Q2 2020 Earnings Call
Greetings and welcome to the simply good food company fiscal second quarter 2020 conference call.
This time, all participants already listen only mode. A question answer session will follow the formal presentation.
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Now turn the conference over to your host today, Mark <unk>, Vice President Investor Relations Treasury and business development. Please proceed sir.
Thank you.
Good morning, I'm pleased to welcome even simply gifted company.
Earnings call for my second quarter ended February 29, 2020.
John Scalzo, President and Chief Executive Officer, and Todd Thomas Our Chief Financial Officer will provide you with an overview of adults, which will that be followed by Q1 exception.
Company issued its earnings release. This morning, I'll, Let me something I am eastern time, a copy of the release an accompanying presentation are available under the Investor section of the company's website.
W.W. dockets, usually good each company back home. This call is being webcast slides on the website and Mark I got to be remarks, we'll also be available.
During the course of today's call manager will make forward looking statements that are subject to various risks and uncertainties that may cause actual results to differ materially.
Oh. Good 19 has been included as a risk as it's uncertain, what the potential impact could be to our business and therefore, it could talk about future results can be different than our current estimates.
Company undertakes no obligation to update these statements based on subsequent event.
A detailed this thing up such risks and uncertainties can be found in today's press release and the company's FCC filings.
Note that on today's call people refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The presentation. This information is not intended to be considered a nice unleashing well, we've got substitute financial information presented in accordance with GAAP.
Please refer to today's press release for a reconciliation for the non-GAAP financial measure.
Most comparable measures prepared in accordance with GAAP.
With that all the way, it's now my pleasure to turn the call over to jokes gallons, our president and Chief Executive Officer.
Thank you Mark good morning, and thank you for joining us.
Today, I'll recap simply good food second quarter highlights and provide you with some details on the performance of our Atkinson quest spread.
Then Tom will discuss our second quarter financial results in a bit more detail.
We'll wrap it up with a discussion of our outlook and then open the call to your questions.
Before we get into the details of our Q2 results I'd like to discuss the impacts were seeing with respect to cope with Nike.
Overall, the first half of fiscal 2020, which ended on February 29 exceeded our expectations with no material impact from co. Good night.
We entered the second half of the fiscal year with positive net sales momentum.
I would cost containment.
Confidence in our ability to execute our plans had to deliver on the outlook. We provided on their earnings January that.
Furthermore, the quest integration is on track.
Synergy plans are proceeding as expected.
In March overall retail foot traffic was extremely volatile with a surge in the beginning of the month followed by a significant slowdown in the second half of the Mark at most brick and mortar retailers.
The retail takeaway trends, both our category and our brands followed a similar pattern.
Given the likely continuing uncertainty around consumer purchasing behavior due to covert 19 movement restrictions. We believe it's prudent to withdraw at this school 2024 your guidance at this time.
Our key priorities now or to safeguard the continued health of our employees and communities.
Sure the reliability of our supply chain and provide accurate and timely service to our retail customers and consumers.
We are in close communication with our key customers and suppliers at the date or supply chain remains robust and fully operational.
Or contract manufacturers are taking extra measures to ensure that they are providing their workers with a safe environment and are committed to me that consumer and customer requirements of our business in the coming weeks and months.
That we would do what's right for the long term health of our employees.
And then business.
Now, let's move on to slide five and discussed.
At school second quarter results.
Second quarter results were greater than or expectations at both Atkinson quest delivered strong sales growth as well as gross and adjusted EBITDA margin expansion.
Legacy Atkins retail takeaway in the second quarter was generally in line with her estimates.
Growth was driven by bars in confections across all channels.
Additionally, Atkins E commerce momentum continue with sales up double digits.
Quest Q2 results were strong across all metrics that are tracking to our acquisition model.
Integration work continues and is progressing on schedule.
No fiscal second quarter and for the year to date period, the nutritional snacking categories increased mid to high single digits.
The growth rate may move around a bit in the short term due to changing shopping behavior related to cope with my team movement restrictions.
Over the long term, we believe the mega trends that are fueled nutritious snacking categories, such as healthy snacking convenience meal replacement and wanted to go consumption will continue to be tailwinds.
For our business and brands.
Enac into quest, we have to trusted advantage lifestyle brands, the target different consumer groups and position us to maintain our leadership role within the category.
On a run rate Apple to Apple basis, we have a scale business with net sales in excess of $900 million at her outsource supply chain enables solid margins low capex results and strong cash generation.
Yeah, I can think quest brands are tightly aligned around the consumer mega trends, such as more frequent snacking occasions and that desire for on the go meal replacements.
In addition to our products are uniquely positioned to benefit from growing consumer interest at high protein low carb and minimal sugar.
This profile has broad appeal to consumers interested in better for you as well as weight management, an active nutrition shopper looking to achieve their goals.
