well in excess of that net amount, we don't look at that the combined value.
From a 170 perspective.
So we are trying to look for opportunities as we think about the value of the real estate and the value of what we're trying to accomplish here is maximizing both of those assets.
The best amount that we can that's why we entered into the.
The sale leaseback transaction that were contemplated at the full value for the land and we'll look for the full value coming out of the operation side as well.
Okay, Great and then if you guys just kind of take a look over your distribution network.
Do you see any opportunities to either have some excess capacity like Tacoma, where you can get some more cash out of the network or may be consolidate some more dcs like you guys are doing in Oregon in California is that something that you guys are looking at at this time.
Yes, so just as a reminder, we have two primary.
Network realignments going on.
Yes.
Yes, so Pacific northwest essentially complete.
And now were jumping into.
Okay.
Morning.
Number.
We will look to.
The rest of the country.
When the time is right.
We got to get through these first two projects before we start.
As it relates to the second part of your question, which is monetizing.
Existing distribution center real estate, that's really not something that I'm, particularly in favor of.
Just because the economics.
Got.
$750 million roughly of liquidity, we don't need to cash.
Generally doing sale lease back.
Shifting distribution center, just has a meaningful negative EBITDA impact on the running of those facilities thats not something that we would consider right now I.
I would add.
In addition to Steve's comments as.
Execute our script you will.
We do.
Recognized.
Some opportunities from a distribution center perspective.
On the facilities that we believe we will be.
Market in monetizing those assets.
Okay, great. Thanks, guys.
Your next question comes from Karen short of Barclays.
It's open.
Hi, Thanks.
Just to clarify a couple of things on the independent line.
The bankruptcies that obviously, an or liquidation whatever they may have been the independent side weren't really announced until after your quarter ended. So maybe can you just help me understand a little bit more in terms of the actual impact on the independent channel because I mean I. Appreciate you probably we're scaling back on the buying some of these.
And you are and customers, but maybe a little color there.
Okay and this is Chris.
I would say that yes, we are going to see the majority of the bankruptcy from a top line perspective through the second half of the year.
There was some that happened in the queue, but the majority of the topline impact will be moving forward.
Okay. So again back to that that that initial question I think from repass, how should we think about independents going into the next quarter, then as it relates to having that full impact in the next quarter.
Yes, we generally don't provide guidance on what's happening in any particular channel.
Karen.
Success that we have.
Cross selling and professional services will find its way into the independents.
Say that the independents are going to get materially better.
The other had I wouldn't say that they're going to get worse either.
Okay.
And then on the sale lease back on the Cub stores.
I guess can you just give a little more color on your outlook on the actual sale of those assets and then I think you had indicated.
I see our I believe that the that there there was no multiemployer pension exposure related to Cub.
But can you just clarify that but then but more specifically talk about why would you be doing this sale lease back if you thought that there was a greater potential selling that asset.
So let me take the first part so we always had consider a sale lease back on the real is just a real estate associated with cost because it economically makes sense for us to do it.
Built into all of our models when we thought about.
And the future.
So that's just something that was going to happen one way or another.
As it relates to the cut Phil.
You don't have to be a rocket scientist to figure out that this is a really tough climate to sell retail AD com is an incredibly.
Strong.
Number one market share makes a lot of money throws off a lot of cash.
No, we're not going to give it away.
So in the process is taking longer than I think we had expected.
Just because of the general climate.
Retail.
And so that that's really the.
And the Multiemployer you said there was no through or that there is no multiemployer pension exposure on the Cubs fan.
There is a multi multi employer pension encore.
My perspective.
It's really well funded so not an issue from a valuation perspective.
Not.
Matt that typically think of it so.
Almost fully funded plant.
Okay and then last question for me just in terms of the environment broadly with.
Current affairs.
Are you.
How do you how do you see that manufacturers I guess ranking priorities for for actual supply factual supply like is is there an issue where in the stronger you are.
More scale you have.
You are more in line or like further at the top line to get supply or like how is the environment kind of playing out from that perspective for you and how do you see that going forward.
I don't want to speak first supplier, so I can only keep in mind.
Historical data, okay and that is.
The higher the visibility up your customer.
Right the greater visibility bigger customers. Thank you Sir.
So the customers.
The greater your opportunity.
Product first.
We've seen that play out several times in the past when we run into short.
So feel good that as the product becomes available.
Yes.
I think the environment, Karen that you're describing manufacturers.
Talk about that.
Hi.
Those environments.
We expect that we will.
On the very.
Diverse customer base.
We will have.
An opportunity against those allocations, we think will be first in line and just going back to a question there.
On mix, we originally saw this.
Limited to those items that you would think.
Stocking or pantry, but.
Saying that left.
Cross.
The store.
So it's not just.
Soups beans and rice.
Produce and protein perimeter center store.
Which leads us to believe that.
There are more and more people more and more consumers.
