Q1 2020 Earnings Call
Good morning, and welcome to set up this first quarter fiscal 2020 <unk> earnings Conference call I now everyone should have access to the earnings press release that was issued this morning and is available on the Investor Relations page on.
So I just website at www dot send out dotcom.
This call is being webcast and its transcription will also be available on the company's website. As a reminder, please note that the prepared remarks, which will follow contain forward looking statements and management may make additional forward looking statements in response to your questions.
These statements do not guarantee feature performance and therefore undue reliance should not be placed upon them. We refer you to all risk factors campaign and set up this press release issued this morning. They companies annual report filed on form 10-K, and other filings with the Securities and exchange.
Commission for more detailed discussion at the factors that could cause actual results to differ materially from those projections and any forward looking statements. The company undertakes no obligation to publicly correct or update the forward looking statements made during the presentation to reflect future E band or Sir.
Sanchez, except as may be required under applicable securities laws.
We would like to remind listeners that the company may refer to certain non-GAAP financial measures. During this teleconference. A reconciliation of these non-GAAP financial measures. What's included with the company's press release issued earlier today also please note that unless otherwise stated all figures discussed today.
They are in U.S. dollars indoor occasionally rounded to the nearest million and now I'd like to turn the conference over to set up just CEO.
And then.
Good morning, and thank you for joining us today with me on the call It Scott Hawkins, our Chief Financial Officer.
We had an outstanding first quarter delivering revenue of $335.9 million, which represents 13% adjusted revenue growth year over year.
We generated nearly 400 basis points of gross margin improvement versus a year ago and more than doubled adjusted EBITDA.
Adjusted EBITDA for the quarter was 24.3 million the second highest quarterly adjusted EBITDA in the company's history up from 11.1 million in the prior year.
Improved results represent traction in our turnaround plan and the key initiatives, we have put into place over the last year, we're more focused on our customers than ever before we are executing our productivity plans and we're controlling costs.
Progress and improved execution is evident in each of our three segments.
We generated $35 million of operating cash flow in the quarter and we reduced total debt by over 20 million from year end.
Combined with the recent $30 million preferred equity raise we have significantly improved our liquidity position, while also improving our profit and cash flow profile.
As we announced a few weeks ago, we completed a 30 million dollar preferred equity raised with two of our largest investors. This is a reflection of their confidence in the business outlook and provides us the capital to support continued investment in our plant based business unit.
There was a total commitment of $60 million from these investors that we have the option at our discretion to access over the coming months.
We continue to invest behind our most promising and high return opportunity while de emphasizing lower margin lower return on capital segments of our business.
We are executing well and have successfully adapted to the day to day challenges of the current cobot 19 pandemic.
We'll touch on this in a moment, but first let me run through our performance during the first quarter and our business initiatives.
Our revenue growth.
Was led by continued strong performance of our plant based food and beverage business unit, which delivered 29.7% adjusted revenue growth in the quarter with strength across each primary product category.
We also produced 9.1% adjusted revenue growth in our fruit based food and beverage business unit as our pricing efforts along with strong volume drove the growth.
More importantly, we saw further improvements in gross margin.
Similarly, we generated 5.5% adjusted revenue growth in global ingredients, while also delivering gross margin improvement.
It is evidence that our focus and investment in plant based beverages has positioned us well for continued growth.
We are executing the turnaround plan in our fruit business unit driving improved margins and optimizing our operations for further success.
Global ingredients, we are focusing on the most promising product categories and we're seeing the results in our margin enhancement.
Additionally, we see marked improvement in the output and efficiency of our cocoa processing plant in Holland.
We are pleased with the improved margin and growth across each of our business yet.
In addition to our gross margin improvement, we continued to execute on our cost savings initiatives.
We are delivering on our SGN a reduction target of eight to 10 million on an annualized basis.
As we noted last quarter. This improvement does have some offsets which occurred this quarter Scott will provide more details in a moment.
Before we talk about the individual business unit performance I would like to summarize cobot nineteens impact on our people our plant operation and the piano.
First let me offer a sincere thanks to all of our global employees for their dedication and their ability to quickly respond and adapt to the rapidly changing environment.
We responded rapidly following all government advice as it evolves and we are laser focused on the health and safety of our employees.