And while we like the diversified forms on this page ours chips shakes cookies and confections. We also have a solid R&D pipeline that will continue to work on every five.
This is an advantage portfolio with solid margins and financial flexibility to invest in marketing to drive growth.
Turning to the second quarter net sales increased 83.4%.
Legacy actions that sales increased 12.1% and as expected outpaced the increase in retail take away due to our strong E commerce growth as well as a slate seasonal inventory build.
The contribution from quest with a 71.3 benefit to net sales growth and grew strong double digits versus comparable period year ago.
The increase in adjusted EBITDA is a direct result of higher gross profit driven by higher Akins net sales in the benefit of quest.
The increase in gross profit was partially offset by the timing of marketing we previously discussed.
Total simply good food company second quarter and year to date retail take away in the IR right, you'll low measured outlay universe increased 11.8% and 13.6% respectively.
Note that this includes the traditional food drug mass merchandisers as well as Walmart B-j's sans the dollar stores.
Additionally, I IRI MULO captures about 90% of legacy accurate U.S. sales.
However, it only represents about 50% of questions.
Actions Q2, retail takeaway increased 6.1% with growth across all major channels, we're particularly pleased with our performance in the club channel, which was up strong double digits on a percentage basis versus last year.
And that Conns ecommerce business continues to do well up about 60% in both the quarter and year to date periods with bars shakes and confessions all up double digits and while early on our momentum here has continued into Q3.
Year to date ecommerce represents nearly 70% of active total gross sales.
A couple of her E commerce business over the last two years and anticipate continued growth over our strategic planning cycle.
Quest second quarter nutritional Snacking group was up about 27% driven by growth in food massive club channels.
The non measured channels, especially the class of trade has been ahead, but.
This is a broader multiyear category issue and not specific to quest and given to covert 19 movement restrictions, especially China could be a greater headwind in the balance of fiscal 2020.
The building blocks of Bakkens point of sale growth for similar to what we discussed over the last two years strong base velocity growth.
Hi form your to the bars and confections retail takeaway growth remained strong up about eight and 31% respectively.
Shakes were off roughly 4% in the second quarter and the year to date period due to challenging year ago comps and other new branded product that trees as well as that distribution wasup or 30 grams shake had a couple of retailers.
As expected based lots of your bars, and confections was solid and distribution with down to the shakes as well as the decision. We made last year the coal some underperforming bar flavors to free up supply capacity.
Promotional buying returned to more normalized levels following a scale back in fiscal 2019 due to supply constraints.
Although this may not be the case and the second half of the year due to changing shopping behavior related to the Coca 19 situation.
Retailers are reevaluating the timing of shelf resets and promotion plans that may result, in a delay or cancellation of some of our previous agree to programs.
Let me now turn to quest as a reminder, quest is uniquely positioned brave.
Management team has done a great job transition that gets positioning from a high protein bar brand to a broader healthy lifestyle snack brand focused on providing craveable foods backed by metabolic science.
About two thirds of the business is the core protein snack bar with the remaining one third consisting of fast growing products, such as protein chips cookies and pizza.
But no matter, which product you consume that attritional profiles to say hi in protein low and cards with minimal sugars.
Additionally question rates about half of that U.S. sales in the Iraq and you look universe.
In traditional food drug mass and club channels.
Other half of quest fuel cells are generated in the convenience store class of trade and the unmet need ecommerce and specialty channels, which are not tracked by higher I wouldn't deals.
Quest year to date retail takeaway in the measured I IRI MULO universe increased 27.6% with equally balanced gains from both based velocity and distribution gains.
Growth across all major forms is up double digits on a percentage basis versus last year, including the important bar business, which increased 12.7%.
Measured channels.
[laughter] team continues to do a great job of driving awareness consideration and trial, the other sophisticated digital and social marketing mix.
Their unique quest squad influence your network is effective in attracting and retaining core servers.
Presence across various social media platforms, such as Instagram will cost as nearly 900000 followers has driven solid growth.
And the quest R&D team has recently launched them close and flavor in line extensions as well some new pack types, such as the snack bar and for pack protein chips depicted on this slide.
We're confident in our long term growth plans for this business, it's a scaled lifestyle consumer brand and not just a single product and like Atkins is backed by an underlying nutritional philosophy supported by sites.
Hi protein to approve strength and low carts and sugars to minimize blood sugar spots, while providing a steady sorts of energy.
Quest is in the early innings growing brand awareness consideration and trial and we believe a significant runway exist for long term growth.
In summary, the set the good food company competes in attractive category and as a leader in that category.
Combination of Atkinson Quest provides us with two uniquely positioned brands and a diversified portfolio that is lined around the consumer mega trends of wellness snacking convenience and meal replacement.
We're operating our business for the long term and committed to do the right thing for our employees customers and consumers during this challenging times.
I'll turn the call over to Todd will provide you with some greater financial details.
