Q3 2020 Earnings Call
Okay.
Good day.
So what's your thoughts.
Our next call today's conference is being recorded at this time like the conference. So for Q2 total I see out he's doing.
[music].
Thank you good morning, and thanks for joining us on Hain celestial <unk> third quarter fiscal year 2020, <unk> earnings conference call on the call to their Mark Schiller, President and Chief Executive Officer, Javier <unk> Executive Vice President and Chief Financial Officer. During the course of this call.
Forward looking statements other than the meaning of the federal securities laws, even see locations assumption regarding the company's teacher operations.
Formats.
Meeting expectations and assumptions related to the impact.
Cobot 19 pandemic. These statements are based on management's current expectations and involve risks uncertainties that could differ materially from actual events and those are trying to make forward looking statements. Please refer it seems actually enter apart on form 10-K in quarterly reports on form 10-Q reports filed from time to time Securities.
Exchange Commission, especially issued this morning for each other crushing the risks that could cause actual results could differ materially knows expressed or implied in any forward looking statements made today leased out management's remarks today will focus on non-GAAP adjusted financial measures a reconciliation of GAAP results non-GAAP financial measures available.
Charlie as reminder, beginning in Q1 of the fear of the company changes segment reporting to focus on North America International incorporated subject.
I see U.S. UK and Western World segment. The company's also prepared a few communication side and I guess, all supplemental financial information, which are posted on <unk> website under Investor relations heading called being webcast and an archive of it will be available on the website I'd also like to know what conducting our call today from our sector <unk> okay.
Sure.
So maybe three to like socks off or other mine.
Nickel issues during this call.
During the day after a patient that understanding and with that I'd like to try to call over to Mark Sadler.
Thank you Kelly and good morning, everyone. Let me start by saying these are very difficult unprecedented time, that's we all learned to adapt [laughter] my thoughts and prayers go out to those have been negatively impacted by this pandemic and I wish everyone. Thank you good health as we move toward a new no I appreciate that we're working in a sense.
So industry and providing people around the world with much needed to copy products that they rely on to navigate this crazy.
And I want to thank all our employer has continued to come to work every day during this turbulent time.
Overcome numerous obstacles to produce and shifting its product to stores every day and they're doing a fantastic job.
Okay, let's call it they talk about her performance in Q3 and guidance range for the full year I'll give you details on the coast pandemic, including how it's impacting our business how we prepared for how we created new opportunities, how we're setting ourselves up for the future.
Let me start with our results and outlook.
Now to announce that after two strong quarters with significant profit growth. We did it again in the third quarter, 24% year over year growth in adjusted EBITDA, and EBITDA margin, which was the highest since fiscal 2018.
In fact, we delivered against all the key metrics, we discussed on our last earnings call gross margin dollars gross margin percentage as well as adjusted EBITDA dollars and margin were all up significantly.
Well, we didn't provide specific guidance on the topline Q3 was the first time, we delivered net sales growth since fiscal 2018.
Sanitizers personal care categories have seen a small decrease in sales overall.
As we discussed her last earnings call, we ran a big hair care program early in the quarter that created significant growth.
We were also <unk> poised to have a record sinclaire season, but it's off to a slow start given the consumers are isolating and not yet traveling.
The snacks category did well in March and April, but his stabilize but low single digit growth as many snacking occasions like parties and lunch boxes have gone away temporarily.
And to get better portfolio baby food saw immediate significant stock up in March, but baby food consumption is not expandable and as a result orders of dropped considerably in April as consumers used up what they bought it.
Remainder to get better brands, which includes things like canned goods I'm in butter soup and salt have benefited from pantry loading and increased cooking from home.
You know almost every category. We've seen are buying rate improve household penetration has also increase most significantly and t. snacks hand, sanitizer and some center store categories like oils and canned goods.
In terms of customers, we saw a significant increase the big Bucks retailers during the initial search and our business at large brokerage grocery chains continues to show strongly single digit growth in April.
<unk> began isolating we experienced a significant increase in E. commerce, where we've been investing for many years and have significant sales are growth, which peaked it over 100% each week and late March has settled back to around 50 per cent growth per week versus year ago. We expect the E. commerce channel to continue to grow materially and pain as well because.
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In North America, we don't do much business and small floor matter food service. So our sales of mostly benefited from the pandemic and are expected to continue to grow modestly and q. for when factoring out the businesses that we've exit it this year.
Let me give a little more color on how they get bigger and get better segments performed within the corridor.
Get bigger brands, we had gagik two three would start to show improvement and top line trajectory in North America, where we were focused on restoring growth.
The court or our get bigger brands grew more than 10% again, it's important to note that are get bigger brands were growing high single digits before the demand surge in March which should give you competence to the improvement inspect expected and in fact materialized before the crisis.
That even thought margins for the get bigger brands were over 14% something we've accomplished in five over the last six quarters those results or even more impressive given we increased our marketing investment by 120 basis points versus year ago.
Let me get better brands, we continue to focus on improve profitability.
