Q3 2020 Earnings Call
No.
Good morning, and welcome to the ConAgra Brands third quarter fiscal year 2020 earnings conference call. All participants will be releasing only mode. Should you need assistance, please signal, a specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question. You may press the star then one on your telephone keypad to withdraw your question, please press * then two months.
Please note. This event is being recorded. I would now like to turn the conference to Brian Courtney from investor relations, please go ahead.
Good morning, everyone. Thanks for joining us. I'll remind you that we will be making some forward-looking statements during today's call while we were making those statements in good faith. We do not have any guarantee about the fact that we will achieve descriptions of the risk factors are included in the documents. We filed with the SEC.
Also, we will be discussing non-gaap Financial measures references to adjusted items including organic net sales refer to measures that exclude items management beliefs impact their ability for the. Referenced.
Please see the earnings release for additional information on our comparability. The reconciliations to those adjusted measures to the most directly comparable gaap measures can be found in either earnings release or in the earnings slides both of which can be found in the investor relations section of our website. Can I go brands.com?
Finally, we will be making references to Total ConAgra Brands as well as the Legacy ConAgra Brands references to Legacy ConAgra Brands refer to measures that exclude any income or expenses associated with the acquired Pinnacle Foods business with that. I'll turn it over to Sean.
Thanks, Brian. Good morning everyone and thank you for joining our third quarter of fiscal 2020 earnings call on behalf of ConAgra Brands. I want to start by expressing my heartfelt. Hope that you and your family member staying safe during this unprecedented time. Today. I'm going to address two main topics are response to covid-19 and its impact on our business as well as the underlying trends that I saw in the third quarter which ended just before the impact of covid-19 started rest assured that were taking all necessary precautions to protect the health and safety of our choices and our ability to safely and reliably meet consumers needs for the most recent status of our efforts to respond to covid-19, please visit ConAgra Brands. How long will continue to provide updated information on our site as a situation involves.
As I'll describe in more detail.
In a moment, we've taken a number of steps to ensure our supply chain continues to operate. Well, we're incredibly proud of our teams who have been producing and delivering without disruption while we all focused on executing through this rapidly evolving situation. I don't want to lose sight of the fact that we've made significant progress against the operational objectives. We established for fiscal 2020 in many ways our progress against these objectives is enhancing our ability to navigate this crisis.
Recall at the outset of fiscal 2020 we set out to execute on integration Synergy capture and deleveraging drive strong consumption growth in Frozen and snacks improved in Hunts, tomatoes and Chef Boyardee and the trend in the Legacy Pinnacle business and drive Innovation and growth and gardein. I'm proud to say that through the third quarter. We remain squarely on track with all of these objectives and from a financial standpoint. The third quarter results are in line with the expectations. We provided at Cagney as we previously described industry soft New Age started in December and food service and pivoted to retail in January would pressure on consumption Trends in several of our key categories, which more than offset share gains as expect. It consumption Trends recovered in February prior to covid-19 impact. It's important to keep in mind that our third quarter ended on February 23rd.
At that time there were very few reported cases in the US and notably no widespread change in behavior is we all know that has changed significantly in recent weeks from the second week of our fiscal fourth-quarter to date we've experienced the unprecedented impact of covid-19 as consumers have stocked up on food and shifted rapidly eating more at home given the quality of Our Brands and the categories we participate in a nagra is well-positioned to serve consumers during this time of disruption and extraordinary demand home team is hard at work in close coordination with our customers to ensure that consumers have access to the food. They need to stay safe at home.
At this point the magnitude and duration of the covid-19 impact is still uncertain. However, I can tell you that we expect to exceed our prior full-year guidance for total companies suck and profit metrics, assuming the end-to-end supply chain continues to operate effectively. We will provide more detail on the impact of covid-19 in a moment. But first off I would like to walk you through the highlights of the third quarter.
During our performance was in line with the updated expectations that we provided at cagny organic net sales decreased 1.7% while our adjusted operating margin was 15.7% and our adjusted diluted EPS from continuing operations was $0.47 for the quarter.
As we noted it.
Acne, we saw a category softness in January that was greater than anticipated at the time. We told you that are more recent data was improving and we expected to bounce back home exactly. What happened as you can see on slide seven total ConAgra retail sales return to growth in the final four weeks of February and sustained a normal rate into the first week of Q4 wage clearly, even before the current disruption due to covid-19. We were well on track and had already seen the expected Rebound in consumption trends
Not only did we see growth of 0.9% in the four weeks ended February 23rd, but what we saw in the week ended March one, which is in our fiscal fourth-quarter off. The front is returned to consumption growth.
And during the quarter we continued to deliver on integration synergies and deleveraging on integration. We have been converting Legacy Pinnacle plans over to sap and through Q3. This multi-year process has been progressing on plan. We captured thirty-three million in incremental synergies increasing our total through the end of Q3 to one hundred thirty-five million and we made further progress on reducing our net debt position by paying down four hundred and fifty million of debt during the quarter slide 9 demonstrates our continued success any important Frozen category is both Graphics demonstrate. We maintained strong growth during the quarter across are frozen portfolio both for total ConAgra Brands off and Legacy contact with brance.
Cuz we will discuss later in the presentation totally froze and growth has been driven by both Legacy, and Legacy Pinnacle.