Thank you Joe and good morning, everyone. Let me start with two point as it relates to the numbers you see on the slides to follow first for comparative purposes. We will review financial statements with a 13 and 26 weeks ended February 29 20 Twond.
Second given our asset light strong cash flow business model, we evaluate our performance on an adjusted basis as it relates to EBITDA in diluted earnings per share. We've included a detailed reconciliation from GAAP to adjusted historical items in today's press release.
We believe these adjusted measures are key indicator of the true underlying performance of the business.
I will begin with a review of our net sales drivers of growth.
Second quarter, you watch legacy Akins volume growth was 13%.
Higher volume was partially offset by greater trade promotion, resulting in total U.S. legacy happens net sales growth of 12%.
As expected this was greater than the retail takeaway growth of 6.1% given the continued strength of our non measured ecommerce business as well with a slight seasonal inventory build.
Legacy Atkins non U.S. net sales, including Canada, and our international business was up a healthy 13.5%.
As a result total organic net sales growth in the quarter was 12.1%.
For Q2 quick contribution what the 71.3% benefit resulting in total Q2 net sales increase of 83.4%.
Now for a review of second quarter results across other major metrics gross profit was 85.4 million, an increase of 35.7 million or seven 2%.
Driven by legacy I can sales growth and the inclusion of quest, partially offset by a noncash 5.1 million dollar inventory purchase accounting step up adjustment related to the quest acquisition, which is now complete.
As a result gross margin was 37.6% to 250 basis point decline versus last year.
The noncash inventory step up adversely impacted gross margin by 220 basis points.
Quest lower gross margin and the previously mentioned increased and trade promotions were up 30 basis point headwind.
Input costs were relatively benign in the quarter and we expect only modest inflation for the year.
Adjusted EBITDA increased 81.7% to $41.7 million driven by increasing gross profit, partially offset by selling and marketing expenses, which increased 33.6% were 12.3 million to $27 million.
Majority of increase about 75% was due to the addition of quest and the remainder driven by the timing of our higher legacy Atkins marketing expense as discussed previously.
Additionally, DNA expenses increased by 82% in Q2, primarily attributable to quest as legacy Atkins with relatively flat to the year ago period.
Moving to other items in the TNL interest expense increased 7.2 million to 10.6 million due to the increase in a term loan balance.
Our effective tax rate in the second quarter was about 26.9% higher than a year ago period of 24%.
As a result reported net income in Q2 was $10.7 million versus 12.7 10 years ago period.
Year to date results are as follows as I indicated earlier net sales was driven primarily by volume growth and the quest acquisition.
Gross profit was $147.6 million, an increase of 46 million or 45.3% driven but let's see I can sales growth and quest.
This was partially offset by the noncash $7.5 million inventory purchase accounting step up adjustment related to the quest acquisition.
As a result gross margin was 38.9% a 260 basis point decline versus last year.
The noncash inventory step up adversely impacted year to date gross margin by 200 basis points.
West lower gross margin and previously mentioned increasing trade promotions were 60 basis point headwind.
Adjusted EBITDA increased 48% $73.5 million driven by increasing gross profit.
Partially offset by selling and marketing expenses, which increased 51.3% or $15.4 million to $45.5 million.
The majority of the increase about 75% was due to the acquisition quest and the timing of higher legacy jackets marketing expense as discussed previously.
Additionally, GNS expenses increased 14.5 million to 36.6 million.
Primarily attributable to quest and higher legacy Yadkin employee related costs.
Business transaction costs were 26.9 million and primarily associated with quest acquisition.
Moving to the other items in the TNL the net impact of interest income and interest expense was an increase of $9 million due to the increase in a term loan balance.
Year to date income tax expense was $2.2 million versus $8.7 million and the prior year.
In fiscal 2020, we anticipate an effective tax rate of around 26%.
As a result due to your day reported net income was 5.9 million versus 28 million last year.
Now turning to earnings per share in the second quarter 2020, The company reported 11 cents per share diluted compared with 15 cents per share diluted for the comparable period of 2019.
The Q2 year over year change was impacted by the noncash inventory step up of 5.1 million integration costs of 3.9 million.
Business combination cost around $700000.
Adjusted diluted EPS was 23 cents, an increase of five cents versus the year ago period.
Note that we calculated adjusted diluted EPS as adjusted EBITDA less interest income interest expense and income taxes.
Year to date reported EPS was six cents versus 33 cents per share diluted in the prior year.
Impacted by the noncash inventory step up $75 million integration costs of $5.3 million and business combination cost of 26.9 billion.
Good day, adjusted EPS was 45 cents, an increase of six cents versus the year ago period.
Please refer to todays press release for an explanation <unk> reconciliation non-GAAP financial measures.
Moving onto the balance sheet and cash flows year to date, we pay down 21 million of term loan and at quarter end. The outstanding term loan balance was $635.5 million.