As it relates to the synoptic team the phrase when the going gets tough the tough get calling most certainly applies.
All our facilities with the exception of our Ethiopian avocado oil plant are fully operational.
Beyond that we have not encountered any plant closures material line disruptions or significant downtime as a result of cobot 19.
We have kept up with the demand spikes from our customers, while maintaining high levels of service.
Within our plant and fruit based business units approximately two thirds of our sales are in the grocery retail channel and approximately one third is foodservice.
Similar to most CPG companies, we saw a surge in demand in the second half of March that was somewhat offset by declines in foodservice.
Well unpack in detail the impact of coping 19 on our financial performance in Q1, but to summarize we estimate incremental revenue of seven to 10 million.
A 3 million dollar gain in gross profit and no material impact on EBITDA as currency devaluation and reserves for bad debt offset a modest gain and gross profit.
Well it it's still early in Q2, I can share that foodservice decline are being offset by retail games, which have moderated after the pantry loading we saw at the end of Q1.
The impact of the foodservice slowdown has been more pronounced on our plant based Bu and we are encouraged by the announcement of our largest foodservice customer, but they will be reopening thousands of outlets in the coming weeks.
Now, let me walk you through each segment.
The crown jewel of the company our plant based food and beverage segment is composed of all of our plant based beverages, such as soy milk almond milk and milk.
Plus our brought business.
This business unit also contains our extraction business, where we felt the concentrated base for making these plant based milk and it includes the Sunpower business.
During the first quarter the plant based beverage unit delivered accelerated revenue growth of almost 30% up from 25% growth in the fourth quarter.
We saw growth from both existing and new customers and existing and new products.
Plant based business unit delivered a first quarter gross profit margin increase of 690 basis points. This significant step change in margin is a function of volume and strong execution of our productivity efforts across the entire network. Our operations team is achieving record setting production throughput.
Inefficiencies, we are seeing broad based growth in plant based milk raw extraction, and sunflower, all generating double digit year over year growth, including over 30% growth in plant based networks and extraction.
We will continue to focus our investment and deliver innovation on our plant based portfolio given the strong category growth and the favorable consumer tailwinds.
We remain on track with our capital projects to expand our extraction capabilities by four fold and we are progressing but the other two capital projects to increase capacity and capability across our national footprint. We continue to expect all three of these capital projects to come online late in the fourth quarter.
Turning to fruit the fruit based business unit, which is comprised of frozen fruit fruit snacks and fruit ingredients posted revenue growth of 9.1% driven by strong growth in frozen fruit and fruit snacks.
It wasn't fruit benefited from both our pricing action and strong growth with our major customers consistent with last quarter, we delivered improved gross margin, which expanded 260 basis points year over year and extended 310 basis points from the fourth quarter.
Our plan to improve margins in frozen fruit is progressing and results are tracking in line with the expectation we have discussed over the last several quarters.
Beyond our pricing initiatives, we're seeing significant productivity gains associated with our automation investment and overall stronger manufacturing discipline as we execute our plan to turn around this business.
The Mexican Strawberry harvest was inline with our expectation and the fruit season in California is gaining momentum each day.
Supply for it looks good our plants are ready and we are prepared to execute the 2020 season.
Our fruit unit has a very high retail customer channel mix. Therefore, as we see the shifting mix of can super purchases towards retail and away from foodservice during the cold that 19 pandemic, we're seeing strong demand.
Given the strong demand in our lower level of inventory, resulting from last year's poor harvest, we have sold off a significant portion of our higher priced 2019 fruit inventory.
Finally, the global ingredients segment, which includes trodden organic ingredients and our premium juice business also delivered a strong quarter with 5.5% adjusted revenue growth and a 200 basis points improvement in gross margin the revenue growth and gross margin improvement were driven by both Trident organic ingredient.
And our premium juice offerings.
We saw good production improvements in our Cronto Holland cocoa processing operation and had a strong quarter overall, our strategy to focus on margin and the return on capital profile of our ingredients segment then process.
As we have already begun to reduce our exposure in animal feed as an example.
During the first quarter, we generated a significant improvement in return on capital in the global ingredients segment with higher margin on lower inventory.