Slide ten shows the outsized performance of Congress frozen meals within the category not only did we have yet another quarter of gaining share of shelf and sheriff sales, but we also do so at an accelerated rate.
Our snack segment reported solid growth in the third quarter total snacks were out 2.9% during the quarter and 8.7% on a two-year basis. Our results were led by our own acts and feeds businesses which deliver growth of 8.4% and 5.9% respectively.
And it's like twelve shows we continued to gain share in many of our snack categories in Q3.
Another key objectives was to improve Trends in Hunts tomatoes and Chef Boyardee as you can see on slide 13. That's just what we've done over the five-week project ended February 23rd hunts tomatoes and Chef Boyardee gained 2.2% and 4.5% in dollar sales growth respectively and both brands also grew sick of retail sales over that same period as outlined on slide 14, it's worth noting that these trends for hunts tomatoes and Chef Boyardee continued into the first week of our fiscal fourth-quarter month prior to the impact of covid-19.
15 shows a milestone for canabra is we bent the trend on Legacy Pinnacle on both the one year and a two-year basis recall that in December 2018. We outlined a number of actions that were needed to get Pinnacle back on track. We also indicated that we did not expect to see the impact of those actions until the second half of fiscal 2020 which as you can see here is exactly what has occurred.
Flight 16 shows how we've been able to bend the trend in the big three Legacy Pentacle Brands by implementing the Canaveral way Playbook. We started with Wishbone where the missteps came from several issues, including a label change, which we quickly address to stabilize the brand as a result. We saw an immediate spike in retail sales before returning to more normal levels Birds. I am which is our biggest brand took a little longer as the Playbook required us to remove lower performing excuse which negatively impacted sales and distribution. Notably bird's-eye is now he's getting to our growth as The Innovation. We launched in the first half of fiscal 2020 builds momentum with more Innovation to come with respect to Duncan Hines. We've made great progress on number ending the brand is a sweet treat but recognize that there's more work to be done or focused on introducing more on-trend Innovation as we trim lower-performing excuse while it will take time to read
This Brant to growth were confident in the ongoing implementation of the kanangra way Playbook.
Another Legacy Pinnacle brand that has benefited from the Niagara way is gardein, which is accelerating at very strong rates as a reminder. We've made significant Investments to expand Guardian manufacturing capacity, which came online earlier this fiscal year.
As the slide shows the Brand's growth is attributed to more than just meatless burgers and includes meatless options for chicken seafood and sausages to name a few cuz you'll see it's clear that we remain on track with all our fiscal 2020 operational objectives through the third quarter.
Now let's turn to the current quarter and the balance of the Year. Typically we would be spending our time on this call reaffirming our guidance and discussing the short list of initiatives underway to pull out the year, but this year is unprecedented and the impact of covid-19 will be significant.
Let me start by saying that our top priorities right now are the health and safety of our employees as well as our ability to safely and responsibly Meet customer and consumer needs.
With respect to our results the magnitude of the impact is difficult to predict what we know to date or retail demand surge is significant change in spans multiple retail channels including e-commerce while our food service segments is facing headwinds. That impact is more than offset by increased demand in our retail market segments.
Even the depth
Breath of our portfolio. We are well-positioned to meet this increased demand for at home consumption having all these Brands and capabilities Under One Roof is in a us to meet a wide array of customer and consumer demands importantly we've been able to address this retail demand surge because of a strong business continuity plan that we were able to activate as soon as the market disruption began. I'm very proud of the extraordinary efforts across our company and the way our teams have supported each other and are busy all in the pursuit of ensuring that consumers are able to access food during this time.
We have decided to temporarily delay some Legacy Pinnacle plants sap implementation to prioritize supplying customers with the food they require now, but our integration page otherwise on track we will continue to consider and prioritize our business needs as the covid-19 situation unfolds.
And I'd like to take a minute to talk a bit more about the ConAgra team and in particular to highlight the exceptional work our supply chain team while demand has sharply increased our or fulfillment rates so far in Q4 has remained above 90% This is a testament to the systems we have in place and the commitment of our people this has been remarkable to see and I'd like to thank our chief supply chain officer Dave bigger and the entire supply chain team for their incredible efforts.
Our supplies of ingredients and packaging remain sufficient and we've experienced minimal disruptions. So far in the quarter, all of our North America manufacturing facilities are open and running at higher levels of utilization and our distribution Network remains fully operational our plants and locations have the resources and critical equipment. They need to operate in full compliance with current regulations and CDC guidance and I'm proud of the remarkable level of collaboration among our sales customer order management and supply chain teams odd collaboration along with the work we're doing with customers is enabling us to ensure we are able to supply consumers with the food. They need great job all around
Although specific guidance is not possible due to the uncertainty of the situation. We do want to give you a sense of our experience. So far the chart on slide shows what we've seen dead in the market to date you can see that there has been a material increase in demand the past few weeks while some categories are benefiting more than others all categories and all temperature states are seen increases in addition to a significant uptick in sales. Our execution has enabled ConAgra to outperform and gain share wage categories in which we compete
the data were showing in the
Art is only measured Channel data. It's important to note that the man has searched broadly across retail channels including e-commerce as well as for pickup and delivery most of which are not reflected in a similar to our measure Channel retail business. Our e-commerce business is also often sales outpacing the competition and gaining share.
