Q1 2020 Earnings Call
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Gentlemen, thank you for standing by welcome to be flowers Foods first quarter 2020 results conference call.
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I would now like to hand, the conference over to your Speaker today, J.T. read senior Vice President of Finance Investor Relations. Thank you. Please go ahead Sir.
Hi, Good morning, everyone yesterday evening, we released our first quarter results.
Certainly a quarterly slide presentation posted on the Investor section of the flowers foods website.
Thank you is available on the FCC website before we begin our discussion please be aware that it may include forward looking statements about the company's performance and other matters such as the impact of the code at 19 Pender. Although we believe these statements to be reasonable they are subject to risks and uncertainties that could cause actual results.
Differ materially in addition to the matters will discuss during the call important factors relating to flowers foods business are fully detail in RCC advice.
At this meeting on the call. This morning arrives at loan flowers Foods, Chief Executive Officer, Steve Kinsey, Chief Financial Officer, Ralph I'll turn the color you.
Okay. Thanks, J.T. Good morning, everybody I know, we're one of your last calls and that's what's been a really hectic, earning season I'm sure for all of you. So thanks for joining us today.
On behalf of flowers I do want to express my hope that you and your family and the ones you care about are staying safe and managing through this as best you can.
These are certainly challenging times for everybody and we've all had a pretty much just every aspect of our lives both at home and at work.
Our collective thoughts and prayers are certainly with all those who have been affected by the virus.
Including members of our own flowers family.
As we work to manage through the crisis, we remain committed to three key priorities.
First and foremost obviously, it's imperative that we maintain a safe workplace and support our employees in every way possible.
It's crucial that we fulfill our obligation as a key part of the nation's food supply.
And third as always we're committed to supporting the communities that we serve.
As far as our team goes it's really difficult to adequately describe how incredibly proud I am serve them.
Across our company from plant operations to sales distribution.
Head office and support staff their performance has been flat out amazing.
I firmly believe that our success during the quarter.
Reflects the collective loyalty.
Commitment and passion of our team.
Our core values of service integrity and character have always been and always will be our guiding light and those value served us well as weve navigated previously unchartered waters.
I'm, especially grateful for the hard work dedication and personal sacrifices of our frontline workers.
Last month, we distributed incremental bonuses to our heroes to recognize their extraordinary efforts.
Our top priority is ensuring the health and safety of the team and in the early days of the crisis, we established a pandemic steering committee and a task force.
Led by senior flowers executives.
We've carefully followed guidance from health authorities and we've instituted a number of safeguards for the protection of our employees, including enhanced sanitation wells and temperature screenings travel restrictions company provided mass remote remote work.
And of course, social distancing.
We've also enhanced our benefit programs that are enabling our employees affected by the virus the care for themselves and their families.
Despite these efforts we have had some confirmed cases and while certainly one affected employee is one too. Many we have been fortunate in that we've experienced relatively few cases overall.
And I think that robust bakery training guidance vigilance constant communications from our pandemic task force are largely responsible for this result.
So heartfelt. Thank you to all the members of the steering Committee and the task Force.
As well as our regional Vice Presidents plant general managers and the broader team for helping us maintain the safe conditions of our facilities.
We take very seriously our responsibility to help feed America.
And we have an enormous responsibility to ensure our products are readily available to our consumers.
No because our bakeries are strategically located around the country and close to the markets. They serve.
We were able to supply the market despite the unprecedented increase in retail demand.
During the height of the panic buying in March we streamlined our product assortment just like we do in advance of a hurricane but in this case, we did it virtually nationwide.
That allowed us to maximize production by focusing on longer runs of our best selling items.
Furthermore, we were able to reallocate some of our foodservice production to support the growth in the retail channel.
Our production teams did an amazing job keeping up with the changing marketplace and ensuring our customers and consumers had the products they needed.
For a number of weeks there they were literally running around the clock.
And our independent distributor partners played a key role.
And continue to faithfully served their markets despite the personal risk.
And finally, we have a deep connection to the many communities we serve and as always we're supporting them. During this challenging time.
That includes donations of food and supplies from our bakeries throughout the country to their local food banks hospitals and first responders.
Like many companies this year, we're conducting our annual shareholder meeting virtually.
And so we made the decision to donate a portion of the funds budget for that meeting to second harvest to South Georgia in conjunction with feeding America.
Flowers is a feeding America mission partner donating more than $10 million worth the baked goods last year.
And this most recent gift enables the provision of approximately 450000 meals for the hungry right here in South Georgia.
Some of our bakeries with underutilized foodservice lines have worked with feeding Americas regional warehouses to provide millions of bonds to food kitchens in need.
So these three parties maintain the safe workplace, helping to feed America and supporting our communities have been our North star and have helped to guide us through.
So later in the call I'll discuss the current business environment and the steps, we're taking to deal with this extraordinary situation, but first I want to turn it over to Steve to review the details of the quarter and share our current outlook for 2020 C.
Thank you Raul and good morning, everyone.
I'd like to also Echo Rob's comment that express my sincere thanks to our team whose efforts during the.
Nothing but outstanding.