Pleased to report that are either dollars in margin more than doubled versus year ago in the corridor. Despite the anticipated shrinking top why he's profitability improvements and corresponding sales declines as a result of aggressive productivity initiatives skew rationalization reduction in low are alive spending.
And product redesign that we've been working on since Investor day last year.
Our continued simplifications you're on our in our continued simplification journey. We were also able to sell to low margin nonstrategic businesses within the quarter, Europe's desk and cast off.
Late last week. After the corridor ended we also sold our rudy's business. These businesses collectively had about $30 million in sales and eat a of only about a million dollars, but they consumed a disproportionate share of management time and added supply chain complexity.
In addition, we've also started shutting down several brands that lacks scale and profitability these brands, including to bowl little bear and gluten free grocery at approximately collective annual revenue a $4 million and adjusted adjusted either zero.
Between the vested in discontinued brands, we've eliminated approximately 200 skews 10 cold manufacturers are only direct store delivery system and one manufacturing site, it's fits with our continuing plan to simplify the business and improve our margins and growth potential going forward.
Turning to international we had a solid quarter with flat sales expanding gross margin in double digits, either Doc wrote them constant currency.
Well most of the trend as we saw in North America are similar here. There are two important differences once we have a scale fruit business that makes up approximately 20% of the international sales.
As a large food service component and those sales have dropped to almost zero in late March and the trend continues in Q. for in addition, while still supplying the grocery side of the business, we have significant stranded overhead and input costs that are further impacting profit <unk>.
Excluding the fruit business about 30 per cent of our international sales or private label. These businesses have done quite well as consumers who are concerned about their personal finances tray down to lower priced items.
Given those two factors somewhat balancing out we're pleased that we delivered flat sales overall and strong large and expansion. It's further evidence that we have solid businesses and strong management teams behind them.
One other important points that I want to draw your attention to is how we managed to excess capital in the corridor I'm previous calls you'll recall that we paid down in debt to lower our interest expense for the year in March when the stock market dropped markedly. We believe that are shares were significantly undervalued and consistent with our strategy, we utilize capital to buy back.
Ours, we deployed approximately $60 million to acquire 2.4% of our outstanding shares at a price of about $23.60, while that purchase had minimal impact on the average your account and a quarter and you will see its impact on E.P.S. and cute four and beyond.
Given are strong results in outlook, let me spend a couple of minutes explaining how are we prepared for covet 19 with the goal of giving you confidence that we are also well prepared for the future as this pandemic continues.
From the beginning our leadership team had a focused agenda that one take care of our employees and to ensure business continuity and continued success with regard to our employees. We ensure that they were safe and can provide for their families. We were early adopters of all recommended actions to prevent the spread of the two of the disease and in many cases adapted them before.
The government directed us to do so we've also consistently met or exceeded all government guidelines for directly addressing those employees, who can track the virus.
In addition to crisis pay for all front line workers. We also recently established a program to help employees, who suffered severe economic hardship. During this crisis with free financial grants from the company to help ensure that day and their families are safe and have food on the table.
Our second priority was ensure that we kept the company on track to deliver plan and meet consumer and customer needs. We learned early in the pandemic from our European business that there would be supply disruptions. So we quickly focused on ensuring supply excuse that made up the majority of our sales and profits were needed we ordered extra materials built inventory created.
Formula flexibility and began qualifying secondary suppliers and told manufacturers and our plants. We added temporary labor quickly to create backup coverage and sanitized common areas continuously to meet surging demand reconsolidated shifting orders to get more products on fewer trucks, resulting in service levels in the mid nineties and signal.
Secondly, reduce distribution costs and short we were well prepared to meet the rapid increase in demand and help ensure continued strong performances the crisis progressive.
As the situation unfolded, we also created new opportunities to drive growth and set up for future. For example, we have a small Canadian hand, sanitizer business that grew exponentially, we quickly added capacity to meet demand and expand into the United States furthering further strengthening our relationship which she retailers, while others have been cutting their marketing.
Had been increasing ours and Q3 with new advertising on some brands impact coupon us to <unk> to encourage <unk> <unk> purchases from new try ours and increase market research to set ourselves up for future success. We also quickly developed scrappy innovation on some cooking brands to compliment pestronk pipeline on our get bigger grant there.
Also partnering with customers in new ways to solve their issues and help them grow resulting in stronger relationships for the future.
As we look forward our focus is shifted to the reopening of the economy in a quest for a new normal while we anticipate some meeting occasions will migrate back out of home as economies open we are focusing on several important trends that will help us continue to grow. These include E. commerce growth, where we have tremendous strengthen relationships.
New try or just for many of our new products cash strapped consumers seeking better value increase cooking at home and new consumer sentiment in values as discussed on Investor Day will also continue to assess our portfolio and recategorized brands as appropriate.
While the current environment has impacted our original <unk> plans on some projects requiring some adjustments are overall strategy and it's four pillars amplification capability building cost control and top line acceleration remains intact now more than ever.
We know we have much work left to do but even more new opportunities in front of us our future continues to be very bright.
<unk>, let me turn it over to Javier we'll give you more details on our financial performance.