Overall, we made good progress during the third quarter of the Year. Our quarterly results were in line with our updated expectations and we remained on track with our with our fiscal 2020 operational objectives going forward. Our teams are prioritizing health and safety adapting well and operating effectively to ensure consumer are able to access the food they need and while this is clearly an unprecedented time. We will not lose focus on executing the ConAgra way Playbook our brand building and innovating process has remained critical pieces to our long-term success.
We're updating our full-year guidance today to note that we now expect to exceed our prior full-year guidance for total company sales and profit metrics.
Beyond fiscal 2020 it's important to note that we are also working with customers as they re-evaluate the timing of promotions and shelf resets as they look to minimize in storage option during this time of searching demand. Finally while the situation is still evolving. We believe the sharp increase in at home eating occasions is Jeff trial among new consumers that we did not anticipate accessing. We view this dynamic as a long-term opportunity for our portfolio overall and in particular are leading Frozen business with that. I'll turn it over to Dave.
Thanks Shawn and good morning everyone. I hope you and your families are all staying healthy and safe before I get into the details. I want to remind you that Q3 had the first full quarter following the anniversary of the Pinnacle acquisition as a result Pinnacles full quarterly results are now reflected in our organic figures. I'll start my remarks Thursday morning by calling out a few highlights from our performance for the quarter which are outlined on slide twenty-three is Sean discussed. Our Q3 performance was consistent with the expectations. We provided at cagny off this included broad-based category softness early in the quarter and a return to consumption growth in February prior to the covid-19 related surge in demand.
All Impact these results further in the slides to come but overall for the third quarter reported net sales were down 5.6% versus the same. A year ago with Organic net sales down 1.7% The organic net sales declined was in line with the updated expectations that we provided in February adjusted gross profit decreased 10 and half percent and the judge the operating profit declined 8.9% We continued to operate efficiently from an sg&a perspective capturing strong synergies.
adjusted
Which includes Equity method investment earnings and pension and postretirement non-service income decreased 7.1% in the quarter and adjusted diluted EPS wage increased 7.8% to $0.47 for the quarter again. This was in line with our updated expectations.
Let's jump into net sales a bit more slide twenty-four depicts the 5.6% change versus the same. A year ago, as you can see the broad-based category softener. We discussed at cagny drove our volume down 1.3% Also, our price mix was unfavorable 40 basis points as we continued to support many of our brands with incremental promotions. As I mentioned on prior quarterly calls, we expect that our year-over-year change and retailer Investments to be much smaller and less material in the second half of fiscal Bath & Beyond now that this type of spending is in our base as a result. We will no longer be breaking out that bridging item and we'll return to our historical approach of showing just the impact of price Mickey Mouse Over All
Moving to slide twenty-five, you can find our sales summary by segment in the quarter organic net sales for the grocery and snacks segment decreased 3.6% the snacks business continued to perform. Well, however, the segment was negatively affected by weather with a warmer-than-normal winner this year stacked against an abnormally cold prior-year on a reported net sales basis with the best at your activity subtracted 5.9% organic net sales for refrigerated and Frozen increased 3% as the Frozen business continued to perform. Well behind the recent Foundation launches importantly is Sean mentioned. We saw frozen meals continue to gain share in an Excel at an accelerated rate in the quarter to strengthen the Frozen business continued to be somewhat masked by declines in the refrigerated business.
Turning to our International segment quarterly net sales and organic net sales for the segment decreased 3.2% and 1.9% respectively throughout the quarter the segment, you to benefit from the growth in the Canadian snacks business and Frozen businesses recall that earlier this year. We said that the business in India had a transitory headwind that would Rebound in the second half. That is what we saw in Q3 these benefits were more than offset by economic challenges primarily in Mexico and certain planned value over volume actions.
Net sales for the Food Service segments decreased 8% in Q3 while organic net sales decreased 2.2% as the best pitcher subtracted 5.8% organic. Netflix decrease was driven by volume declines a 4.6% as a result of soft industry traffic Trends early in the quarter that were partially offset by a 2.4% Improvement in price next month turning to slide twenty-six. You can see the adjusted operating bridge for the quarter versus the prior-year as I mentioned on our second quarter call input cost inflation did start to increase in the quarter inflation was just over 3% which translated into a 240 basis point headwind to margin.
importantly, however
Our gross margin expansion levers such as realized productivity pricing mix and synergies continued to be effective in Q3 The increased promotional sales in the quarter partially offset these benefits resulting in a 90 basis-point Improvement in gross margin.
A&P had only a modest impact on margin in the quarter while reduced sg&a spend benefited our operating margin by 100 basis points during the quarter.
Y 27 highlights the significant progress that we've made to date on our overall Synergy capture from the Pinnacle acquisition in Q3. We realize thirty-three million of incremental synergies banking our total Synergy capture through the end of Q3 to 145 million. We remain on track to achieve approximately 180 million of synergies by the end of fiscal 20 with 20 million being reinvested into longer-term business opportunities. We also remain on track to deliver our total Synergy Target of 305 million again with twenty million of that is being reinvested into longer-term business opportunities.