We will continue to work through 2020 to rebalance the trodden ingredient portfolio and Rightsizing inventory levels to further improve the return on capital.
In conclusion, I'm pleased with our first quarter performance with gains across each of our three segments.
We are executing our turnaround and we are positioned to capitalize on further growth opportunities.
Now I'll turn the call over to Scott to take us through the rest of the financial Scott.
Thank you very much Jo Ann good morning, everyone.
Let me walk through gross profit in the rest of the income statement given Joe's discussion of the commercial activities in revenue during the quarter.
I will also cover our balance sheet and cash flow results.
First as Joe mentioned, we had a strong revenue performance with double digit growth.
We saw some fairly significant puts and takes from coded 19 in the quarter and I will give you our estimates of the impact is a walk through each line item on the piano.
We estimate that seven to 10 million of our revenue came from cobot 19, consistent with our prior estimated range.
Gross profit was 43.7 million for the first quarter of 2020, it increase of 15.5 million or 55% compared to 28.2 million during the first quarter of 29 team.
The plant based segment accounted for 10 point Sixmillion of the increase in gross profit.
Mainly reflecting revenue growth plant productivity efforts and higher capacity utilization.
Prepaid segment was responsible for 3.1 million of the gross profit improvement, reflecting pricing initiatives productivity improvements and increased revenue.
Global ingredients contributed the remaining 1.8 million of improvement.
We estimate that cobot 19 added approximately 3 million of gross profit in the quarter.
That came from margin on the additional sales any roughly 2 million commodity hedging gain in March in our global ingredients segment.
Commodity hedge was in a modest loss position prior to code.
The negative impact to gross profit from the 2019 weather related shortfall in the fruit based business was in line with our previous expectation.
We recognized a 1.9 million impact during the first quarter in anticipate approximately one to 2 million in the second quarter.
As a percentage of revenues first quarter gross margin was 13% compared to 9.2% last year Athree hundred 80 basis points increase.
The largest contributor to this margin expansion was the plant based segment, which saw 690 basis points of margin gross to 19.8%.
Operating income was 11.5 million or 3.4% of revenues in the first quarter compared to <unk> point 3 million last year.
Excluding approximately 1 million of nonrecurring costs, that's DNA was consistent with the prior year in terms of dollars.
We realized approximately 2.6 million of savings this quarter associated with our reorganization work last year.
These savings were offset by approximately 1 million of bad debt expense.
1 billion of higher stock compensation, and 1 million of non structural costs during the quarter.
The code at 19 impact as Junaid was approximately 1 million as we provisioned for potential bad debt given the current economic climate.
Earnings attributable to common shareholders for the first quarter were 1.3 million or one cents per diluted share compared to 23.7 million or 26 cents per diluted share during the first quarter of 29 team.
Again, the prior years income benefited from the onetime gain on the sale of the corn and soy business.
On an adjusted basis earnings were 0.9 billion or one cents per diluted share compared to a loss of 7.9 million or nine cents per common share in the prior year.
As Joe mentioned earlier for the first quarter of 2020, adjusted EBITDA was 24.3 million compared to 11.1 million in the prior year, excluding disposed operations.
<unk> teen impact on adjusted EBITDA was flat with seven to 10 million of revenue.
3 million of gross profit, including a 2 million commodity hedging gain in March offset by 1 million of increase just DNA for bad debt in a 2 million FX loss from the devaluation of the peso in the month of March.
I'd like to remind listeners that adjusted EBITDA and adjusted earnings our non-GAAP measures and a reconciliation of these measures to GAAP can be found toward the back of the press release issued earlier this morning.
Turning to the balance sheet and cash flow at March 28, 2020.
Total debt was 469.3 million down approximately 21 million from December 28, 2019.
Total debt reflects 218.8 million net of issuance costs of our senior secured second lien notes you wouldn't twentytwenty too.
223.5 million drawn on our first lien global asset based credit facility with the balance representing smaller credit facilities lease and other financing arrangements.
From a cash flow perspective during the quarter cash generated from operating activities was 34.7 million.
Compared to cash generated of 1 million during the first quarter of 2019.
The 33.8 million increase in cash provided by operating activities, primarily reflects improved operating performance and more efficient working capital management as inventory declined 51 million during the first quarter from Q4 2018.