Our quarterly results are important.
The president environment, we think it even more important to go beyond just reporting the numbers.
And also provide as much clarity as we can about what drove our performance in the quarter.
What we are seeing presently and what could occur over the remainder of the year.
Our look into the future no better than anyone else.
But we are committed to offering as much transparency as possible given the uncertain times in which we find ourselves.
Now turning to the quarterly results.
Given our first quarter in 16 weeks and includes the first two weeks of April our results were strongly influenced by Coven 19.
Looking at the cadence of our topline during the quarter.
Most food companies, we experienced the soft January.
Sales improved through February in early March.
Prior to the widespread shelter in place orders.
What those orders took hold in mid to late March we saw our retail sales accelerate as consumers again any more meals at home.
As a result, we generated record earnings and sales and deliver a second consecutive quarter of adjusted EBITDA margin improvement.
Consolidated sales increased 85.5 million or 6.8% quarter over quarter.
We estimate the sales increased by approximately six then I have to 7.5% due to the impact of the covenant and endemic in the quarter.
Price mix drove 6.2% of the sales increase the demand factor being the shift in mix to branded retail items due primarily to consumers anymore mills at home.
Volumes contributed 0.6% to the overall sales increase with retail channel volume growth offsetting declines in the food service and other non retail channels.
Looking at sales by channel.
Ended retail sales increased 133.8 million or 17.7%.
Brands continue to thrive with particular strength from Nature's own Canyon Bank Health Dave's killer bread and wonder.
Store branded retail sales decreased.
Roughly 1 billion or 50 basis points.
Increases in sales of bread buns, and rolls was offset by loss for branded breakfast business.
And lower volumes in store branded cake.
Foodservice and other non retail sales decreased by 47.3 million or 15%.
Lower volumes due to business disruption or most of our non retail customers caused by the pandemic drove most of the decline.
We saw these declines across all categories of our foodservice business, including QSR wrong on distribution and schools and other institutions.
In the quarter growth margin, excluding depreciation and amortization.
Increased 190 basis points as the mix shifted higher priced branded retail products.
Partially offsetting that benefit were 4.1 million related to appreciation bonuses paid to frontline workers and $1.7 million of startup costs incurred when the ongoing conversion of our Lynchburg, Virginia facility to an organic bakery.
Excluding items affecting comparability detailing the relief adjusted EPS DNA expenses increased 70 basis point as a percentage of sale.
The shift in product mix from non retail to branded retail resulted in higher distributor distribution fees.
Workforce related costs increased primarily due to $2.1 million appreciation bonuses paid to frontline workers.
Also due to performance, we recorded higher employee incentive costs.
Considering the economic uncertainty during the quarter, we recorded additional bad debt allowance as of 2.7 million or certain retail for certain foodservice customers.
GAAP diluted EPS for the quarter would the loss of three cents per share.
Loss was driven by 41 cents noncash charge related to the termination of a defined benefit pension plan.
During the quarter, we transfer the remaining benefit obligation and administrative responsibilities of our largest defined benefit plan to a highly rated insurance company.
This was done as part of our pension risk mitigation strategy, which has helped to significantly reduce our exposure to changing and pension liabilities due to falling interest rates. We are pleased that this transaction was completed inline with our forecasted fundamental impacts both cash and noncash.
Excluding this charge and the other items affecting comparability detailed release adjusted diluted EPS in the quarter was 41 cents per share.
Nonsense compared to the prior year quarter.
Based on our best judgment and analysis, we estimate the changes in the marketplace.
And all the independently called GAAP and adjusted EPS to increase by approximately nine to 10 cents per share.
Turning now to our balance sheet liquidity and cash flow.
In the first quarter fiscal 22, any cash flow from operating activities increased 10 million to 106.2 million.
Capital expenditures were 21.7 million and dividends paid were 40.3 million.
Our financial position remained strong.
At the ended the quarter net debt to trailing 12 month adjusted EBITDA stood at approximately 1.8 times.
Now from two times, the 2019 year end.
Given the significant impact the covenant team has had on global financial markets.
Out of an abundance of caution and to ensure liquidity these uncertain environment.
During the quarter the company drew an incremental 200 million on our credit facility.
At quarter end, we held approximately 253 million in cash and cash equivalents and had 266.6 million of remaining availability on the credit line.
All told we have been pleased with how the business has performed in this uncertain environment and we expect to reduce these excess borrowing overtime.
Now turning to our outlook for the rest of 2020.
As we think about the year going forward like most companies, we are navigating an uncertain business environment.
Putting together our outlook rebalanced, our allfast first quarter results against potential scenarios that could play out over the rest of the year.
Based on this analysis.
In the most likely scenarios, we are forecasting sales growth in the range of 2% to 4%. This includes the 50 Threerd week, which is expected to contribute approximately 1.5%.
We are forecasting adjusted EPS to be in the range of one dollar to dollar eight per share which includes the impact of the coven not team pandemic.
As I said, there are a wide range of outcome number which could result in sales and adjusted EPS outside of the ranges we are providing today.
In a moment, Rob will share more color on the factors, we considered when setting guidance.