Turning to slide twenty-eight you will see an outline of our adjusted operating profit and operating margin for the third quarter are adjusted operating profit decreased 8.9% in Q3. I just it operating margin came in at 15.7% across our segments realized productivity and cost synergies benefited our operating profit in the quarter these benefits were more than offset off the impacts of higher input costs lower organic net Sales Inventory write-offs and lost profit from divested businesses.
flight 29 outlines the various drivers of our Q3 adjusted diluted EPS from continuing operations into three our adjusted diluted EPS of $0.47 increased by $0.04 compared to the same period a year ago the decrease in adjusted operating profit and higher tax rate during the quarter more than offset the benefit from improved pension income and interest
why 30 summarizes conagra's net debt and cash flow information. I'm sure that our perspective on the balance sheet and liquidity are top-of-mind in these uncertain times. I'll start by reminding you that we have made significant progress towards our deleveraging and free cash flow Targets in recent quarters, since the closing of the Pinnacle acquisition through the end of Q3. We have reduced tone. No debt by over one point five billion improving our balance sheet and the overall health of our business with respect to Q3. We reduced debt by 450 million while back that debt balance at quarter-end was 9.9 billion and the net debt leverage ratio was 4.8 times.
At the end of the third quarter our average debt maturity was approximately 8.8 years are weighted average coupon was approximately 4.7% And approximately 92% of our total debt was still a free cash flow. Year-to-date is 641 million marketing and Improvement of over 100 million against the same period last year
We remained.
One schedule with our deleveraging targets and are confident we will achieve our fiscal 21 leverage Target of 3.6 to 3.5 times.
Overall, we remain confident in the strength of our balance sheet and we have many options for maintaining liquidity first. We ended the quarter with $99 million dollars of cash on Hancock. We expect stronger cash flows in Q4 due to the normal seasonality of our business and because of the increased retail demand we're experiencing in light of covid-19 off Capital allocation priorities remain constant. We are committed to maintaining our dividend deleveraging and maintaining a solid investment-grade credit rating along these lines long. We anticipate deleveraging further in Q4 of fiscal twenty.
In addition to cash flow from operations. We also have a 1.6 billion dollar fully undrawn revolving credit facility during certain months of the year. We issue commercial paper against Iraq to fund working capital needs. We did not need to access the commercial paper markets during Q3 and we don't anticipate needing access during the rest of Q4 given our strong cash flow and borrowing capacity. We have many options available to fund upcoming debt maturities in August and October.
Academy last month we discussed that we continue to explore smart divestitures that can help sculpt top-line performance and generate cash flow to support the leveraging by smart ensuring that any potential divestiture will deliver a valuation that exceeds our intrinsic value in this environment Our Brands are growing and playing an important role for consumers off and they are generating sales and cash flow in excess of historic levels while we continue to evaluate portfolio actions. We do not feel pressure to pursue any divestitures that are not value-creating.
Now recognizing that our new guidance is in specific. I want to give you some color on what we do know and what we don't know at this point.
What we do know is that our retail businesses have seen accelerating shipments in our domestic retail business, which is about 80% of total company sales total fourth quarter to date shipment wages have increased approximately 50% versus last year similar to the most recent consumption data internationally. The impact has been a bit mixed with the Canada retail business seeing increased demand, but some softness in global export all told to go retail shipments are difficult to predict given the wide range of possible outcomes.
Just as the retail businesses are seeing a surge in demand our food service business, which is about 10% of total company sales is beginning to experience the negative impact of the covid-19 situation so far in queue for Food Service shipment declines have accelerated and Trends imply a Q4 organic net sales decline that could be in the range of down fifty to sixty percent versus last year turning to profit as you would expect. We believe that the significant demand surge in the retail businesses, which are the vast majority of our sales will positively benefit from it versus our prior guidance. We also expect that the mix of sales and operating leverage of the increased volume will benefit gross margins. Just how much is too speculative to forecast this time as we are also increasing investment where needed to ensure we support the surgeon demand.
We are incredibly.
Out of the investment. We're making in the supply chain to meet demand. Not only are we investing as needed to meet customer orders, but we are providing direct financial support and recognition to our people and communities.
I now like to turn to our fiscal twenty guidance on slide thirty-three. It's just a bit over a month ago that we shared our updated fiscal twenty guidance. And as we told you at a guinea pig be seeing improving Trends in our categories giving us confidence in our ability to deliver those updated results. However, as a result of what I just discussed about Q4 to date we are now unable to forecast Q4 with specificity, but we can say that we expect to exceed the full year guidance on all sales profit and cash flow metrics.
Although this situation remains highly Dynamic. We now see upside to the guidance. We provided due to the quarter-to-date surgeon consumer demand and the related sales and profit impacts one that we don't know is how long the impacts of this pandemic will last nor do we know exactly how consumers will continue to adapt to the situation in the immediate term or in the longer term as we move into fiscal one is Sean mentioned earlier. Our portfolio is well positioned to meet this increased consumer demand and our team is focused on working with customers to make sure that orders and shipments remain uninterrupted during this time of need.
As long as our strong execution continues and there are no other material disruptions to our ability to provide products safely to our customers. We expect to exceed our fiscal twenty guidance across all sales profits and cash flow metrics.
Thanks for listening. Everyone that concludes my remarks Sean and I are happy to take questions, or not joining us today as we wanted to minimize the number of speakers since we are ma'am this Q&A from different locations this morning. I'll now pass it back to the operator.
Thank you. We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you're using a speakerphone, please pack handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
And the first question will come from Andrew Lazar with Barclays, please go ahead.