<unk> good morning, everyone I would like to Ecro mikes bombing in thinking our employees, who have worked tirelessly help our company navigate through these global health crisis, I am extremely proud to work and Hey, I will focus my discussion on our financial results from continuing operations. It companies presenting the results of <unk>.
<unk> pure protein businesses within discontinued operations in the current and prior year period.
Now onto their financial.
Third quarter consolidated net sales increased 1% nearly year, two $553 million exceeding our expectations boring exchange came back on the corner was ahead window for 100 basis points.
<unk>, <unk> rationalizations, where an incremental headwind of about 400 baseball.
When adjusting for these factors net sales increased 6% versus it prior year period Gasque Roman Catholic pale wings, only covert 19 impact.
From it profit profit perspective, as we had gotten huge region <unk> adjusted gross margin and dollar expansion and adjusted even thought margin <unk>.
<unk> for the third quarter, we expanded adjusted gross margin like 282 basis points, resulting in adjusted gross profit of 130 $40 million, an increase of about 14% versus prior here.
Supply chain cost reductions enable by our productivity and you shouldn't is mainly drove the improvement.
Guarantee impact on gross profit was a hand when of about a million dollars in terms of productivity and efficiency. We have made significant progress in the corner as demonstrated by the meaningful improvement in gross margin.
The initial North America skewed rationalization project has been implemented and he's benefiting dedicating carrying consolidated gross margin.
<unk> place greater focus on high velocity skis, we continued to evaluate our portfolio for further simplification to position our sales for 16 to current Empire.
In addition distribution and warehousing costs as a percent sales improves by about 50 basis points versus prior here <unk>.
Increasing volume allowed to company to ship for their truckloads, leading to a reduction in distribution costs.
S G.N.A. as a percentage of net tales was 16% up from 15.2% prior year period.
This was largely driven by increase marketing spending of about 9% versus prior year and increased incentive compensation accruals to match are higher guy.
Adjusted he picked Doc increase to $60.7 million compared to $49.1 million seemed to prior year period.
It's represents roughly a 24% increase versus prior here.
[noise] currency impact on adjusted either got what the handling of about a million dollars adjusted even got margin of 11% represented out improvement of 200 basis points year over year, driven by gross margin improvement.
<unk> adjusted E.S. of 28% based on an effective tax rate of 28.8% compared to 1917 Q3 last year with an effective tax rating of 28.4% the higher tax rate was mainly driven by higher guilty impact and into prior year period.
Now to provide some detail on the individual recording seconds.
Let's start with our North American business third quarter net sales increased 1.9% you ever hear two $320 million exceeding our expectations morning exchanged came back from that quarter was minimal divestitures and skew rationalizations, where an incremental headwind of about 700 basis points when.
Justine for these factors net sales increased about 9% versus it prior to hear period.
Escrow also had the tail wind so they could like 19 impact.
From a profit perspective accused three deliver year over year, adjusted gross margin and dollar expansion and adjusted either got margin handler expansion.
Specifically for the third quarter, North America business expanded adjusted gross margin by 350 basis points, resulting in adjusted gross profit of $84.5 million or an increase of about 18% versus the prior here.
Improve Benny was mostly driven by her productivity.
<unk> teasing or distribution system, given day increase volumes that we experienced.
Adjusted he'd been increased to 49.9 million $42.9 million compared to $31.5 million into prior year period.
Represents roughly 36 per cent increase versus prior here.
Currency impact on adjusted either die was minimal adjusted even <unk>, 13.4% represented an improvement of 340 basis points you over here driven by gross margin improvements.
We are very pleased with the progress that are in North America region has accomplished that far but we have not finished we have identified multiple opportunities to continue to improve our margins structure and we'd planned to begin to execute them once turned to more normal operating conditions.
Looking into the components of the North American portfolio, they get bigger France experienced a gross and net sales of 12.7%.
Well coated 19 was a clear tailoring. These brands were growing high single digits before the meeting March as Mark stated earlier.
This growth primarily came from several product lines are personal care line driven by out buying one step our Canadian hand, Sanitizer brand, which we also introduce into U.S. in April under the Mets clean Brandname are snacks product line, driven by sensible portion as well as R.T. and yogurt line.
Yeah, adjusted even gone margin for these brands improve 50 basis points versus prior here.
In March in 14.8%.
They get better brands, which are being manage primarily for profit showed it gross margin improvement of 480 basis points, and then you'd be down mugging improvement of 660 basis points versus prior year, yielding margins of 21% and 11% respectively <unk>.
Nevin per cent eat that Don margin home to get better brands is in line with our long term guidance of 10% to 12% provided on Investor day last winter.
[noise] now let me, let me shifted to our international business, where results for the quarter were very consistent with our expectation net sales wear slacks prior here and up by 2.2% constant currency foreign exchange represented at 5 million dollar hit wind.
The impact of Coovick 19 on performance what the mixed.
Financial European business to each non dairy product line benefited from continued high demand throughout the quarter R.U.K. business experience mixed results.
One hand parts of the U.K. portfolio, such as they left kitchen, Linda Mccartney in our suit business experience healthy growth.