For 2020, we are targeting capital expenditures in the range of 95 million to 105 million, which includes approximately 19 million related to the conversion of our Lynchburg bakery to an organic production facility.
We expect continued strong cash flow generation and our capital allocation priorities and velocity remain consistent with our focus on maintaining.
And maximizing return on invested capital and growing shareholder value.
Thank you and now I'll turn the call backdrops.
Okay. Thank you Steve will suffice it to say the current situation is certainly unlike anything we've ever seen.
To provide you with some perspective I'd like to walk you through the environment. We saw in the first quarter, how we respond to that and then and then what we're seeing now so far in the second quarter.
As Steve said the quarter began with sales roughly flat for the first 10 weeks.
Like a lot of the food industry January was particularly weak for us.
We were up against a difficult comparison relative to the prior year, primarily due to early snap payments and some winter storms that occurred in 19.
We saw things begin to recover in February in early March and then at the outset of the crisis, we saw jump in net sales with our week 11, a pop approximately 12%.
Yes consumers began to stock up on groceries in anticipation in anticipation of stay at home orders.
And that performance continued until the last week in the quarter, which was comping against a really strong Easter a year ago.
Sales momentum than resumed in the second quarter with the first three weeks coming in at approximately 7% to 8% over last year.
The the primary driver of the sales growth has been our branded retail business, which is experiencing growth far more than we would normally expect under normal circumstances.
Having increased 17.7% in the first quarter.
During the peak of demand in March our weekly branded retail sales growth exceeded 70% versus the prior year.
In the final weeks of the quarter the rate of growth did moderate but remained elevated at about 20% above prior year.
Looking at the overall category, while it showed some nice growth I am happy to report that we outperformed the category by large margin.
Right data shows dollar sales of fresh packaged spread in the quarter were up 13%.
Flowered branded bread sales grew 21.2% in the track channels.
Our top brands performed especially well tasty cake was up 3%.
Nature's own was up 18 wonder was up 30.
Dave's killer bread was up 32 and Canyon Bake house was up 77%.
As I mentioned earlier, our financial performance in the quarter was primarily due to our ability to quickly respond to market place demands.
From the very beginning of the crisis, we streamline production and sped up service to the market and our customer shelves, where in large measure wells stopped.
Also contributing to market share gains were new products from our leading brands, which continue to attract consumers and our DSD distribution model.
And in times of rapidly increasing demand like what we saw in the quarter.
That advantage becomes even more apparent as our itps worked tirelessly to keep product on the shelves.
Not only did that distribution advantage result in higher sales in the quarter.
But we also benefited from much greater numbers of consumer trials.
For example, one major retailer reported that more than 2 million households tried our brands for the first time during the quarter. That's just one retailer.
And we attribute that largely to our quality and the availability of our products.
So we certainly hope to retain a number of these new consumers and realize a longer term benefit as a result.
As consumer spend more time at home, they're shopping behavior is also changed.
With fewer in store visits and greater use of online shopping and we think this will continue going forward so to attract and retain these new digital consumers, we shifted advertising dollars away from traditional media and increased our ecommerce budget.
The result of the shift in consumer activity and our greater emphasis on the E. Commerce category was a significant increase in bread sales through that channel on the quarter much of which occurred in the last six weeks.
[noise] ecommerce sales and tracked channels of nature's own fresh bread and rolls increased 80% dk be was up 86% and wonder was up 274%.
We believe the advantages of powerful brands are even more pronounced in the growing online channel and we hope to attract many of these new buyers by working to build strong meaningful connections with them.
Now in contrast to the strong retail sales foodservice results have been pressured as many restaurants closed or had to sharply curtailed service.
The timing of the decline directly corresponds to the much higher retail demand that we saw as the crisis unfolded.
As states began to implement stay at home orders and other business restrictions are foodservice results were negatively impacted beginning in mid March and then worsening into April.
So to give you a sense of the magnitude of that decline in the final four weeks of our first quarter non retail sales were down more than 40% compared to the prior year period.
Despite the decline in non retail sales, though our adjusted EBITDA margins did increased 120 basis points.
Again, a primary driver of that margin expansion is the flexibility of our bakeries, many of which can produce a variety of products serve both retail and non retail customers.
So as the demand for foodservice price decline, we were able to shift production to our retail products, which obviously, we're experiencing much greater demand.
So although total volume in the quarter was relatively flat it was that mix shift combined with lower steel product return.
That primarily drove the margin expansion in the quarter.
Opportunities often come disguised as problems.
Our recent results are particularly instructive relative to one of our strategic priorities portfolio optimization.
Which we continue to work on even as we manage through the crisis.
Our performance in the quarter illustrates the significant potential of our optimization work.
Combining the REIT portfolio mix with an optimal bakery network structure can drive significant margin improvement.
And these results of strengthen our teams resolve to accelerate our work in this area and position ourselves to deliver improved margin performance over time.
So that's really what we saw in the quarter and how we responded I certainly hope that you can see from our results the strength and commitment of our team and the steps we can take we've taken to ensure our success going forward.