I've got two questions. If I could first Sean wanted to dig in just a little bit off on your comment around, you know, the potential maybe over over a longer period of time for you know, some stickiness maybe given you know in light is a very significant unanticipated trial that you suck a lot of a lot of your peers are are getting done relation to the the current crisis is is there any data maybe that can add a little context around us? I know it's early but maybe from some of your panel data off track around, you know, some of the increases in either household penetration that you've seen with some of the quality, you know enhancements you've done particularly in the Frozen space, maybe what some of the repeat rate wage or look like or the ability to gain, you know, some of the new trailers that might not have let's say try this product in the last, you know several years or so and any perspective there would be really helpful and then I just got a follow-up.
Okay. Sure Andrew. Let me tackle that the concept you're raising is that because we've got this crisis situation and people.
Our eating much more at home and not away from home, um products like ours are getting levels of trial that were not anticipated in that could turn into consistancy users over time is that trial converts to repeat I would tell you that makes sense to me both intuitively and in terms of the very early data, we're beginning to see there's been a massive amount of transformation in our categories in the last five years Frozen in particular doesn't even closely resemble the category that it used to be the quality of the food is a completely different place and we've seen consumers so far who have tried that new food respond extremely favourably to it and large established brands that had long been forgotten are growing extremely again now because of this crisis situation people are at home, as you know, everybody can see it there stocking up and they're stocking up with foods of all kinds across all temperatures. Yep.
Including categories like frozen. So just logically, you know, we know we are getting higher levels of of trial here during this phenomenon in terms of data that that suck it up quite frankly. It's just too early to point to a lot of data points. The one place I can tell you that we do look that tends to be a leading indicator is Ecommerce. And in the world to be Commerce, what we are suggesting is that we are reaching a large number of new tires that we had not reached previously. Now as you think about how that might convert to repeat you all are probably accustomed to looking at national average repeat rates repeat rates will vary depending upon the user. So early adopters super super heavy users will have higher repeat than light users when you get new tires, like this happened to be getting lighter users. So it may not be the kind of repeat rates. We get from super heavy users. But the point of all of this is it should help categories like frozen it should help suck.
Are other categories that people may have forgotten about but it's just too early to quantify the impact of that. I would also tell you that we do expect as this thing gets behind us that will see a return two people eating out American wage their restaurants. They love to eat out and obviously the Food Service space is is hurting badly right now. And and so we we we route him for that side of the business to bounce back as well. I'm great. Thanks very much for that. Just to a quick follow-up would be on on the margin in profitability side. I just want to make sure I heard it, right it sounds like you know, you've got a number of puts in takes on the positive side, of course all of the increase volume leverage that's coming through from running at you know, very high levels of utilization and what not, you know, maybe some of the if there's a reduction in assortment and focusing on the longest run length SK used to maximum output and things like that. I would think would be on the on the positive side of The Ledger on the other hand. There are some increased costs as you've talked about whether it be for employee benefits and things like that and and just a simple inefficiency wage.
maybe running it, you know, whatever a hundred percent utilization in such but it sounded like you may not know the exact magnitude in the way it all comes together, but that the balance of those things at least of what you're seeing so far are more tip more than the positive and
The negative I was wondering sure I kind of heard that right and thank you so much. If you want to take down. Yeah, I will thank you Andrew you you summarized it very well. I think right now obviously with the volume we're seeing in our domestic retail business, you do get benefits there from from operating leverage, but, you know fixed costs or fix over relevant range as we're always taught right in a significant volumes resulting in incremental costs that were occurring in the form of overtime, you know higher spot Freight rates, you know Expediting certain supplies and then additional cost. So when you get it all together and you factor in the significant declines and Food Service as well, we do expect an increase in gross margin year-on-year for the quarter, but we we didn't want to he's supposed to be around that.
Thanks so much and stay. Well, you too. Thank you.
Our next question comes from Ken Goldman with JPMorgan, please go ahead.
Hi, thank you for the questions too for me if I can one. I didn't hear you mention this, but I've been jumping around a little bit. Forgive me. Can you talk a little bit about the shelf resets that were happening in May what your current expectations are for those and how they might affect you and the second one is in terms of your promotional strategy. Can you walk us through a little bit practically how you can change some things whether you want to pull back a little bit. It's been such a big part of how you've driven some growth recently. I'm just curious how you think about that in this kind of environment. Thank you.
Sure can let me try to tackle that Dave if I miss anything by all means that time in the priority right now is producing the maximum amount of food that we could possibly produce and and we are running our plants 7 days as you might imagine to do that. We have cared back on some of our excuse so that we can continue to serve the highest volt excuse. So keeping food in stock so we can feed America is our our top priority right now as it is the priority of our retailers, um that has caused us to to reprioritize in terms of school. And in the case of the Innovation resets, I would tell you the word that comes to mind for me is fluid. We are hearing different things from different customers many customers most customers are just trying to keep products on the shelf right now with some customers big ones have said to us that they want to continue with the the Shelf said timing others had said, you know, we're going to push that back a bit just so we can ensure that we don't have any complex.
And any uh anything going on at the store shelves, it's going to be a distraction from keeping products in stock. So we are trying to respond to all of our customers requests so we can do what they want in terms of our philosophy on Innovation overall. It hasn't changed. It is a central part of the country Uruguay that we're going to keep building out our Innovation pipeline so its industry-leading and we're very confident. We've got that we're as you know from Cagney incredibly excited about the Innovations slate that lies ahead how it flows into the marketplace now will probably be uh a little bit more customer buying a customer then then all in a tighter window is we previously expect it. But I think it'll be good news overall because we'll have the benefit of that Innovation and and the pipeline fill helping us next month with respect to promotional activity, you know, as you know, we've cut more promotions in the last five years and just about any company in food as we pursue value over volume. We have a game
Gotten more aggressive in the last year where we've seen competition act Arash.