The sequential reduction in inventory included 40 million due to strong Q1 sales.
Greater efficiencies in our global ingredient in fruits segments in the normal seasonal decline in fruit inventories ahead of the annual harvest season.
As a reminder, we generally see working capital increase from Q1 to Q2 based on seasonal inventory purchases, particularly in fruit.
For the full year 2020, we would expect working capital to be relatively flat to 2018.
Cash used in investing activities was 9.7 million compared with 8 million in the first quarter of 2019 adjusted for the proceeds from the sale of the corn and soy business.
The increase in capital investment primarily relates to the expansion of our extraction capabilities that are currently underway as well as investments in new automation for frozen fruit facilities.
Finally, let me touch on the recent preferred equity finance.
It's Joe mentioned, we received a commitment of 60 million in series B preferred shares from two of our largest shareholders oaktree and engaged capital.
First 30 million closed on April 24.
At our discretion, we can require the investors to purchase a second tranche of up to 30 million on or before July 15 2020.
This investment provides the capital for us to continue to invest in our plant based foods and beverages platform and provides additional liquidity, we're very pleased with the successful transaction.
Now turning to our outlook, let me address or expectations going forward.
Well, we don't provide guidance given these uncertain times, let me give you some insight into what we're seeing right now.
We did not experience a material coated impact in Q1 from our foodservice customers, but we are feeling the impact of reduced foodservice orders in Q2.
The short term results of this is the plant based segments growth moderating from the Twentys down to the mid single digits the second quarter.
This is likely leaves total revenue roughly flat to last year for the second quarter.
Beyond the second quarter, it would be pure speculation and too early to comment now.
However, we do expect adjusted EBITDA to be materially greater on a year over year basis for the remainder of the year.
With that I'd ask the operator to please open up the call to questions.
At this time, if you had a question. Please press star to that number one and her telephone keypad.
Your first question comes from Jon Andersen with William Blair.
Yeah, Hi, good morning, guys.
Good morning job [laughter] warning John.
Hi, congratulations on the I'm a start to your.
Thank you I.
I guess.
Maybe I'll start.
With a with the client base the business.
You know you saw terrific growth in the quarter, you've seen terrific growth frankly, there for the past couple of quarters, a few quarters and I'm wondering if you can give us a little bit more color.
Around the various product categories of the components of that business, where you're seeing no particular pockets of strength.
And then I think.
The second question plant based is.
The extraction capacity that you're bringing online what's the opportunity around that I know that that will probably not really come.
To fruition until 2021, given that the capacity comes online late in 2020.
How do you think about the market opportunity around that.
Extraction capacity and and how quickly you can.
Phil that.
Sure in terms of where we're seeing that first part of your question, where we're seeing strength in the plant based business. It is certainly across every customer both existing customers and news. So we're doing a good job on the business development front.
Roughly two thirds of the growth the school in the first quarter two thirds of the growth came from existing customers and importantly, a third of the growth came from new customers and we see a similar balance between new products than existing products, so really strength across the board.
Last quarter, we spent considerable time unpacking the underlying consumer drivers the of the plant based business and and we certainly continued to.
See an experience those tailwind in the first quarter. So I'm really in summary, just strength across the board.
On the extraction side.
I'll I'll explain it this way.
We produce think of it as like a concentrated base that you then add water to to make it in the form that you would you know poured out of a carton from there's two opportunities I mean in on one side of the business. We produced the concentrated bay.
We then add water and packaging they sceptically ourselves there is obviously a significant business done in plant. They smell that is outside of products that are packaged or a sceptically. If you think about the refrigerated aisle and gable top carton style packaging, we will sell.
Producers were manufacturers, the concentrated base, which to which they then add water and put it in their package format be it a carton a bottle et cetera. So.
That's how that business.
Is gonna be monetized. Good you don't think of it as an ingredient sale.
Okay interesting and is that.
You know.
You have capacity coming online.
You know how much visibility do you have into you know your ability to kind of cell.
Sell out or sell into that capacity in 2020 does it come online quickly because you have arrangements kind of in place or is that a longer business development timeline.