Now to give you a sense for what we're seeing so far in the second quarter branded retail sales certainly remain below the peak levels. We saw in March but are holding strong with 20% plus year over year growth rates.
Foodservice results have improved slightly from the first quarter, but they do still remain depressed. So as I said overall, so far in the second quarter, we're seeing total year over year weekly sales growth around 7% to 8%.
Looking forward, it's really anybody's guess, where the market will find equilibrium as as I'm sure. Many of you have as I've reviewed white papers and other resources it seems to me.
But you can find research to support just about any position you want to take.
The paraphrase Churchill life would be intolerable, if we could foresee the any large extent the unfolding course of events. So at the end of the day, we don't know better than anybody else exactly how or when the market will change.
But it does seem reasonable to assume that retail sales will eventually return to more normalized growth as people were turned to work in school and spend less time meeting home.
And when that occurs we would expect our non retail business to benefit as restaurants opened for more normal normal service and schools of workplaces drive cafeteria and vending sales.
The real question is the trajectory and the speed of that recovery.
On the one hand, you can imagine a large amount of pent up demand with consumers kind of itching to get back out in the world as things begin to reopened.
On the other hand, you can also imagine many consumers remaining cautious for some time to come until their condense that the risk of eating out as acceptable I think in particular about the the travel and lodging industry is and how long it might take them to fully recover.
Less business travel in my mind late means a lot less eating out in restaurants.
In any event.
Life is unlikely to return completed a normal right away.
Furthermore.
Summer holiday spending may remain muted to accommodate household only celebrations in fact, one third of consumers already report their memorial day plans will be different this year due to the virus.
How these changes have plans might affect the summer been season is just one of the many many factors we've taken into account as we think about our outlook for the balance of the year.
Given the business shutdowns and the resulting high unemployment. It's also likely that were already experiencing a recession.
We have a diversified portfolio of products that target various price points, but our margins could be impacted if consumers decided to trade down from premium brands.
The good news for US is it because the vast majority of our business is fresh DSD, we're able to quickly rack to changing market dynamics and adjust our mix to meet whatever the market demands.
So looking ahead as Steve mentioned, while we did have a very strong start to the year. The reality is that a lack of visibility does make predictions very difficult.
We tried to give you at least a sense for what variables, both positive and negative could impact our business.
Boring extraordinary circumstances, we feel comfortable that our current guidance range is appropriate.
Well there are certainly scenarios in which our earnings could come in above the range for now and given the facts available to us and keeping in mind. The summer been season is still ahead, we expect our results to fall within existing guidance.
In summary, we'll do our best to position ourselves to succeed no matter what the environment.
Now as I've consistently reminded our team while it was vitally important that we managed well through the crisis.
It's equally important that we manage well as we come out of the crisis.
And that's why we got to keep one I focused on the future and not lose sight of our four strategic pillars.
Focusing on our brands prioritizing improve margins pursuing smart M&A and developing the team.
Our brands are strong and they're driving growth.
Margins have improved for two consecutive quarters, and we expect our supply chain and portfolio optimization program to propel further improvement going forward and in fact, we remain committed to the 10 20 million in savings for 2020 that we quoted to you in February despite the disruption from the virus.
And while we can't comment on specific M&A targets. Our recent acquisitions continue to generate strong results and we're actively pursuing similar acquisitions to help drive growth in the future.
And finally, our talented and dedicated gain team is performing exceptionally well under very difficult circumstances, and they've adjusted nicely to remote working utilizing a variety of technologies to stay connected with each other and the business in fact personally I've been I've been very pleasantly surprised at how well. This has worked for us I.
Unlike many companies we will likely consider increased use of these technology platforms and permanent changes to remote were policies going forward.
In this period of heightened uncertainty our business is well positioned to thrive.
With weekly data on sales trends the ability to shift our production mix quickly and advantage distribution network and a strong liquid capital position, we can capitalize on opportunities as they present themselves and rest assured we're doing everything in our power to do just that.
Naturally will lie if youre ready, we'll open up the line for questions.
As a reminder to ask a question.
Press Star one on your telephone till this draw your question press the pound key.
Please limit to one follow up then bylaw when compared to Q and a roster.
And your first question comes from feels apparel with Suntrust.
Thanks, Good morning.
Good morning.
Have you all are you and your families are doing well.
Thank you as well wanted.
Wanted to just talk a little bit more on to to foodservice maybe just.
Remind us of that kind of the breakdown of both quick serve versus fast casual and then kind of your exposure I mean, I know you have fairly.
National exposure for retail, but just in terms of foodservice how it relates to some of the states that are moving faster to open versus slower I mean be at California versus Georgia.
Sure Bill we normally don't breakout the foodservice segment into those discrete items, but just speaking overall, it's about 20% of our business overall foodservice and we generally serve.
All the channels within suits food service, whether that be broad line or vending or QSR restaurants that sort of thing so.
It is fairly broad across all those categories obviously.
As the as the Lockdowns began and restaurants closed the effect was pretty immediate.
On the foodservice business.
More recently, we've seen the QSR oriented folks on the ones that are able to maintain drive through service a little bit on the takeout side have started to come back a bit.