Italy and we needed to defend our market shares, but that has not been in a broad-based way. What I tell you on promotions right now is we're honoring all the contracts we have in place, but the Practical Dynamic is that we're in Daily discussions with our customers on how to help them meet the needs of their Shoppers and many customers are looking to pull back on promotions as they try to manage the basics of just keeping their shelves stocked and running promotions can exacerbate out of stocks, which is clearly not their goal right now. So we're seeing some cut back on that and that way just be a more of a timing issue than anything else anything I missed their account.
No, I know it's used the word fluid to describe the situation. I think that's the understatement of the day, but thank you for that color, Sean.
Okay. Thanks.
yeah, the next question comes from David Palmer with evercore is I
Thanks, actually just to follow up on that and where the retailers are not doing new shelf resets what happens exactly or you just keeping some of the more standard items. I am showing that are really Solutions like the frozen vegetables and holding off in the guardian Healthy Choice power bowls that might have been coming and that's more of a back-to-school item than a follow-up.
Well David is customer my customer. So some customers at this point are articulating that they will move ahead as planned. We'll see if that happens. Nobody really knows what tomorrow looks like our next week looks like and right now everybody is literally trying to get as many items of all the foods they sell in stock. So um, but I I I, you know, if if what they're saying plays out, I think you're going to see some customers take it sooner some customers take it later and it's not as if those who take it later would be at a deficit position if this pandemic does not Abate any time soon because as we're seeing right up till today that the consumer pull in this is is remaining extremely sick across the board.
And then just if there are any changes that you're making in terms of your marketing spending or any sort of reinvestment from this. Or that you're going to planning in the last couple of months. What are those changes and then you mentioned thanks for those comments on service levels at 90% You know how differentiated is that and some of your key categories in other words are key components keeping up with you on that and thank you.
You know just in in reverse order, I don't really want to come it too much on our competitors others say that I'm just incredibly proud of the food industry in general spoken in my colleagues. Everybody's rising to the occasion here to do the thing that matters most which is keep our consumers fed and keep our employees healthy. So I would say everybody is operating at the top of their game right now, and I I think we're certainly fully competitive in in that regard.
with respect
David hit me on the other part of your question the other the other part was just simply what changes are you making in terms of your marketing given that you're obviously in a new world system and that's not a lot other than you know, some of the in-store activities that we would plan in support of new items hitting the shelves. So, you know, you get a new product on shelf you want to sample it you want to do some promotion will sync them up to what's going on at that particular customer is everybody knows we've been putting more emphasis on retailer level Investments. So those are very TurnKey if a product will go into Market later will will turn that Leo our bass kind of A&P programming remains highly digital and and it also remains extremely easy to kind of curate and as you might imagine with people eating at home now at eleven am done in a long long time. If ever we are trying to provide them with cooking ideas and recipes and and things that will help them understand how to use our products at home.
In a way that their family finds not only healthy but but delicious as well and and digital is a and social is a perfect place to do that. It's kind of a utility for our consumers.
Thank you again.
And the next question will come from Steve's Piccola with UBS, please go ahead.
Hey, good morning, everybody morning. So Dave. Just wanted to touch base on the balance sheet and The Debt Pay down on that you guys had today too impressive so far off, but want to understand a little bit how to think about free cash flow Generations. We look forward to dress both maturity schedule and liquidity think through nine months. Your slide says you pay down $645 a month was $41 billion of debt, but guidance is greater than 950. So you should be doing three to four hundred billion of free cash on the fourth quarter X divestitures can just help us think through what we should be thinking about to understand the maturity schedule and um kind of like the numerator and denominator effect of how you get to that 3.5 to 3.6 leverage. Thank you.
Sure. So so as we've consistently said Steve our our financial policies been consistent right that we are we are remain committed to solid investment-grade credit rating since we've closed on Thursday. We pay down over 1.5 billion in Grosse tete for Q4. We expect to be cash positive at a higher level than we previously anticipated and and that additional cash flow we're going to use to to pay down debt. So we don't expect we we're going to be cash flow positive in the fourth quarter it higher than than expected levels off. So as we we finished the fiscal year, we'll have our full 1.6 billion dollar revolving credit line, which will be undrawn and and we did not have any debt maturities in Q4 this year. So as we look to fiscal twenty one, we have one point 1 billion in debt maturities for the full fiscal year are August maturities of birth.
Twenty-seven million we expected to to fund that from cash on hand.
Our next maturities of $775 million are in October and will have flexibility to to fund that from the home or expected free cash flow from the business and and we'll just have to see where we land with that given the the upside that that we're seeing right now. We can access service revolver where we can refinance in the form of either term loans or or investment-grade notes. So as we've been doing every day with our advisors will continue to monitor the markets and evaluate the best structure work in a grand stay in a position of Readiness because I mean if you look at the markets today, as you know, the bank markets are significantly different than they were two weeks ago and I expect that they'll be significantly different a month from now. And so we want to constantly look see what the markets are saying, but the good news is that we're cash flow positive. We're generating cash.