Given our cash balance in the outstanding term loan balance at the end of second quarter, we are well on track to achieving our trailing 12 month.
Debt to adjusted EBITDA target of less than 3.7 times by fiscal year end 20 Twond.
Given the unpredictable nature of the Cobot 19 crisis in March the company began to increase finished goods inventory of some of its high velocity products.
In conjunction with this as well as for other working capital in General corporate purposes. The company drew down 25 million over $75 million available under its revolving credit facility.
The company believes it is in a strong liquidity position and at the end of March the company's estimated cash balance was about $80 million.
We anticipate the impact of interest income and interest expense to be in a $33 million to $35 million range, an increase of $1 million versus our previous estimate due to the draw down of the revolver.
Year to date, depreciation and amortization was 7.1 million capital expenditures were about a half a million dollars.
Capex for fiscal 2020 is expected to be about $5 billion, driven primarily by the ERP implementation.
Let me now provide you with a brief update on the quest integration.
Identified cost synergies a $20 million are on track and they'll begin to materially flow through the in fiscal year 2021.
The major parts of the integration work stream are well underway from tracking with our plan.
Specifically the supply chain team is working on it integrated approach to procurement distribution and warehouse.
Work and discussions with vendors are proceeding as planned.
Additionally, the question Atkins high teams are working collaboratively arm ERP implementation onto quest existing platform.
To date, we're on schedule and Havent encountered any major obstacles.
Despite the challenges of everyone working remotely. This is one of our top priorities and integration steering committee is in constant communication to ensure that we're progressing on our timeline.
I would now like turn the call back to Joe for closing remarks.
Thanks, Todd as a previous stated our first half of the fiscal 2020 performance exceeded our expectations and as we began to second half of the year, we were confident in our ability to achieve our previously communicated fiscal year 2020 outlook.
However in March retail foot traffic was volatile retail takeaway of our products is very strong in the first half of the month followed by a notable slowdown thereafter underscoring the unpredictable nature of current consumer purchasing behavior due to covert 19.
The severity and duration of the current situation is uncertain.
And we will likely continue during much of the second half of our fiscal 2020.
Therefore, given the rapidly evolving situation and the uncertainty related to the potential effects of the cobot 19 outbreak.
We believe it is prudent do withdrawal of previously communicated fiscal 2020 outlook.
We will continue to monitor the situation and will provide additional perspective on the year during our fiscal third quarter conference call.
In early July.
As I mentioned earlier, we're fortunate to participate in the category that so many positive underlying growth characteristics. We believe that health and wellness will continue to be an important part of consumers' lives that the mega trends related to healthy snacking convenience meal replacement and on the go eating our long.
Term trends and at the low household penetration of this category will be a tailwind for our business for years to comp.
As such we believe in that confidence in the long term growth prospects of our brands and our business.
Finally, I want to extend my appreciation during these unique times.
First thank you to our employees and Denver El Segundo around the world. They have adjusted remarkably well to their new remote work environments. Despite juggling multiple new challenges at home.
We have continued to collaborate well and executed superbly.
Second I want to thank the leadership teams have simply good inquest as well as our board of directors.
With their continued guidance and leadership I'm confident we will navigate the short term challenges of the situation while positioning the business for continued long term growth.
We appreciate everyone's interest in our company and are now available to take your questions.
Thank you at this time, we will conduct a question answer session. If you like to ask a question. Please press star one when your telephone keypad.
Information tone and to keep your line is in a question Q.
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So participants use and speak we quit ma'am you may be necessary to pick up your handset before present to start Keith one moment, while we pull for first question.
My first question comes from Chris Growe with Stifel. Please proceed with your question.
Hi, good morning wanting.
Morning, Chris Hi, Chris Good morning.
Glad to hear you guys are healthy and hook stays that way I.
I just thought I would ask you first of all as we think about.
Thats very loyal consumer base, you have just wanted to get a sensor you Joe if you can speak to it I know, it's very early but how those kind of those consumers react in this environment.
And then I'm just curious how you get a sensor that is it through E commerce trends. So like those were strong through March.
Well, let's say that probably picking up a bit you see more activity through your website as their panel data just to get a sense of how these consumers are reacting now if you have any sense of that and then how you've got to try but.
Yeah, Chris Good question again very early early stages of this and I think right now you know the big driver of this has been shopping behavior influence more than its consumption behavior influence. So we have a pretty good view of what's going on from a shopping standpoint.
As we said in our prepared.
Comments that March was really volatile through the early portion of March up to the weekend at the 2021st we saw.
Significant spike in foot traffic and a significant uptick in our business in both our business as well as the category the weekend, the Twentyth and 21st appeared to be a.
Inflection point and people shopping behavior, there's a dramatic falloff double digit fall off that as remained true they remain through the end of the month.
And people shopping bag.
People shopping patterns and.
Going into stores.