And even within that and the QSR segment. There are kind of those that are doing better than others.
Some of have maintained a pretty good pretty good basis sales all things considered whereas others.
I've experienced a pretty precipitous drop off in business.
Obviously, the sit down restaurants, the fast casual type things.
They can't.
Can't host any patrons.
They have been significantly affected which in turn significantly affected our foodservice business.
Now as Scott it as state start to reopen it's a little too early I think to really tell.
We started as I mentioned in the prepared remarks, we have seen volumes start to come back, but it's been rather slight so far just kind I would say over the last maybe two to three weeks, we've seen a little bit of improvement there, but not enough to to call. It a trend just yet.
Got it and then switching just to kind of cost, especially promotional and advertising I mean, how did that.
Schedule, you promotional schedule or your advertising, especially with advertising rates coming down on TV side, and I mentioned other areas as well over the next few months, how do you change that and is there any offset with.
I don't know Theres plans for other incremental pay.
Bonus pays or stuff like that that's baked into your guidance.
Sure well on the promotional side I mean, we work retailer by retailer to basically incorporate the plans that they would like to they would like to put in place I mean overall I would say promotional activity has been a little bit lower during this during this period.
Advertising dollar wise as I mentioned.
We did have.
A pretty robust advertising budget set for the year, but we have shifted some of those dollars away from traditional media and in addition to that actually is.
Implemented some increases mostly targeted at digital and the ecommerce channel.
Got it okay. Thanks to the color stay safe sure. Thank you.
And your next question comes from Rob Dickerson with Jefferies.
Great. Thanks, so much good morning, everyone.
Morning.
I do hope you're refineries are doing well sounds like everywhere flowers is great job.
Regarding Brad that.
Thank you for that too.
So I guess I just have a bunch of questions I'm trying to keep it short though.
In terms of the guidance.
Like you said upfront you said, you're basically the lack of.
Those reporting on on a calendar basis, you've had companies lift guidance keep guidance increased guidance, you're you're you're holding guidance for the year speaking more specifically to the top line.
But obviously the first quarter came in very very strong given the appropriate left.
And then you have comments around the first few weeks of the quarter around 70%.
So I guess the first question I I have is.
I'm not sure if you can potentially dimensionalize.
So.
But your base case, and if we think about.
Branded.
Retail versus private label versus food service and I, just asked that obviously because once you X out 50, Threerd week, we're kind of talking I'd say, one or 2% organic.
But the first half of the year, obviously seems fairly strong so trying to understand better what could decelerate maybe in that back half and I know you mentioned bonds. This summer of its still just given what that first how could be it seemed like a little volume pressure.
Might not be that big of a deal.
My follow up.
Sure It will Rob, let let me start and Steve May want to provide some additional color, but I mean, what we consider to a variety of things as we as we thought about gone, it's obviously, where we landed was.
Was maintaining what we had as we looked at at various outcomes and scenarios that could take place for the balance of the year.
Trying to trying to take into account as you said the really outsized results of the first quarter, but also.
Tempering that.
Against very uncertain outlook for the remaining three quarters for US we felt it was it was most prudent and most reasonable and and given what we know today at least.
The most likely outcome would be that we would fall somewhere within the current guidance range.
Yes, I think the the real uncertainty is centered around where everything settles out and what I mean by that is.
How long does the elevated retail environment remain elevated.
And then on the other side what is as I said, what is the trajectory and speed of that foodservice recovery and the end the balance between the two.
And also factoring into that foodservice recovery is how it recovers because I'm kind of to Bill's previous question in the mix of our foodservice business. If it if it turns out to be the case that what recovers the quickest and the and the most is the QSR business that just so happens to be the lowest margin foodservice business, we have and so from a mix standpoint within.
Foodservice, obviously, that's that's not the the.
The optimal outcome for us so.
There are there are a variety of scenarios, we talked about the summer been season, how much is how much is that going to be affected I know in my home state of Florida, you still cat rent.
You keep still can't do rentals Beach rentals and Florida for example.
And if that does open up before Memorial day, It's limited it's going to be limited to end state residents note nobody from out of state can can rent and then there's got to Theres got to be like a three day waiting period in between rental. So it's just those kind of restrictions that you can see that being somewhat disruptive to that really important summer been season for us and it's just it.
And today, it's just too early to make that coal and so again, we just thought the most prudent.
Conservative way to handle this was not to pull guidance. Because we also thought that was extreme that that was not not necessary. We feel confident on what the range that we have out there but by the same token.
Too early to make any other any other Justin Steve anything else you want to add to that just one other comment Rob I mean, obviously the unemployment rate in unemployment continues to be a national concern.
And in fact that on a consistent how that will impact the consumer I think Ralph mentioned in his comments trade down from premium to non premium even on the retail side.
He said we to service the market, we just like we typically do with Hurricanes, we shifted the long runs of products, there's not a lot of changeovers.
At market kind of normalize and you start.
Bringing back some of that SKU assortment to the market. There's also the risk of shift even with the.
Eating at home, so just concerned about that.
Factor as well so you couple that with kind of the trajectory of the recovery around food service.