Want to use that cash to to pay down debt, and we have our full revolver. So I think our our liquidity very strong. They said it's very helpful. Then very quick follow-up question to that would be a gross margins, but we met with you in Cagney the time you'd commented on taking an inventory reserve for the fourth quarter after imagine inventory for all grocery stores one product right here right now. So is there any chance that that gets reversed out into the fourth quarter as we think forward and if I heard you correctly where you commenting that the retailer trade investment really becomes Thursday is from this point forward and kind of like a rounding error as we think borders for 21. Thank you.
Yeah, so you're right. It it Cagney given the softness and volume. We had expected inventory write-offs and in Q3, we actually did experience both inventory write-offs and some negative operating leverage. So that impacted our Q3 gross. Margin that that we reported is is we look forward. I'm sorry, see what the second part of your question dead.
It was just something to reverse out with part one on the accounting pieces that come back and Q4 in the second piece was just on the retail trade and Investments. Does that become de minimis at this point or like a round? I think more thank you God. Yeah. Yep. So, yeah, so as part of our queue for information we talked about we expect gross margins to improve in the fourth quarter based on all these dead, and so, you know to the extent that inventory that we thought may not be sold is now moved through that will be a benefit as part of for so long, you know that that would be reflected in terms of the retailer investment. Yeah. It's really de Minimus. So a lot of the slotting and other Investments year-on-year, it's just not as significant. So I'm just going to show price mix and total as opposed to break that out now.
and the next question will come from Robert Moscow with
Please go ahead.
Thanks for the question. You know, I would argue that the pantry loading. Is probably coming to a close in terms of consumers loading up the houses. So what are your what are you telling your manufacturing facilities to do for the next 30 days or 60 days. Are you telling them that long? You know, the the hours still need to be at a highly elevated level because you want to keep up with you want to expect consumer demand to remain at elevated levels, even though the the shelves are full. How do you how do you communicate to your plants what to make and and how specific does it get brand by brand?
Yeah, Rob, we're telling him to make everything they can right now and to keep themselves safe and healthy as they do it and we're helping them to do that. But you know, simply put until we're on the other side of this pandemic home sales growth is likely to remain elevated because you've got most of the food away from home volume is moving to food at home. And so, uh, you know, we've got obviously a lots of experience with how pantries and warehouses get filled by customers and consumers around situations like hurricanes and you always see big volumes move into a house is at the customer level and into pantries and freezers and refrigerators at the consumer level, but you know how long the pole remains you know in this particular case is direct function of how long does this thing last and how long are people Sheltering in place? And I don't think anybody can predict right now, you know when that is going to end obviously dead.
The latest thinking here is is that we will go until minimum the end of April with with people really spending lots and lots of time at home and who knows how much further extend beyond that? So the way this works is the initial surge of volume is volume that is going to fill warehouses and to fill pantries, but with people not eating out away from home. I think a reasonable person could conclude that there then in the mode of consuming that volume aggressively and as they work down those entry levels and Warehouse levels come down to normal normal level wage. And then it just becomes kind of a just-in-time replenishment as long as the elevated level of consumption remains. So, you know, it's just too early to to pin this with any accuracy, but that's kind of the mechanics of of how long this works. I totally agree and if I if I ask a follow-up question, have you tried to dive any deeper into single serve on Thursday?
Demand characteristics versus frozen vegetables because my what I remember from the last recession is that single serve entrees they didn't do that great consumers were making meals for the whole family to try to save money so that probably benefits vegetables in an outsized way. Do you expect that to happen again, or is it just too soon? Well in this particular case. I don't think there's any any comparator to what we're experiencing right now because people are eating at home right now breakfast lunch dinner snacking dessert. I mean, it's all being consumed at home. And and when you think about all those day parts and you think about the family being together, you've got day Parts like dinner where you're probably going to be leaning on multi-serve products, which is very different from how our normal society that operating because everybody is together. But if you think about lunch it's very much a single certification because kids have online classes, you know moms and dads have have, you know video conference. Yep.
People are eating individually. So and people continue to snack throughout the day. So I see uh, and we see it in the
Data, we see incredibly High velocities across multi-serve single serve snacks. I mean you name it right now. It's moving. Yeah. Thank you very much.
Thank you.
The next question would be from Rob Dickerson with Jeffrey's please go ahead great super thank you so much. So first question probably some would consider lame to ask you anyway because it's something we'll be going through, you know, the next few weeks or a few months. It's just, you know, in terms of you know forecasts for us right whether you're an investment side or on the sales side, you know, we have to plug something into our models for Q4 and think about q1 and kind of the you know, progression throughout fiscal 21. I feel like I'm in general people haven't been comfortable, you know punching it, you know, plus 40% you know retail, you know growth expectations and down 50 on food service rep, but just to be clear right? We know what the guidance is now, obviously, it's a fluid ditto situation, which is completely understandable that you can't pinpoint how Q4 plays out of birth.
She won but just in terms of you know, kind of consensus and how we're all you know, used to, you know, looking at that as a benchmark. I guess the first question is just like wow you you know, how do you think you know, we should then be modeling, you know the forecast for your business in terms of top-line. Is it a I don't know. Yeah given marches up 40% you know a retail consumer if that were sustainable then yeah. I would take that piece of the business and say up 40% and giving a guide on Food Service take that down 50 and then we'll just have to see how that plays out and make sure that reverses next year if there's a pantry load and maybe not so just there's a lot in there, but I just kind of wanted to hear you know, what what do you want us to do in terms of, you know, if there is no took the city that can be provided basically, you know at this point, you know, the guide is almost irrelevant to an extent as is consensus if we don't model it correctly. Thanks.