Spending more time eating at home than they are going out.
Actually last question on that is are you seeing any SKU on geography is or is it broad based across the country and then secondly can you decipher whether or not there's a much bigger ecommerce shift.
I'd be hard for you to tell.
Yes, so I'm glad you asked that so not surprisingly.
We saw the biggest swift.
Factors.
In the coastal cities.
The New York market, California, Washington market, we're now seeing.
Similar left.
Later.
And other large midwestern cities as well.
Got it thanks.
Okay.
Your next question comes from Chris Mandeville of Jefferies. Your line is open.
Hey, good morning, guys.
Steve So I appreciate your comments around taking some additional steps to to monitor bad debt, but I suppose maybe absent the three recent bankruptcies how is that trending.
How should we think about store closure risk remaining absent near term benefit that.
Subscale retailers might receive from from coded and is there any additional color you can offer with respect to potential new business.
Adding customers or greater penetration given the fact that you called that are about pipeline, but yet now in the quarter anyway, you really only grew with the whole foods channel.
Yes, well, let me let me take a stab at the first one I'll turn that John will give you more color.
The pipeline increased for probably answer that.
So first of all you want to add long history.
Got it units.
Bad debt.
You look back over time or actual bad debt as a percentage of sales is actually pretty nominal.
This is just one of those rare situations where.
Once which I can't remember.
That ever ever happening before.
So we do have very rigid policies in place.
Look at risk.
And obviously when you get three bad debt.
Areas.
Quarter, let alone one month.
And Dave.
It forces you to look at things a little bit differently. So I'll, let John comment on that.
I'd say that so we did.
Go through.
Our full blown process to examine our existing receivable base, particularly on the national side, where the.
The customer bankruptcies occurred the three customers that.
Did have the situation in Q2 and that and day period.
All three of those were substantially current in their terms the majority about the owed us where within terms.
And so when we looked at our rest of our receivable base through that review everything that we're seeing now with the data that's available.
We don't think Theres any other significant exposure certainly nowhere close to the magnitude.
Experienced in Q2, and we're going to continue to monitor all of that throughout the rest of year and continue to look for process enhancements as we go through that.
Let me just comment on.
Your first part of the pipeline Chris.
Take over.
Right now our focus is primarily on.
Or.
Our distribution centers.
Terry safety.
Product in down product outbound leach.
Drivers warehouse.
Our.
And by the way that retailers as well.
Our spending.
28 hours, a day on Coke 19, and make sure stores already.
Wars are following.
Procedures.
We are in our distribution.
I think or be unlikely to think that.
Couple of weeks.
I want to business changing hands.
Just making sure the product stores.
Like I said in the comments the pipeline is full and I'll, let Chris Connor.
Yes, I mean, just real quick on the pipeline if you think about it very simply.
We have two ways to grow and that is by selling more to the existing customers and of course acquiring new customers in our pipeline is full both in the fiscal year. So far in the first half.
The cross selling wins have been allowing us to sell more to the existing customers and that is natural customers either taking on conventional products through our brands first pro services, so forth and our conventional customers buying more from us.
Capital projects that they've never had before so those are starting to build.
As we get.
Make it easier for the customer to choose those options from us and then the larger wins.
Where we're looking at a pipeline of acquiring new business. Those are those are.
And in the inline.
And ready to go.
Yes, I would just at that.
You know.
So focused on integration.
I think this quarter.
We're really through the integration and now we're really focusing on execution.
Over 19 makes a little bit more complicated, but the company is.
Certainly.
Great position to execute today, and if you recall.
Going back to the acquisition Supervalu.
Grocers.
And so there was some business loss associated with integration that took place at that time, we haven't yet.
No I feel really good about where we are both in terms of the pipeline.
Reader of execution.
The company forward.
That's very helpful to build off of that Steve and then I want to circle back really quickly just to kind of it.
Can you guys just speak to the competition that you're seeing of late in distribution between the like the specialty in conventional.
I wouldn't say there's anything different.
Or unique about the competition.
Youre now the largest.
Pretty big factor.
Our distribution centers are close.
Yes.
Our people on incredible we offer a high level of service across so many different product categories very diversified supplier base.
So.
From a competitive perspective I think.
Much better prepared.
Okay, and then just on Cove it again.
No you referenced that you attempted to be prepared at the best.
That you, possibly could have been but yet that the search has exceeded your expectations. So I guess is there any additional color you can offer around how to think about the EBIT margin that will be attached to any potential sales uplift because I would venture to guess that you're not necessarily servicing these customers in the most efficient or the ideal.
Manner, so help us understand maybe that the offset in opex relative to the uplift from sales potentially.
Yeah, I wish I knew the answer to that right now again, our focus is to get the product into the stores.
And so thinking less about doing it in the most effective and efficient way.
And more in the most city.
And getting the demand Phil.
So I think we're just going have to wait.
Couple of weeks couple of months.