The country opens back up we thought it was just as Ralph said prudent to remain.
Where we are today until we have more clarity.
Okay that all makes complete logical sense and just for the follow up.
This is more of a I guess could have a theoretical.
Question around DSD, you mentioned, there with the larger shift to online.
So I guess one is.
Obviously in the near term, there's there'll be no change to your DSD system, but kind of more conceptually do you do you need to think about if there are a longer term effect.
How flowers would attract those and then really quickly.
Just any commentary made from you Steve just on kind of the go forward.
Mainly in Q2 around any incremental SDMA costs driven by cobot. Thanks.
Yes, good question, Rob and it is fascinating to watch these changing market dynamics.
You know did the rise in ecommerce, but still overall it still pretty small I mean, we quoted you some pretty high percentage growth numbers, but bear in mind, that's off of a relatively small base, but.
We believe that.
Some of these changing behaviors.
Yeah might be permanent.
And you know as consumers were almost almost forced in a way.
To adopt a different way to grocery shop.
Yes, they've got more comfortable with along the way too I mean, you guys have seen the number of employees that Instacart. For example is higher than it does that alone demonstrates the just the wild growth of this and so you as the marketplace changes, we'll have to it will have to change with it certainly not prepared to comment on any any changes to our our distribution.
System, we don't have any plans to do that currently.
But certainly you know as the market changes, it's incumbent upon us to to evolve with it.
Rob one file one follow up on ROE comment.
Most of the most of the third buying I actually happened in brick and mortar it was three click and pick.
So that that drove instacart that drove other maintain major retailers.
Primarily the consumer with ordering online, but either picking up or having home delivery. It wasn't like they were necessarily reaching out to.
The order online and.
And you haven't delivered through other channels.
With regard to DNA costs.
Again, primarily it will depend on the mix of products going forward as you look at distribution discounts.
We also expect some probably heightened workforce related costs.
As is continue if the growth in the kind of the buying continue that.
The 20% range or some of it.
Seven 8%.
I'll talk about.
That doesn't really of the ordinary is some of the same factors, we seen historically, maybe driven by different conditions nothing were historically, but all of its workforce.
Right now we talked about.
Okay, all right off but.
Reality at our businesses so near term on a weekly basis. We believe we have a good handle on that and barring anything catastrophic.
Across the board you I don't anticipate that can really get out of hand, so we feel comfortable that.
Rob I just this rouse I just wanted to circle real quick back to the guidance question and say one more thing about it.
I do want to make sure that it comes across as we are optimistic about the business.
Yes, we are optimistic before the crisis and we're still optimistic now, but we yeah, we do need to be responsible and temper that optimism against the lack of a lack of visibility that's ahead.
But having said that we certainly believe in our brands. We believe in the strategies behind the brands. The resources were deploying behind them our portfolio and supply chain optimization work. You know all these are our net positives and as I mentioned in the prepared prepared remarks that work has in large measure.
Continued on you know even as we manage through this process. So it in very large measure all that remains on schedule. So we do we do still feel very very good about the business. It's just it's an unprecedented uncertain environment simple as that.
Yeah, Hi, Greg during the great job. Thanks, so much thank you Rob.
Your next question comes from Mitch Pinheiro with started the income.
Hey, good morning, good morning.
Good morning so.
Couple of questions.
I was curious.
Hi, you can easily.
The the Cobi sales benefit to your business was it just looking what your plans were in versus last year. How did you how do you come up with a number like that.
So thats why we then as we went back and look kind of at the performance coming out of January and through February and then we and we.
Several different scenarios and built off of the trends that we were seeing.
Do those first few months and then we made some adjustments based on what we thought would potentially happen.
Back half of the first quarter with a holiday period as well so.
We felt like we did we made.
Our best attempt to that and we did it in two different functions, we didnt within our insights group and we also do that within our EFT DNA in accounting team.
And.
So we took different views.
On sales trajectory as well.
Okay.
Yes.
Then I'm curious like with from your customer point of view.
You know.
At the height of the.
Lockdown.
And you go to the supermarket obviously.
Gels were bear and I imagine customers that your customers. This would take any product that they could get.
In terms of fresh bread and I'm curious.
So at that point I mean, do your customers maintain their order pattern your brands in private label. They just accept anything do you guys from an internal to make long runs and things like that you guys. Just say you know we're not doing private label right now.
How does that help situation.
Hang out and how is it evolving today.
So Mitch I mean, you're.
At the end of the day that the retailers want the shelf stopped now you know even with the exemplary service that we provided I might sit here and tell you that we didnt have some out of stocks I mean, the panic buying was so large, particularly around our week 12, which I think was the peak of it for us.
It was super hard.
To keep it fully stocked 24 hours a day, but we like I said, we shifted production over from from foodservice to help support and as far as the private label branded mix in order for us to get that much production out faster, we have to eliminate change adverse and so what you want to do is get the.
Getting the longest runs you can have the of the best selling items and that's how you get to the market the fastest the change ever times.
Changing.
Different private label bags and things like that eats up so much time during the day that it does impact your ability to get enough product out. So that's why just like in a hurricane in Florida.