Yeah. It's you know we feel good about where we are right now with our business development efforts against that you know part of that thesis for that investment was <unk>. You know we were experiencing we have a small extraction capability right now and we were experiencing significant demand.
You know customer interest in demand certainly in excess of what we could produce and and that was really the.
Underlying premise for making the capital investment so.
You know we feel good about our ability to stand up that plant and you know, we we certainly wouldn't expected to be full one day one.
But we do have you know customer commitments.
You know that allow us to open that facility up and ER and start running.
Terrific.
Ah again on plant based.
<unk>.
Could you talk about the.
The mix of that business it sounds like it.
Excuse more away from home or food service you know is that the case and then.
So how how.
How are you thinking about the the return of that larger customer in foodservice for your plant based beverages is that.
Looking like it's going to be happening here over the next several weeks and.
How should we.
Yeah, I mean, what's your expectation around that piece of it foodservice side.
Yeah. So our plant based business in total is a call it roughly 60% retail 40% foodservice.
We do a significant business in that foodservice channel with large coffee chains.
No I won't weighed into speaking for a individual customers, but you know there's been some recent public announcements from some of the bigger coffee chain about their plans over the you know this weekend in in the coming weeks to start to aggressively reopened.
Their outlets and so you know we're optimistic.
You know obviously the big question Mark will be how quickly do consumers flash customers return.
But you know we're we're encouraged by their announcements and Ah you know we're ready display.
Great.
Okay, so shifting over to.
The beverage excuse me the fruit business.
Strong quarter <unk>, you know it sales and in margin progression or it sounds like very much.
Aligned with the kind of the the cadence that you you've described a for sometime now.
Is there and I understand it's very early but.
Is there anything you can talk about a with respect to fruit availability and or pricing more broadly I guess just didn't they both in the context of what you're you've seen year to date.
In Mexico in early in California, and also in light of the fact that theres, probably less going into <unk> foodservice, maybe less demand for fresh fruit.
Which which which may have an impact I would guess on the fruit availability for the freezer market, which is where you primarily play athlete.
Yes. Good question, you're absolutely correct in that the foodservice contraction has impacted the fresh market pretty significantly and so you know we remain optimistic that the supply of a free.
It is going to be within historical ranges.
And as far as pricing goes you know again pricing is in historical ranges.
You know about where we would have forecasted it to be at this point in the year, So Oh, we where it's not.
There, there's no real concerns on either the pricing front or that supply front as it relates to the California three feet.
Okay.
And it sounds like from your commentary that there's been some there's been some nice progress on.
Both.
Demand.
From existing customers, but perhaps also pricing I know this was a an area that you really emphasized when you came in that there was probably a better way kind of think about structuring pricing arrangements with customers to take some of the volatility up.
Maybe you could provide a little bit more color around.
Whether that's happened to what extent, you've been able to make that happen and how much of the demand you're seeing maybe in fruit right now is the stock up or or at home.
Acceleration given the Covance situation.
Yes. So you know the fruit business is a more retail oriented than foodservice call. It 75% retail 25% foodservice. So we definitely benefited that towards the end of March with.
Stock up take purchases and saw that but we were having a.
Strong quarter.
11 weeks ended the quarter before it really the cold bid.
Orders started slamming the system so it didnt all come in the last.
Two weeks of the quarter, so pretty strong growth.
And you know we you know we've seen a inventories kind of pull back on our side, where you know the strong orders have really.
Helped us work through some of that expensive 2019 inventory and put us in a strong position going into the 2020 season.
Great.
Right all the couple of more here.
I don't know how many people we have in the queue, but I will.
I do want to ask about global ingredients because that to you you've made solid progress in the quarter and.
How much of this is <unk>.
He is coming from you know better performance better productivity.
Out of the Cronto Holland client a the cocoa processing facility I think there might have been some headwinds that you experienced last year there that maybe.
<unk> Kinda overcome and then you did mention that there was one facility I think the avocado oil plant Ethiopia, that's not up and running.
You know.
Maybe you could give us a little bit more color around your expectations for that.
And interest the Sanmark acquisition General.
Yeah, So the Cronto Holland throughput and I'll put the operation team.
In Holland have done a great job, yeah, and getting that plant up and running it into a very nice productivity zone for the business and.