We saw significant channel shifting so E commerce online pickup and delivery all accelerated and then brick and mortar saw a significant fall off that's kind of remain until until now so most of it right now I'd say Chris is.
Wrapping behavior driven more then it's consumption driven and right now we don't have a really good read on how the confined to the confinement is influencing how how people consume the product I can give you my anecdotal.
Experience, it's a your home the pantries pretty close and I'm snacking more frequently so I think from a snacking behavior, our category will do well once we get over some of the shopping behavior issues I think obviously the on the go aspect of this category is going to be.
A negative drag for us.
Offset somewhat by that snacking behavior increases, but really early innings at this point, we don't know a whole lot about comes consumption behavior in our view of how we're thinking about guidance I'd much to do with uncertainty around shopping behavior in the decisions people are making when they go into stores.
And presumably in any given period there are volatile weeks and it's obviously very unique no question.
I've heard anecdotally is while you're seeing a pickup in sales in early April here.
Snap benefits and again, there's there's another reload if you will have pantry loading. So is that picked up a bit of you've seen that of late and most recent days and the week or.
Any sense that yet.
Yes last few days have been much better than the previous two weeks yes.
Okay, that's what I, that's what I'm, assuming it's going to jump around yeah.
Yeah, that's I I think that was in part one of the reasons that we suspended guidance just the sheer level of volatility of what people are doing I'd also add and I've been into a fair number of stores, just watching shopping behavior and actually in the stores. The behavior is really interesting so people moving into the stores quickly doing there.
Shopping and for the most part staying in center of store.
So shopping shelf stable.
I'd say.
You know basic staples and getting out of the store pretty quickly. So one of the behaviors. We noticed early at this is even when people are shopping there avoiding the perimeter not always getting into the health and beauty section, where upper Dom that number of our products are and that had some impact two foot traffic in the island, then obviously purchase behavior.
Well, let's hope they go online to buy that Uh huh.
They missed when they go through that section. So I appreciate your your color there and I'll leave it for the for the next question. Thank you.
Thanks, Chris.
Our next question comes from Rob Dickinson with Jefferies. Please proceed with your question.
Great. Thanks, so much as real good questions by Mr. Troy.
Yes, and you know it seems like.
What you're implying obviously or what you're saying is there's a ton of volatility going I understand that I've I've had a number of people ask me this morning.
So it Q2 came in so well, though right I mean, you came in with.
12% organic sales growth that's to the end of February.
And you also had 12% in the first half you know than the first half is 12% guidance was still kind of high end to four to six obviously everything seems since then you put you said in statement, though that tracking to still to hit that guidance.
Even though there's volatility the back half. So we don't really know, but is going to happen in the back half but.
The same time just to try to find you know keep a positive here is in Q2, and if you put up 12% I know there was a lot of concern kind of in the shake business coming out of the February data trends are your quarter only go through February. So there's no co bid pre buying will impact, let's say outside of the inventory build.
Net net it seems like that business actually did better on the bar side than you would have thought because the narrative kind of coming in to today through February was what seems like the doing worse in shake side, there's more competition in shakes, we worry about shakes, what about shakes, but you actually blew away expectations in the quarter, which.
It makes me think that you actually we're way ahead of expectations or bars. So I just you know as as we think about you know they try to.
The base business Right Act cobot near term behavior shifts can you just speak to that bar business and its shape business in Q2 pre cobot. Thanks.
Yeah, Rob we felt as I said in the prepared comments, we felt very good about where we were to the mid year, obviously pretty cobot 19 are both of our brands were at board meeting or exceeding expectations through the first half of the year. We felt we were well positioned us very confident that our ability to liberty.
So I think that's that's clear cut so our decision going forward was much much more to do about can shoot consumer shopping behavior over the month of March and the unpredictability of projecting that behavior going forward I would also add the.
The decision to suspend guidance was more strategic decision and not just about the uncertainty in the magnitude or the duration of consumer shopping behavior, although that clearly was an important factor.
It also reflected our current priorities, namely to protect their employees in our communities ensure the robustness of our supply chain and to provide service to our customers and consumers. So for US. It was much more about doing the right thing for our business over these challenging times.
Then it was just about the Pos but again to reiterate we felt really good about where we while we felt very confident.
Pretty cobot 19 that we were going to be able to achieve our financial guidance and we felt good about the composition of our business. As you mentioned it had been driven through the first half of your by strong barring confection business. We added RTD business that for the first half of the air was down a little bit we felt good about the plans we had put into place.
The second half of the year to get that moving into positive digits and all in all prior to the confined mid to consumer confinement, we're really confident that we have momentum on our side and we which closed the second half of the year strongly.
Okay, Great and then just one follow up.
Obviously given everything.
Is occurring within the consumer behavior, and what you're saying about the perimeter the store relatively the same store.
They as it relates to the marketing plan in a promotional plan.