That's why you go to that limited SKU assortment. So you can get as much out as possible. Just this time, we did it in virtually every bakery.
Okay.
And then you know roles you spoke about.
How are you in your team looking at what you've been you've been focused on the right assortment within the bakery and the rate.
Configuration of your bakeries and a lot of that drove your you're one of the highest EBITDA margins as seen in a long time.
Hello.
How do we keep that going how do you may Hain is that.
This open your eyes, yes sprint.
Any any other different.
Hi.
Not objective, but the way you're going to look at mix in the future I mean.
He talked about that a little bit.
Sure I wouldn't say that it's changed any of our viewpoints, but it certainly solidified the viewpoint that we already had I mean, certainly we understand the value of having the right mix Ana.
Skew if you will more towards branded products, particularly as we began to acquire some of these really.
Fast growing more premium priced brands.
But I think what it did.
Oh. This this is an extreme example to be sure, but I think what it did for for me and the team is really solidify.
The fact that are the way we're approaching it the way we're thinking about this is the correct way.
Again extreme example, but overtime as we focus more on on branded products as we optimize our foodservice business et cetera, you would you would hope to see overtime that shift in mix to become a more permanent fixture and us be more skewed towards higher margin branded items.
Okay well.
Well, thanks to the questions everybody Stacey thank.
Thank you Mitch.
Your next question comes from Brian Hollenden with D.A. Davidson.
Yes, good morning.
Also caused by the magnitude of certain loans given I believe most competitors utilized deals throughout the market. So I was curious if you could just highlight where that share class capture was most acute in the quarter. I mean was more pronounced within any brand price point category channel.
It was it was pretty.
Excuse me it was pretty broad based on.
The reason for at least in my estimate estimation is is what are what are largely covered in the prepared remark, which which is very early on we were able to quickly shift production get to those longer runs that I was just talking about get product out and then you know are unbelievable network of independent distributor partners that were there and ready to go and serving the market I mean.
It was really we're used to doing this we've always done it.
For winter storms for hurricanes or whatever.
Yeah, I like to Joe we don't they don't have hurricanes in California, but the guy that won't runs that region used to be based in Florida. So he knows how to do this so even out there in California.
We have we have our personnel out there that I understand the business and understand how to get product out quickly so to me.
That in probably the largest measure was the reason for our our share performance in the core.
Okay.
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What does that provide or route.
The concepts into you know, how how significant kind of a grilling season is as a pickles.
Your business.
I guess.
So as we look at insights and I read some of the same services browsers reference I mean is there a thought that.
When we balance out.
Maybe fewer gathering.
You into the summer holidays versus just the underlying demand serves.
Continues to persist at above average levels. I mean does there is there a scenario, which you know that category is flat or down around these holidays.
If you could just provide a little more context around that.
It certainly M&A anything's anything's possible just depends on on how severe it is I mean, you on one hand, you could see it.
Because people are allowed to gather or whatever reason it might be you could see less less holiday celebrations shout I mentioned the restrictions here in Florida.
But on the other hand, if every household has a celebration.
You can still have a pretty doggone. Good been season now I will say, we have we have taken steps to.
As best we can make sure that our level of production is inline with what we are best estimate of what demand might be.
And so we're not lots as we in order to completely serve the full been season, we have to go outside.
The company to co Packers to help us manufacturer, we're doing less of that this year.
And not taking on on quite as much so.
Again, it's it's one of the reasons for for Us being conservative on the guidance is it's just it will have to just wait and see how it plays out you know I hope as we move through the summer then hopefully July 4th is better.
Labor day is not nearly as big of a holiday as it used to be for us.
At school start back.
But then the though they start back so much earlier.
Than they used to but I'm thinking about other factors on the retail side.
You know obviously kids are out of school still in the summertime, but there's a lot of the summer camps or cancel too so you're still going to have a lot of family still a home together through the summer, which could help maintain that that.
That elevated level, then whole meeting.
Thanks, that's helpful.
Last question for me.
M&A landscape.
Some reference to it.
Just curious.
We've heard some commentary from folks looking on the foodservice side about.
But.
The backdrop sort of opening up here as we come out of this.
Maybe your focus would be a little bit more on the branded side. So just curious what you're hearing or seeing.
Is there is there and increased appetite for folks to so in this environment.
Evaluations getting any more palatable.
Just curious what what you as a single.
Not really any change from the commentary I made last quarter, which is that they're they're starting and kind of the back half of last year I saw a pretty substantial decline on in the level of.
M&A activity.
A decline in the level of companies that were interested in may be pursuing it a transaction and really that's that's kind of continuing right now yeah. They are sort of trickling in whereas the up until you call at June of last year, they were coming in seem like once a week.
So I don't I don't know, whether this is necessarily change people's appetite to engage and transaction I certainly haven't seen a whole lot of change and at least valuation expectations, if not actual valuations from completed transactions, but nonetheless, whatever the environment. We we remain active we remain engaged with with.
Those that were interested in.
Probably the best like weather.
Thanks.
Your next question comes from phase of the Alvin.
Thank you.
Yes, hi, good morning.