The other hand, our food business with large exposure to the food service channel experienced decreasing rather than.
<unk> adjusted gross margin and dollars and you Don margin and owners were all lopping the quarter versus prior year.
These results were in mind with our plan.
Now, let me transition to our cash flow and bad energy.
Third quarter operating cash flow improves by $29 million to $47 million and operating free cash flow defined as operating cash feel nice Catholics improved by about $25 million, you $29 million versus it prior year period.
These improvements resulted primarily come stronger earnings and decreasing cash using working cat.
Are inventory $61 million lower than the levels at the end of June 2000 in 1990, driven by the sale of the Arrowhead and Sunspire differences reduction in the number of shifting locations in our network and to high demand from Penn tree, noting that took place in March.
Our cash conversion cycle during the quarter decrease 253 days compared to 61 day in the prior quarter. They seems to be low our target of 60 gauge driven by they decrease in inventory levels Jess pension.
Capital expenditures into quarter, where $18 million compared to $14 million for that prior year period.
Also I've highlighted in today's earnings release any marks Parliament. They company used to $60 million to read purchased shares in March and April 2020 that leads us with that $190 million, an additional repurchases authorized under a 2017 share repurchase authorization.
So we close the quarter March 31st with the cash balance of $42 million neck data $324 million and gross debt than average of 3.3 times.
Now that's turned to the full year out as a reminder, our guidance excludes kills a which contributed approximately $200 million a net sales and $26 million in adjusted even die for fiscal 2019.
We now expect all profit metrics for the full year ending June 32020 to be higher than the Rangers. We previously providing driven by our strong basic fundamentals in higher at home food consumption. As a result, we are now racing throwing a range of 40 year Guy.
It is important to know that the magnitude and duration of increased demand remains uncertain and data challenge we face he's our ability to maintain your level of supply needed to keep up with increased demand.
The outlook, we are providing assumes that our supply chain continues to operate with minimal disruption for the remainder of physical 2000 and Twain.
We now expect adjusted even thought to be in the range of 192 $200 million, an increase or 16% to 21% that's compared to adjust that even with $165 million and teach put 2000 in 19.
Constant currency, we expect adjusted EBITDA to being the range of $195 million to $205 million, an improvement of $16 million versus the low end up a range of our earlier guidance.
Adjusted U.P.S., he's expected to be 75 cents to 82 cents within effective tax rate of about 28% compared to adjusted E.D.S. of 60 cents for fiscal 2019, an increase of 25% 37%.
Forecast has the benefit of the share repurchase.
Costing currency adjusted D.P.S., he's expected to be 78 chance to 85 cents.
Our annual guidance assumes on exchange rate $1.23 for British found and into our night per year for Q. for.
The full year foreign exchange headwind on even got these estimated at about $5 million compared fiscal 2000 in 19.
Interest another x. fans are expected to be approximately $18 million and decrease about $5 million compared to the prior year, mostly driven by lower interest free in addition in April 2020.
Company sought to reduce the future interest rate volatility enter into several floating to fix break swaps U.S. dollars and cross currency east swaps hadn't added benefit of lower interest rates <unk> existing variable rate and lower than prior here rates.
Appreciation and what station in stock based compensation expands are expected to arrange between 65 and $70 million.
55 million dog and fiscal 2000 in 19.
Spent cash flow from operations to be around $110 million consistent with the previous guy.
It's represent the 70 mean another improvement from the prior here.
We were targeting a 15 day reduction in our cash conversant cycle from 75 days to 60 days, we exceeded targeting two three and as a result, we now expect increasing inventories as we seek to replenish expecting levels and create some contingency in case demand turned just again in the corner.
In addition, and we expect capital expenditures of 60 $65 million consistent with our area or guidance.
As we look ahead, we'd be needs that our business models wealth position for long term girl, even with the uncertainty of how long Coovick Nike will influence at home food consumption.
The ability of our team to come together and adapt to changing conditions since become evident more than ever to base quarter. When we are confident in our plan and ability to further progress throughout the remainder and fiscal 2020 M.B. on I will now trying to call back to Mark.
As you can see we've had a terrific quarter and have a positive outlook for the future I want to thank the entire hang team around the world for how they performed during this transit transformation journey, how they have risen to help us thrive during this pandemic and what they're doing to ensure our continued success.
Together, we created a scrappy entrepreneurial results oriented culture. This delivering exceptional results and I really appreciate all that they are doing to transform this great company with that let me turn it over the operator for question operator.
Mm.
Thank you so she would like to ask the question need signal by <unk> on the telephone keypad.
You think a speaker phone <unk> make showed a mute function is to adopt a lotus signals to reach Oh equipment questionnaire and sensation insisted that the one question Oh participant like the follow up questions.
<unk>.
<unk> <unk> <unk>, just a moment <unk>, everyone and also she going to take no questions.
Yeah.
I can't we know take apart from said, David Palmer from ever called I inside.
Thanks, and good good morning, Congrats on this this margin progression that you're pulling off your very impressive wanted to ask you about the guidance implied for the fiscal fourth quarter. Obviously it shows a little bit last gross and what you just saw from.