How quickly do you think those plans could actually shifts or cap allocation could shift like I'm asking you know more about positioning online right. It seems like pro good protein shelf stable product. If you have the right placement you know it sound like they go in and Amazon.
Did or you could ship that very quickly relative to be shifting your private placement within the store is their ability to ship promotional spend a word rather marketing spend your product placement spend on on the page upfront to try to actually further increase.
So that all my business given the current dynamic that's it thanks.
The Rob excellent question already underway. So we've obviously seen as I mentioned that they prepared comments our ecommerce business.
The post Cobot 19 has accelerated as is other online.
Delivery and pick up so people are the best they can't trying to avoid going in the stores and choosing other means a buying products. So we've seen that significant pickup in our business and other channels that has led us to shift marketing spend or ready.
To promote our brands in those channels in order to keep some marketing pressure on the business. So good question. Thank you.
Thank you.
Our next question comes from Alexia Howard with Bernstein. Please proceed with your question.
Good morning, everybody.
Good morning Alexia.
Okay, Great asked about the supply chain and I know that that you are using co manufacturing fire.
Yes supply.
Much flexibility is that to ramp up.
Production I note utilities and also how dedicated upsilon selling if one of them.
The Gulf wind because it's hard to 19 I could have upon pick up that capacity I'm thinking about the crops.
Shakes.
How much could you increased production Oh, let's say data over the next few months, while restaurant traffic Hi, Dan. Thank you.
Yes. Good question Alexia first is the Oh, we've been in constant communication not only with their contract manufacturers, but communication upstream with our ingredients suppliers.
They're situation you know they are well prepared for this we've been in communication for over five weeks with these suppliers to understand what their plans are.
Coming into the situation and we're very confident in the robustness of our commands a third party logistics provider in our gradient suppliers and so far there have been no impacts.
In their facilities in production in our ability to meet demand. We are in the early stages of this stepped up inventory on T.S.K. You. So we typically are running about call. It five to six weeks of inventory in our own warehouses for T.S.K. use about 30.
Five of our top SK use we started moving our inventory position.
Closer to eight weeks and we'll be continuing to monitor that continued to move that up in some instances. We'll go to 10 weeks of inventory just to give ourselves some safety stock in the event as a spike in demand from a retail standpoint.
We were able to get that because we've been.
Communication vary a lot in the process, we were able to get that available capacity pretty easily gonna have I have a complete confidence in their preparedness and the robustness of the supply chain and our ability to flow goods ingredients to co man's to our third party, where warehouse and to customers smoothly. So it's been our top prize.
Already were on it very early and so far.
They are our supply chain has responded wonderfully today situation.
Great and can I follow up with equestrian promotional activity I think you alluded to the idea that you might be pulling back on that aren't going forward when might that Kim.
Do you anticipate to an increasing we'd like pricing as a result over the next few months.
That's where the question. These are this is less about us pulling back it's more about retailers changing their priority. So as you can imagine they're dealing with.
Operational issues in their stores to keep it short stores stocks and trying to keep social distancing. So the number of employees in the stores walk consumers are shopping you're seeing those behaviors number of retailers announced the number of people that can be able to store at any one time, some retailers are actually having traffic patterns in the store in order to.
Minimize interaction between their employees and other shopper so.
They are the retail operational impact of the situation as for some retailers to prioritize that over promotions and even shelf resets. So I would say it's too early for us to understand the impact of bad I think it's reasonable to to believe some retailers will delay.
Self resets some retailers will push out promotion events to focus on in stock shelf and safety and security of shoppers hard for us to know that I do think it's reasonable to believe we are not going to be we'd probably aren't going to spend most of our trade spend that we had originally planned Sims.
Because customers will pull pullback events, and then and those moneys will go on used.
Great. Thank you very much hot market.
You're welcome.
Thank you out next question comes from Jason English of Goldman Sachs. Please proceed with your question.
[noise] Hey, good morning folks.
Thanks for side, just one Jason.
Jason.
Hey, So I think in response last question.
I was talking about taking inventory from five to six up to somewhere eight to 10 range.
[noise] sounds like that could have a bit of it impact on cash balances, excluding working capital needs in that context, where do you think you'll land.
By the into fiscal 2000.
Yeah, so that impact in the short term probably has about a $10 million to $15 million.
Cash flow impact.
I'd like to think by the end of the fiscal year, we can wind a good chunk of that down, but obviously depends on how the cobiz situation plays out over the over the next few months not a big impact.
On our our goal of 3.75 or less on the leverage still confident.
We will be below that target as of now.
Well, obviously had some levers.
To pull from a cash flow perspective on your Joe just mentioned trade.
Sleeve with no travel going on wasn't DNA savings here in the back half of the year, so feel much more comfortable.
Trying to predict cash flow and to some extent EBITDA than than sales just given what's going on in the marketplace right now, but very confident on the leverage.