Please now obviously, we're always going to be better with revenue growth a lot of revenue growth not.
But again thats not our focus right.
Okay I'll leave it there thanks guys.
Your next question comes from Edward Kelly of Wells Fargo. Your line is open.
Hey, guys Anthony on for Ed Thanks for taking your questions.
So just on the 2020 sales guide in the closure as you've seen to date it sounds like you're going to kind of see continued independent softness can you just help us understand a little more clearly your decision to maintain the guide and sort of what gives you confidence in your ability to hit that number I know you kind of mentioned cross selling and some potential offset from cobot, but is there anything else, we should we thinking about there.
Hi, Anthony this is Chris.
I would say this is that you think about our customer base right, it's very very diversified.
And so what that means is if theres for example in store closure.
Consumers are then shopping at one of our other customers. So.
Were able to ride the wave of challenging environment with the diversified customer base.
As eventually those shoppers are going to be looking for those products that supply.
So if theres contraction in one area, one geographic area or channel. We're typically we're poised to pick it up and another channel another customer.
Okay. That's helpful. And then just on the supernatural channel I know you said you're benefiting from.
Both new and existing stores, there, but can you kind of just help us understand a bit more detailed acceleration you saw and sort of what's driving that.
Yes, I don't know that we can provide any more color on any particular customer in depth, obviously theyre executing well.
Consumer.
People are enjoying to our prime delivery and a lot of markets around the country.
I would say that those are the primary drivers for any other color you probably.
Fair enough thanks, guys.
Your next question comes from Kelly venue of BMO. Your line is open.
Hi, good morning, Thanks for taking my questions.
I wanted to ask about your EBITDA adjusted EBITDA guidance I think the first half when you look at the combined Q1 in Q2 is kind of coming in around 10%, but.
Eric Your updated guidance includes.
For the second half looks to be down between I think 9% to 20% on a year over year basis. So can you just help us think about the drivers in the puts and takes there.
And also including how much savings you're expecting.
Limits consolidation.
Yes, So Kelly this is John.
If you're looking at the second half year over year is what I think youre, saying.
Yep.
So I think what you're seeing there is some of the the.
Good growth that we are anticipating from from the sales, but you're also saying some of the traction from the synergies and and other strategy that we've taken taken into account.
So I think when you think about the year over year back half.
Yes, as Steve mentioned also there's some of that.
Expenses that we incurred last year as we went through some of the rationalizations.
That we're lapping.
I think from from that perspective year over year.
Yes.
From that perspective year over year, I think thats, how were feeling comfortable about achieving our guidance.
That makes sense, but so the the back half you're guiding to be down about 9% to 20% year over year.
And I'm not following those numbers Kelly, that's not what I'm not sure I'm with you on those numbers.
Okay, Okay, maybe.
Let Jerry we can take.
Yes, the 50 Threerd week.
I think when we when we think about how we reconcile to last year.
We've got we've got a different set of numbers and we can take that offline to talk about that.
Okay.
I guess, just another kind of question on co bid.
If companies like Walmart announcing leave policies for their employees.
Emergency Weve policies I'm, just wondering if you're considering or have considered putting anything in places like that.
Sure the safety at your warehouses and your drivers.
Yes, So of course, Kelly, we're always going to do the right.
So right now first and foremost safety.
For us.
And today, thank goodness knock on wood.
We havent had any reported or known case of Cobiz 19.
Any of our distribution centers or.
Corporate offices, we have.
Disciplined.
Business continuity plans.
Please.
Screens.
C.
It's unchanged or close to where people have to go home.
No.
Obviously through the right thing for the associates first and foremost and.
We can cover that market from another location.
So we have done the work.
Like I said, we have some very very robust plans in place consider most of the potential alternatives.
And that.
We're going to be.
You know a company that.
From payments perspective.
It's always going to have a preference.
Because the grocery stores are going to need to get products.
Our folks have been into our conversation.
Agencies.
And.
Like I said.
Right and this is Joe.
We also think if we have an impact on a DC will be experience for a fairly short period of time.
But we will be able to follow decontamination procedures.
Through the federal and local governments and and hopefully bring those theses right back up.
Great and to Steve's point in a way, we're able to serve customers and our associates and keep everybody.
That was our final question I will now return the call to our presenters.
Let me hand, the call today by again personally thanking all of our associates.
Demonstrated an incredible level of dedication and commitment to serving our customers to these two during these truly unique times.
From a broader perspective, we're all hoping that the cobot 19 viruses contained as quickly as possible.
And that we can return to some level of normalcy, but in the meantime.
Unified piece going to be a company that continues to do the right thing for all of our constituents. We know how important the role is that we play.
In the supply chain and we take that roll seriously and we'll continue to operate with the amount of integrity and doing what's right first and foremost.
Thanks for joining us today.
Ladies and gentlemen, this concludes todays conference call. Thank you for participants you may now disconnect.
[music].