Eat adopt perspective is that does that contemplate reinvestment and then what's the nature of that reinvestment as you prepare for fiscal 21, and a half a follow up.
Yeah. So personally I would tell you is obviously these are volatile times and as we started moving toward you know reentering reopening our communities summer being home from something occasions are going to gravitate back out what exactly that means you don't know, but there there will be some slowed down and.
Growth rate versus what we've been experiencing in the last six to eight weeks.
That's implied in there, but we do expect at the corner will be up in terms of sales overall with regard to investment yes. There is investment in there and marketing as I said in the prepared remarks.
We believe this is a great opportunity for us to leaning and and be aggressive versus kind of sit back and and wait to see what happens. So we have new AD campaigns, we have innovation coming up and we'll have some flooding things with it if retailers naked. So there is some inclined investment in those numbers.
And then just conceptually for fiscal 21, as you're thinking about those drags to your revenue from ASCII rationalization and Divestures I can imagine that the current environment might allow you to go pedal of a metal on those two things you might find better prices for things you might want to sell and you might.
I find the tailwind, giving you air cover for more aggressive pesky rationalization. So I'm just wondering how you're thinking about those things too we see those drags actually increase before they start really decreasing aside from the innovation less thanks.
Yeah. So we are looking at additional ski rationalization, although it will be less than what we've been doing because we've been at this for a while we got we were doing this for the last couple of years in this company and we have taken out.
Huge amount of unproductive skews the that a lot of complexity and that's part of what you see the margins, particularly on and get better brands, improving so much with regard to divestitures. We continue to work on shedding the tail as I said in the prepared remarks, we are evaluating the situation in some of the things that we may have been.
To to sell we may change our perspective on given the the surgeon demand in this situation, but I I would point out something that that I think it's pretty compelling which is since the January of last year. We just sold about a dozen brands that had $750 million of revenue the collective either.
$750 million revenue was $16 million. So it was about a 2.5% either orange and $16 million, we sold those those assets for $400 million 27 time, even though.
So we have been getting very robust prices for what we've been selling in many cases, we've been selling things that are losing money and getting obviously cash for them. So I think we've been doing a pretty good job of getting extremely fair value for the things that we're looking to develop and your point in this environment, we will be thoughtful and joyful about what we sell.
And how much we're willing to accept given a that demand is up on on most of the items that we so.
Great. Thank you.
Thank you, we know and plus two <unk>.
<unk>.
Thanks.
I just wanted to talk about the new customers Mark.
Been able to.
Get three minutes pandemic.
Exactly how where you get people to market to them and and.
<unk>.
You think it seems opened up the opportunity to teen <unk>, new products and then just to follow up on products.
You know I'd be innovation.
<unk> had been a little bit of a slowing focus more on on the common person.
Yeah. Good collection. So the first thing I would tell you as we've been increasing our marketing for several quarters in a row now so we have been.
As part of the turning around very get bigger brands toward gross we've been investing to bring drier than before we started so the good news is one of those messages were seated in People's minds, when Mary the pandemic hit and obviously given supply issues from many people there was a lot of ran switching.
Non where people are trying new brands of because potentially the one that they're used to wasn't there. So we've had some brands that have had household penetration increased by as much as 50 per cent. So it's pretty significant in some cases <unk>. We are doing now is marketing to those people specifically, so we'd put repeat coupons.
In some of our products, whereas easy for us to do that so that if you try it for the first time you have an incentive to come back and repeat we are using shopper car data and digital social mobile marketing to go after the people that are most likely to be purchasers in this environment, we've changed some of our messaging to.
More relevant sensitive to the environment that were in so we're we're aggressively trying to continue to recruit people and for the people we have to make sure that they're delighted and that we started to form a relationship with them.
With regard to innovation, you've heard bits off a few times on the last several calls about how we've been building the pipeline and two of the bigger innovations that we had launched were t. well on for less still and the flame hot draws on sensible portions the t. well repeat rate is exceptionally high but.
Trials, a little bit lower than we had lights before the pandemics. So we're actually going to do some downsizing to get some more of an opening price point. It was a little bit of a high price barrier for trial, but those are tried to repeat Reagan was very high. So we're very confident in that one and on the Flaming Hot it's already performing in the top half of the category in terms of velocity.
That one's going to be a winter as well we have additional innovation coming out on yogurt and a ton of innovation coming out on T.V. and right now we're trying to partner with retailers to get that onto the show my expectation would be that we may have a little bit lower H.T.V. then we initially.
And host because some of the customers are not resetting right now and they may either postpone the reset for a year or delay the reason, but it's also an opportunity for other retailers right now we're trying to differentiate themselves from their competitors and so we're finding there are quite a few retailers that are very excited about innovation want to use it to show.
They're consumers that they are different from everybody else and that they are bringing new and exciting things to the market. So we're going for with our innovations lambs. Some of the best stuff, we've ever had and we continue to believe that's going to be an important part of our gloves unfold.
Thank you very helpful.
Thank you know taking next question from <unk>.