[noise], so and that's kind of what else can it back into us as trying to reverse engineer, Turkey, where you're you're still expecting EBITDA. It sounds like you're correct. Your EBITDA expectations aren't change materially it's just the sales volatility.
So in that context, I imagine you use mapped out sort of bold bear based type scenarios or worst case best case type scenarios in the various offsets that will allow you to manage cash EBITDA in each of you feel like you've you've adequately stress tested on both ends of the range and do you feel confident and leverage ratio on either end.
[noise], we do obviously you know whether this thing has been last three months.
Or longer hard to tell hopefully, it's not hopefully will be even shorter than that but we have we are in the process of doing a lot of stress tests right now again.
We do have some levers to pull on on on the cost side will be smart both from short term and long term perspective on those cost levers but.
But but we should be very good on leverage.
Okay, and then last question just.
Okay, all right now as you.
As we think about consumer sheltering in home in the influence of marketing pressure you really start.
You really start challenging how much more marketing dollars you'd be should be spending and how truly effect. If they are so we'll be looking at our marketing investment levels I totally expect us to see a fall off and return on investment and I would expect us to pull back on marketing actually keeping some powder dry for when people are about again so.
So that'll be another level that lever that we will pull out on a just based on ROI. We're seeing we're not getting a return for that spending we're going to pull back we'll keep our powder dry that provides us even more financial flexibility going forward, but I think you accurately reflected our sand, but a lot of volatility on shopping which drives some volatility on revenue.
But oh, we have a fair amount of dry powder from anybody Angel.
Yeah that makes a lot of sensing as you mentioned as people shelter all marketing may be less less responsive.
Behavior may also be different to can can you remind us what percentage of your consumption occasions, you believe falling meal replacement versus snacks.
Yeah, I don't think we are accurately node and.
Because if I.
We don't have that I don't completely understand how much is meal replacement versus snacking. There is a there is a fair portion of our business that snacking old Lee and so I think we're going to see again as I mentioned.
An increase in snacking behavior, and probably fewer occasions on beer, replacing.
The thing to think through which is I think is really important as the consumer benefit that we offer and our brands weight management and active nutrition.
Probably a little less relevant from a consumer standpoint during times of consignment no that said I think healthy snacking will continue to be relevant the folks is there.
In their homes, but I think the weight management benefit and kind of active nutrition when we just.
Those are less relevant to us that absent the impact on consumption going forward that said look we're really confident in our business. After we merge out of this we're going to make the right decisions in the short term for our business for good reason for our communities and then we'll we feel really confident in our ability once this crisis.
Is that our business will be right back on track.
[noise], but I think you guys very much appreciate it.
Our next question comes from John Paul Gartner with Wells Fargo. Please proceed with your question.
Good morning, Thanks for the question.
Yeah, I guess first off Joe looking at the Quest business, obviously, the specialty channel has been weak already now with the store closures that number.
Falls harder as you all did what are you seeing in terms of pick up an ecommerce maybe being able to offset those declines any data you can share thus far about any channels here.
Yeah just.
On queso the entire company.
Right, but is your quick question you know as you just step back the.
This has been going on for a number of years quest growth in food drug mass and now online has more than offset the declines in the specialty channel I think with this crisis specialty channel will accelerate the good news there is for US is that it's it's as a percent of our total business declined pretty significantly.
<unk> versus the last few years. So we're reasonably comfortable that Chad Backchannel shifting is going to continue this makes celebrated a little bit but we're in a good position in those other channels to pick up themselves.
Okay, Great and then the follow up you want to push backs that we get on investment case for symbol is a degree of uncertainty as to how long yadkins granted grow how long the Rob Lowe messaging can work, but we look uncoated you hear about the more severe cases being associated with.
Obesity diabetes, it would seem to reinforce the low sugar low carb messaging and you guys you referenced the R&D pipeline in your comments I'm curious just sit back do you think Colby opens new opportunities for you expand the low car portfolio into new categories. You have any household panel data or any anecdotes about how scares being positive for low carb demand just know how do you see.
The about things on the other side of quarterly cement demand perspective, maybe.
Yeah, Great question and they had one observation the the.
The low carb diet high protein low carb diet is.
Is.
Beneficial front about stress standpoint beneficial from immunity standpoint, so I think people that I think all those things that had been driving our business from a mega trend standpoint around health a word well out there while this aware a obesity.
Diabetes, we'll continue to be relevant and at times when people were concerned about their health will continue to be relevant. So we feel really good about how our brands are positioned from a home health and wellness standpoint for those that kind of pushed back on how long can we grow this business I just point out there. That's been 11 years now compound annual growth rate of 30.
10% on actions.
You know the category still massively underpenetrated a lot of opportunity a lot of white space for us.
Consumer targets standpoint, so were again really confident that the mega trends once we come out of this crisis will continue and our ability to continue to capture those consumers opened to low carbon protein rich will we'll continue to be there for us and.