A sizable percentage of our pick up in gross margin in the quarter. A was a result to that and we're encouraged by the continued progress that's being made.
As it relates to our avocado facility you know not a massive portion of our revenue, but is something that we spoke about on previous calls and so wanted to touch on it.
The availability of public transportation in Ethiopia.
You know the closing of public transportation has made it difficult for our workers to get to our production facility in as such we made the decision to close until a public transportation resumes and indeed the up yet.
Okay.
Oh, the last one for me.
He is is really a somewhat comment the forward looking commentary that you provided the end of the prepared comments.
Just wanted to make sure I understood is clearly so.
I understand the rationale for kind of a flatter year over year topline coming to you to I'm on the the EBITDA combat.
Do you does that it might interpreting that right that you mean EBITDA dollars.
Increase on a year over year basis for the rest of the year or EBITDA dollars increase sequentially.
How do we interpret that.
[noise] age on its it's got I'll take that one said at the comment was that we seats and muted levels of growth as Joe just a talked about but notwithstanding that on a year over year basis.
We would expect still to produce meaningful year over year EBITDA dollar improvement.
Terrific Super helpful.
Thank you guys and a again great start to your congrats.
Your next question comes from Mark Smith with Lake Street capital.
Hi, guys I'm, a lot of might have been answered, but but wanted to talk kind of big picture food supply chain is certainly the news.
I'm seeing issues in dairy, especially meets could you guys talk about any potential risks that you see out there a outside of some of the fruit things that you've talked about but more so potential opportunities that you see in the short term and long term.
Yeah. So we.
Don't anticipate any supply chain disruptions I touched on fruit on the on the plant based side of things.
No we've had pretty decent crop whether in a in the U.S. So far this year as far as planting goes for soy you know.
So you know no material disruption I expected there.
As it relates to opportunities you know I think the opportunities that we we have in front of us our are really about keeping up with a consumer demand.
And.
You know we continue to experience I know there was some news articles recently about the meat shortages in the shift over to plant based.
You know again, we've been seeing that trend for the better part of a decade with consumers.
On a slow migration toward plant based and substituting dairy products with a plant based and so you know its representing a great trial opportunity for us as people stock up.
You know we saw.
With with concerns around and people wanting to pantry load the aseptic side of it which is obviously shelf stable benefited from that consumer behavior, and we hope that the new trial that we got in the first quarter translates into a loyal consumers going forward.
Okay.
We're kind of an unprecedented times, but if you can look a little bit in your crystal ball at consumer behavior as we've seen the shift and kind of four shift to home based food away from food service. How sticky do you think these consumers can be and how much you can hold onto them in kind of home based grocery food versus.
Migration back to two for foodservice once it reopens.
Yeah, I mean, I think we will return to you know I think the pre cobot 19.
On a pattern.
Between foodservice and retail the you know the question of when is Ah.
You know that's the 64 trillion dollar question that Ah you know I wish I could give you a great answer to Brett. So Unfortunately, my Crystal ball is a little cloudy this morning.
No problem and then last one for me and sorry, if I missed it during the the commentary, but can you give any insight into kind of FX. What you expect from from currency impact here, maybe near term in Q2, but but maybe even as we look through the rest of the year.
Oh sure. It's got a good morning, Yeah, we realized a A.O. called a 2 million dollar unrealized impact from the decline of the peso.
You know, it's it's a better currency forecasts are than anybody else that we did take a this stuff I've tried to protect ourselves a bit from out or if you will lock in that benefit meaning because we have production facilities in Mexico, and a lot of peso denominated cost we would actually routes were a weak peso to take.
Yes, and stuff to try to preserve you know that relationship for the balance of the year I guess you want to other comments to make probably today would be the euro has been weak of recent vintage down enough. You know the one on nine type area, but Ah that's at least been comparatively more more consistent so it must be my thoughts.
Okay, great. Thank you.
At this time there are no further questions I will now hand, the call back to Joe and then for closing remarks.
Great. Thank you operator, and thank you all for participating in our first quarter conference call look forward because speaking with you in the future and appreciate your interest and support in Sun off that have a great day.
That concludes today's conference. Thank you for your participation you may now disconnect.