Good morning, everyone.
Good morning.
Alright, then.
And you mentioned the challenging I think I.
Tend to keep a little supplied Kelly I could you talk a little bit about <unk>.
Challenging oh like to keep <unk> <unk>, you know what potential problems might be I know everything fine now and then like.
If you do I mean to.
Challenges.
Two point, which you can say that pulling back home for monks like.
Aren't you realize high enough like.
To what extent like what happened thank you.
Yeah. So the first thing I would tell you is because we're a global business. We saw this pandemic coming way before you know the government ever said this is going to be a pandemic and so we immediately started building inventory and creating backup sources of supply. So that if something were to happen in one of our factories that we would happen.
Alternative.
So and you have an also remember that we have a business. It's been declining for a couple of years. So we have plenty of capacity. We don't have the capacity is you we have backup supply on I'll call at the top 80 per cent excuse that make up the vast majority of our sales and profits.
And we are well position there what could happen obviously you could have a an outbreak of the virus never require us to shut down the plan for a period of time and you could have challenges into supply chain with suppliers not being able to supply ingredients on time and again, that's where we've been very aggressive and finding backup source.
<unk> flexing formulas in k. certain ingredients become harder to to get et cetera, I would say, we're very good shape with the exception of there's a couple of categories, where we use go manufacturers and the industry capacity is tight so awesome her bronx, they're packing set for pack packaging there there's.
Not a lot of 10 per pack capacity or.
And on Baby Food is another example, there's a very limited number of manufacturers of baby Formula those are probably the two where I'd say, we have the most risk but that said we've also built inventory. So that if there is a short term out into a resort for implant shut down on their side that we've got enough inventory.
To weather the storm so far are service level have been in the mid nineties very high relative do I think what others are experiencing.
I I would stop levels at retail have been much lower.
And so I feel pretty good about our ability to supply.
Regard to the the part of the question around promotional activity a fair number of our competitors pulled all of their promotional spending which alienated retailers. We have knocked on that as yet if we get into a situation, where we have more demand and supply as we would certainly look at something like that but we are trying really hard to use this is enough.
Activity for us to partner with retailers to meet their needs. So they want to promote we're going to promote if they don't have the resources to change. This l. tags and don't want to promote then fine we're happy not to promote so this is a great opportunity for us to become supplier of choice and whether it's the scrapping innovation I talked about or whether it's.
Tailoring our programs.
Very specific needs are drunk dropping from specifically at stores versus in their distribution center were being incredibly flexible here.
And trying to further some into our relationship. So I think we're in good shape elect here and I think we will be malleable, depending on what the circumstances requires.
Great. Thank you very much <unk>.
Mm.
Thank you only know ticket next question, so Mike, allowing something quite some time to though.
<unk>.
Mourning mourning.
Mentioned at your Investor Day, a little over a year ago now that you see a a future steady state profile and so.
Oh, I'm, sorry to 6% and and 13% to 16% margins.
Just as well as you progress since then how far away do you think that might be an adult still you're thinking or or have some portfolio moves gone differently than planned or or is there anything in the current environment that may be sticking up you you think about that any differently now.
Yeah. So <unk>, you'll remember we distinguish between to get bigger brands and they get better plan to get bigger brands instead of the mid single digit top line gross and and 16 around 16% either die and on the get better brands, We said it would be.
Hi single digit declines on the top line with margins in the 10 to 12 range you Miss quarter to get better brand had 11% even <unk>. So they are already there and and they're already within the top line of what we describe the get bigger brands also robustly, but we can can you do.
Invest in marketing so we haven't quite hit the 16% either don't largely because we keep adding marketing to the equation, but we're very steady in the 14% plus even though margin on those brands as well. So we're well on our way to wherever we said we would be in North America.
We have a little bit different circumstance and our international business given a fruit business that I talked about given that we have 30% of our business there and that's probably the label that the margins there will be a little bit lower there more than the 13% either the range.
But strategies coming to life. The margins are materializing and yes. There is some benefit in the short turns off line numbers from October 19, but we're we're really confident given the trial, we're seeing given the retailer response that we're seeing given the huge margin expansion that we're seeing and honestly, we have a lot more room in the mid.
You know, we're doing some amazing things and you can see it in the numbers that we've got but we still have probably.
80, plus per cent of our trucks that we shift don't go out. So if we can fill up drunk, which is part of what we're doing and this pandemic of we can get standard bracket pricing in place we can get a lot fewer trucks on the road with a lot more efficiency in our costs bucks or so we'd make huge improvement, but there's a lot more runway and so I'm I'm bullish.
On the top line and on bullish on the middle of the P. and L. and I I feel confident we'll get there.
Timeline was three years from Investor Day, we're halfway there in terms of time regular about 16 months into into the journey I think the three year journeys in Jackson and hopefully, we'll get there a little earlier.
Well, that's really helpful and just the follow up on your thinking about you know any economic stress.
You know some some of what you've seen in the past and and how you're consumer typically behaved and what some of the waves or you might be able to adapt and adjust if it's necessary.
Adapt to have the consumers they.