It's backed by science. It is a trend that's continued for a lot of years and we're reasonably comfortable and our ability to continue to grow household penetration and frankly this will just tejas that.
Health and wellness is important to us good immunity is important to us so to people and that's going to continue be beneficial.
Great. Thanks, Joe Thanks for the insights.
Yeah.
Thank you on next question comes when Plaza a week with Deutsche Bank. Please proceed with your question.
Yes, hi, good morning.
So I just wanted to you touched on this a little but during the call, but I wanted to talk more about what you're seeing from various category point of view.
You know we don't have so much data at this point and will be kind of saw the uptake across the board a true data that we do have through March 21st, but I was wondering if you could talk a little bit more about which categories are you seeing the most volatility versus the most slowdown and then which categories do you think I'm most.
Easily.
Transferable to E commerce.
So I understand you when you talk about categories. What are you, referring I do you foresee shake shakes, but for now.
Yes, yes.
Yes. The reason I asked that as we don't consider those categories right that there are.
We looked at the category organization and around consumer need states. So broadly we think about it is nutritious snacking sports active performance and kind of weight management. Those are the three segments that we see a as we moved as a shopping behavior.
Your after the Twentyth and 21st.
CLI and kinda double digits category broadly moved with that with the foot traffic.
So that's what we experienced after the 2020 onest within those segments of.
The category.
The the category segments that are in the health and beauty I'll, namely sports in active and waste management.
Saw more falloff than nutritious snacking, which isn't center store.
We believe that down again that that category Center store, that's what kind, that's where cliff is right.
They were in the center of the shopping area with shoppers coming in getting in the center store and getting out at the store, whereas pharmacy Hava. We saw just less foot traffic I think that's the phenomenon that's going on at least was going on towards the end of March.
We moved into April really purchasing behaviors, driven by shopping behavior and the reason, we're pretty confident that out as the case. If you look at both of our E commerce businesses Spike at a stage strong since the crisis studies. So we saw a significant uptick in our quest big.
Just by the way Amazon as its largest customer 15% of their business can sometimes they saw significant spiked in the business on the upside across all their products and it's continued to be strong.
And again on top of kind of 60% growth on our act or an ACA or actions business on online we spiked above that after after the restriction starting to take place. So again strong growth in the business. We're shopping is clearly not the issue right. So I think.
Right now, we're seeing purchase less about the for almost a less about the the consumer benefit much more about where it is in the store and how people in shopping.
Hi line.
Online our business is strong across the board so ever reform, including shades, we're seeing significant growth so not not impacted by form.
Got it just one quick follow up but just going back to the supply chain I know historically, you've talked about how are you know you're kind of as you talk to your co Packers, Joe kind of putting in certain orders relative to where you expect sales will be into the extent that your diverged from that.
They can be incremental costs associated with that but is there any framing that you can give us why are you know I don't know sales are up the X percent like that might have its you know what the cost impact might be.
<unk>.
No. So far we've not seen as a cost impact we're very early in the stages to give you. An example, we we went to a travel restrictions at the very beginning of March we also went to remote.
Operations as a company a few days after that so we're early all does we're early in communicating with our suppliers and where we were early in and increasing orders on key items. So we grab a lot of available capacity early in the process.
With really a significant up.
No significant uptick in cost we've seen a little bit of extra costs in our warehouse operations, mainly driven by making sure. They are the employees than those operations continue to come to work, there's a lot of pressure in the area for.
Other distribution companies looking to try to get employees to come into their places. So we've been paying bonuses that had been.
I've been a helpful and thus making sure that.
We have the employees necessary to get products out the door, but I I Todd do you have any other comments, we have not experienced any uptick at all in cost of goods.
Yes, very nominal at this point look as we pointed out on the call.
Where we are looking at this very strategically we have to pay a little bit more in the future to make sure we have products now warehouse, our and our.
Customer shelves, where we're more than willing to do that we have not seen that yet.
So hopefully that will that will not.
Be created over the next couple of months, but so far very very little.
Yeah, I would remind you can do I I wouldn't mind you two a year ago, we saw pretty significant uptick in bar demand, we were able to get that extra supply really really didnt have any increasing cost in order to get that extra supply. So that the good news our <unk> were eight we're a big manufacturing.
We have Oh, we have large volumes and we offer a long run when one day contract manufacturer makes our product. So we're somebody that they will actually want to have more business with so we're getting our demands in our requirements and pretty early they're happy to meet those needs if they've got surplus capacity and so far.
That capacities for the vulnerable.
Thank you.
You're welcome.
Thank you at this time I would like to turn the call back over to Mr., Joe scalable for closing comments.
Yeah. Thanks again for your participation on our call today, we hope you'll continue to remain safe and we look forward to updating you on our third quarter results in July So I hope, we all have a good day take care.
Thank you. This does conclude today's teleconference. You may disconnect your lines to Tom and thank you for your participation.