Yeah, let me just take a shot or do you want to go? Let me just make one General comment Dave and then you can take a shot.
Have of kind of coming up with consensus is is very similar to the unenviable task. We have of things like trying to contemplate fiscal 21 annual operating plan as you may imagine, you know, if it's business as usual it's kind of one set of assumptions. If this thing were to continue if it were to come back in the fall is I read this morning. That's a whole nother ball game. So, you know, it's an impossible thing to to predict. Nobody has a crystal ball, but I think what you guys are going to be looking at the scanner data, what we look at is the scanner data to understand take away what we look at our our shipment patterns. And of course, we follow any all the the health news on the national news every single day multiple times a day. So I think we're in one of these times where we will Endeavour to be incredibly transparent with what we're seeing what we're thinking, uh, you know, so so that we can provide, you know, the best perspective we can provide while fully acknowledging that it's dead.
Awfully, it's it's impossible to ask to be precise right now Dave you want to add to that?
Yeah, you pretty much hit it Rob. I would say would feel your pain right on this forecasting. I mean in my whole career, I've never done daily forecasting, you know, where you're going out quarters and years and all these things and so, you know, the way we approach it is almost a kind of a a high medium low type scenario of and that's why we laid out what we did today. We wanted to tell you what do we know right. Now? What we know and from there you can then, you know kind of make some assumptions on sort of, you know, different scenarios Sean said it since the date on the the retail side of business from domestic retail, which is 80% of our business shipments and consumption or in line. And so what I would say is, you know consumption could be a good proxy to try to forecast court go in the retail business since since they're in line. There's no guarantee there. Right? Cuz you do have Ebbs and flows with shipments versus consumption in a short amount of time, but that I think would be a proxy to age.
Okay, at least try to figure out how this is how this is trending as we move forward but there's no silver bullets here. Unfortunately, that's all very helpful and makes no sense. Okay, and then just quickly in terms of your shelf-stable products. I feel like you know, even a Cagney the focus here going forward. This truck is more Frozen snacks shelf-stable can you know have a place within the portfolio but my feel at least is that you might look at some of those Brands more proactively offer terms of divestment potential now, I don't know. I mean it seems like, you know, like you piloted today on the slides, you know, you know punts off Shepherd. He was doing incrementally better before covid-19 hit now. There's a pantry might feel would be that those areas would actually now do better. Maybe than some other areas. Yep.
In terms of you know, the you know, the attacks acid that you have and kind of thought process around divestments and shelf-stable. What have you might is it fair to think that yeah, at least for the time being given everything that's going on that you kind of step back from that and say well, let's just see how things settle keep the business as is we'll reevaluate, you know, as Thursday. We kind of get through this a bit more, but yes, we still realize that we have an accident, you know attacks us at that's expiring at the at the end of next fiscal year. Thanks.
Yes, let me take that sure. Yeah, then you jump in here. So I did I did make some comments Rob on on our prepared comments, you know, the way that we look at the messengers hasn't changed my life starts with our strategic rationale and then the financial rationale and and the point I made today would was Financial rationale means that the valuation for any potential the best of asset must emergency far intrinsic value for the asset and given the growth we're seeing in our business giving the the the sales and cash flow at higher levels than to save historically been that factors into age of how we do those assets. They're generating a lot of cash for us right now, but my comments were meant to stress that you know, we're going to continue to identify assets for divestiture. But if the potential price doesn't exceed suck you ugly, you know that to kind of Agra that we that we see the the brands are worth then we don't feel pressure to move forward and so we have are capitalized carry for it doesn't extend.
It doesn't expire until the end of fiscal twenty one and so is Sean said earlier it's fluid, but we wanted to make sure that point was clear. The only thing I would add to that page just to cover a little bit of a different bit of perspective.
On what you call the Shelf stable business, I would call it the Staples business and that's how we we talked about it at cagny is we've got a decent sized chunk of our portfolio and what we call Staples took. These are products that people rely on these are our products that drive a lot of foot traffic to our retailers. They're very important of the retailers. They tend to be high gross margin good cash flow businesses off. And as I pointed out at cagny just a small handful of them add up to, you know, a big big chunk of our total staple sales. And so these businesses are very important to us when they're reliably contributing and most of them have been reliably contributing and they do a lot of good for our portfolio on occasion. We've seen competitive activity or other Dynamics Drive weakness in our faith paucity. Historically has been look if we don't have a line of sight to stabilizing something on the top line and the bottom line then then we've we've divested it and we've always been open to that. What Dave's pointing at is these authors
Different times where everything is moving. So it takes any kind of compulsion to want to move and do that and kind of reduces that because these are are contributing a lot to us right now, but in general the point I wanted to make his are Staples businesses across the board almost are very strong valuable businesses to us and and we'll continue to monitor them to make sure that they are repeating reliably once we get through this pandemic and then we'll go from there.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Brian Kearney for any closing remarks great. Thank you page. The web is detailed in our press release. The IR team is available for any follow-up discussions. Anyone may want thank you for your interest in kind of a grant.
The conference has not concluded. Thank you for attending today's presentation. You may now disconnect.
Thursday
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