Oh, the receptionist Gotcha Yep.
Yeah for the first thing I would tell you is.
Because we have many organic type products non G.M. low gluten free et cetera, we tend to appeals more raffling consumer so when you hear about the massive unemployment that we're experiencing those tend to be lower income workers and less of our target. So I.
I think we're a little bit insulated in that regard as long as the more affluent people feel like they're you know their income to secure the stock market's doing okay, and they're not too worried about their future. So I I'm. The one hand I think we're we're relatively insulated the second thing I would say at least in Europe, We've got 30% of our businesses in private label. So we actually it will be.
A beneficiary of those lower income consumers, who trade down.
It's a a significant part of our business there and the third thing that I would say as well you have done an exhaustive review of all of our products here in the U.S. and where we think we have a price point that it is two premium if you will we're looking at alternative sizes entice going so.
I said before for example on this call that our garden of eating tortilla chip business.
We offers considerably more product at a higher opening price point than everybody else. So you can get four and more houses or five more houses, but you're going to pay a dollar more for it if the consumers cash strapped they'd rather pay a dollar less so we are already in the process of downsizing that offering and getting to a more competitive opening price when we're doing.
And a number of places that work was already under way before the pandemic because we we saw the issue in the opportunity and so I feel like we will be pretty well positioned to compete in all of the categories that were in and we should be able to whether a recession relatively well.
There's a couple of thinking.
Oh.
Thank you we know taking next question from <unk> <unk> chance. Please.
Hi, Good morning gets Mad Fischbein on <unk>. Thank you for the question.
I believe you set a majority of the margin improvement in hand in the corner was attributed to the many initiatives that you hadn't. Please prior to cope with 19, so maybe not as much attributed to cope in 19 related operating leverage is that because the quarter was only partially impacted by the pandemic.
And maybe also given that you have a different co manufacturer Nixon and some of your public company peers.
And and how does d., perhaps more fragmented mark manufacturing footprint given the history of the company's built up over time playing into that overall, just trying to get offensive how should we think about that contribution split from March it improvement over the next couple of quarters, probably see him a more full cope with 19 operating budget, which benefit.
And then just a quick follow up a mark the council penetration comment you have a sense of how much of that 50% increase in helpful penetration for some brands are new houses sort of category, perhaps like some consumers are buying in different categories for at home consumption. Then we're <unk> where's it mostly upbringing and change related thing.
Thank you very much.
Yeah. So.
Let me ask the second one for so with regard to household penetration I think it's a combination of new category buyers and new brand buyers in some of the categories people coming into the category through our brand, which is interesting, particularly in snacks. The terrorists at spring in the sense of abortion brand, we tend to attract new users into the category. They have a good experience.
And then they stay in the category. So it depends on the category, but in some cases.
We are we are seeing a little bit more of any new buyers in some cases, it's more interesting buyers switching around with regard to the first part of the question remind me alignment on the manufacturing sites. So we haven't had a robust.
Oh productivity, a set of initiatives going well before kohut said, we were making significant improvement in the middle of the P.N.L. beforehand. You are right that operating leverage the you know the absorption benefit of producing significantly more crowded in our manufacturing locations really wasn't seen in the queue. Three p. you know because.
You are those products are in the warehouse undershipping into for the stuff that you were making and the second half of of a few three so we will see that fixed overhead absorption benefit in q. for.
We are there are some one timers in here that are helping the middle of the <unk> I would be candid and tell you that in this environment customers are relax and some of the fines and related to service because they they just want product. That's a one time benefit I would say certainly obsolescence, we're able to sell through.
Everything so if we had some things that were aging that might have aged out before they are being sold so far off the lessons is down a little bit because of Cove, and but love. The vast majority of the benefit is off being a more efficient operator and things like filling up products, which is something that we've been on a journey to do.
We don't have standard bracket pricing like everybody else. So there's no incentive.
For people to to fill out a truck we're working on that and then we're going to make that change in F. 21, but this was an opportunity where people needed product for us considering what we only have so many bayes in each one of our distribution centres. We've got to send you a full or truck you gotta consolidate all your orders because we've got somebody or so it was a catalyst to change.
The behavior on the side of the manufacturers, it's been very beneficial to us and we will now make that a permanent change and tell them. What you have to order or at least a half a truck or whatever whatever the minimum number is that they were allowed to buy before will be raised as a result of this and that will be a permanent change that will benefit. So it it's a balance of some benefit that.
We're getting naturally and some benefit that we're getting from <unk>, but I want you to know there's there's just huge productivity automation has been a big part of our agenda.
You can w. cost, but I just mentioned, there's been a big part of the agenda getting rid of the the low margin excuse that out a lot of complexity, which is resulting unless changeovers in the plant has been a benefits a lot of this is is our hard work, it's not just a a windfall from Cohen.
Thank you very much for the detail.
Thank you know take on next question from the Chopper from some trust.
The building can take my question.
Well.
Just a quick one on the European business you guys noted that you smell some really trends.
Oh.
Self in U.S., starting really in Europe, a warning if we're seeing anything as part of Europe starts to come out of there.
Slumped down restrictions any early reads on.
Shipping friends back keep food service business anything on consumer D. stuff that you may be able to use as you look to the U.S. was much Becky.
Yeah. So it it is early like us kind of sticking to telling the water here to open society, they're doing the same there like what's interesting about Europe is it's so many different countries with so many different stances on this thing.
But where where they are opening what we're seeing if they're doing it gradually we're seeing consumers still haven't fear of going out in public to just because the rest runs opened doesn't mean all of a sudden everybody's flocking to the restaurants I think we're seeing that people.
Want to get outside so whether it's the beaches, whether it's to the mountains, whether it's part the first step is for people just get comfortable leaving their homes, but they're still eating in their homes, it's not like they've flocked back the old behaviors and those eating occasions have rapidly migrated to away from.
Home at this point I think with regard to opening offices, all we see fits and starts they opened they can they can't figure out social distancing they closed for a week, they try and revamp and adjust and so I think it's it's it's a trial and error process I think everybody's doing it slowly I think you're going to see the same thing here when I see it in here.
Some states in the U.S. or opening malls, and and movie theaters and the like I have a feeling that they'll end up needing to take a step back if they get too aggressive there because there's still a fear catching the virus and there's a lot to be figured out in terms of social distancing and I think consumer psyche has changed it's changed.
Europe exchanged here and so I think it's gonna be kind of a slow steady progression back to whatever the new normalize the only thing I would say that I think it's also interesting here as as you know we've got a huge U.K. business, you came up behind us and Europe, whereas you know, Austria and Germany.
And and much of Europe is ahead of us.
So it's a good we've got a pretty big business in the U.K. and they are in lockdown. They are they are they've got ways to go they've got 30000 deaths. They are they are in in the midst of trying to bend the curve, where we are we have been sick or so I think it will be a little bit slower returned to normal and.
In the U.K.
Mm.
Can be moved to the next though.
Yep.
Okay, but now they can next question <unk> from wanting to talk.
Then whining.
Hmm.
Well first about you know I I'd love to get.
How much the parentheses package.
Quandary well.
Okay.
We are with arms went well, let's tracking afforded marched that's why they started you can.
Yeah, so as I as we don't yeah.
Over to a million specific guidance on the top line, but what I didn't stay in my opening them are remarks were that they get bigger brands were growing in the high single digits in the first two and a half months of the quarter before this happened and we ended up in the low double digits. Afterwards, so you can put some map to that and and.
The general sense of how much the the the virus improve the get bigger brand and we saw some litter trained on the get better better brand. So the less.
The last three weeks of the quarter certainly added some volume to what was already a business that was moving in the right direction and you'll remember on the last earnings Gall. We were very clear that we were going to bend the trend I'm gonna get bigger brands and that we were going to have a robust border back in high signal digit growth.
So we were doing that in the case of Europe against been more of a mixed mixed bag in some places like fruit, we saw a huge drop in demand and in other places like private label, we saw an increasing demand. So it's a little bit more of a mixed bag.
I wouldn't say there was a in aggregate almost no benefit in total in Europe, because somewhere favorable one summer unfavorable but here. It was definitely a few hundred basis points as improvement on the top one.
When I would add those as we go into April one thing that's important to know consumption was ahead of shipments in March and so we have added benefit in fourth quarter of the shipments catching up to consumption because the demand surgeons. So massive in such a short period of time when that pantry loading behavior happened that.
You know retailers couldn't keep product on the shelves and we tend to have a little bit longer supply chain because much of our volume goes through third party distributors. So April is a real bucks a month, we're off to a good start with a quarter and and our consumption continues to be a steady at a much higher level than it was before the virus.
Okay, Yeah, I'm not quite so yeah. Obviously, you know that's quite environment provides a great opportunity.
Trial, and I realize it's early but.
Oh repeat.
<unk>, alright, or anything to suggest that some other.
Hmm.
Yeah, it's too early to give you repeat data are purchased cycles are you know tend to be 60 days 90 days in the case of some things like spectra Moyles. It could be you know six months between purchases. So it's too early to tell what I would tell you as we've seen the most robust.
Increase in trial on snack.
On T.V. has been exceptional trial on our oils business spectrum of soup business imagine soup.
And so it's it's early on in the case, something like Super coming out of the cold weather. So the repeat cycle will be very long in the summer, but we just don't like we don't have the data yet it's too fast for for repeat purchases to be.
I'll be evident at this point.
Oh, Okay. Thank you so much.
Oh.
I get looks like they're not sort of course since at this time selected <unk>, but do you.
Yeah. Let me just then by again thinking all of the employees here for their hard work. This has been quite the cat and I think a a crisis is a good way to assess the quality the organization in its ability to respond very proud of what we've been able to accomplish I'm very optimistic about but.
Future, we have well positioned we are we are playing offense work thinking I had versus reacting.
And being very proactive so I think the futures very bright and I appreciate everybody support and we'll we'll talk you later, thank you all.
Thank you <unk>, let's try this conference calls thank you for participation, but now discussed given lines.
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