Morning.
Couple of questions from me.
I see that do you still have tend to like $10 million to $20 million of.
Sourcing saving their benefits that you have in the back half and I know last time, when we talk to that of our other savings that you were thinking about that we were supposed to talk about this year I imagine that that more on the back burner, but I just wanted to get a sense of how do you is there risk that you don't get the sourcing save.
Things, if things don't sort of quote unquote normalize baby and they are and how should we think about incremental cost savings that we were talking about last time.
Sure. So on the on the 10 to 20, obviously, we're we're we remain committed to that everything remains on schedule on the amazingly, even with everything else that's going on so we feel very good about that 10 to 20, yes do I do think that there is likely some additional benefit behind that but we're still in the midst of doing our.
Our work around that and not ready to comment any further just yet.
Okay, and I know you know I know, you've historically talked about.
Improving the margin mix as it relates to the foodservice business.
And I'm wondering instead of this crisis.
This may get more difficult for you.
Does that provide an opportunity for you to maybe have some of those conversations about the our with your customers and sort of improve.
Improve the margin mix as we look ahead.
Well.
It doesn't make it any easier or any harder I think I think.
What what the what the crisis has done is kind of strengthen our resolve to go ahead and speed up some of the work, which that which is what we're doing.
We were already talking to various customers.
You know about them the margin profile of their business and how it fits strategically with us and with them frankly.
Going forward and I.
I think we can expect to to accelerate some of that work and continue to focus on.
The higher margin food service business it it.
The foodservice side of things, while it is overall lower margin than the branded side. It is it is a very important part of our business in the sense that.
It does cover a lot of overhead for us.
We're very high fixed cost business. So it serves a very very important role there.
And then in addition to that as we mentioned you. When you have extraordinary situations. Like this you are able to flex production to retail as well.
But at the end of the day to answer your question it doesn't make it any easier any harder it's necessary work either way.
Okay I understood just last question I wanted to get your take on.
Private label as the as we look ahead just to the rest of the yard. Thank you mentioned that you think we're already in a recessionary scenario.
Historically, we have seen private never take share in a recession, but this time might be different as you know you're not seeing that much you're not seeing can seamlessly to go out to eat so there's more demand at home and there's been a lot of talk about consumers going back to trusted brands.
I'm just curious how what's your take is on how this will play out.
Through the course of this areas.
I think you might than a want.
I think what trusted brand or do you see.
A greater risks device private label.
Sure well historically in our category and I'm, just speaking to our category not not others.
In our category in prior recessions, we've we've held up pretty well.
You might see a little bit of trade down, but generally speaking the brand side of the business has held up quite well remember that private label.
Is pretty over developed in our category relative to others.
So it's already a pretty.
Pretty high share of the of the total market as it stands today. The one difference that I would point out is that because of some of our more recent acquisitions, particularly days and canyon that do carry an even higher premium price the nature's own does.
One one can at least imagine a scenario, where you know if we remain a deep recession, and we don't bounce out of it pretty quickly.
You could see some trade down from from those call. It Super premium items. If you will have more down to two nature's own, but I wouldn't expect to see too much.
From Nature's own to private label for example.
Great. Thank you so much welcome.
Your last question comes from Ryan Bill with consumer Edge research.
Running evidence I believe looked at a meaningful portion of your one Q.
Less than normal trend as we get out of the peak stock up maybe how do you think about the cost impact to be seen.
If we see that take the latest three or four we think you talked about on the trend you're seeing there are more similar over the next few months.
Okay.
Yes. Thank you know when you look at the category you look at our business, we're not a typical pantry loading category I mean do the shelf life of our product.
Those are pretty.
Pretty robust and things happen pretty quickly.
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So we don't have no more trends most of our costs.
Let's go in tandem with our volume.
And because of the volume increases on the.
Retail the business you did see some elevated cost within.
Margin overall.
And you also see the elevated distribution costs because of the higher priced items in the fact that were primarily both flowing through DSD. So I think relative to the to the sales line most of the costs should trend.
Relatively the same as as a progressive even if its offline pulls off your backs off somewhat the one area, where we did see.
Significant benefit this quarter and we actually have talked about this for several years now with and stay online.
Lastly, as the market.
Reacted and shales were empty, we did see a fairly significant decline in overall sales percentage.
That is the one cost element.
On the one item that could trend slightly differently.
Offline pulls back somewhat over the next.
One or two and we'll just continue to watch that.
Realistically I don't expect any significant cost pressure to come out of left they'll there we haven't already seen.
Thanks, that's very helpful.
That's correct you plan to take around incurred increase.
Attention of increased household consumption that we gain as we get into more online environment.
Sure I mean, we as I mentioned earlier, we have increased our our ecommerce budget. We already had a very robust plan marketing plan for this year to continue to support our brands and if and if you remember that's that's a big difference from two or three years ago. We've we've raised that that overall budget significantly and frankly have seen some very.
Nice results from an I think thats part of the reason that that our topline.
Has performed so well in addition, we very very briefly mentioned new product introductions, but we did have several.
That went out right at the end of the ended the quarter and so can continue to innovate and bring new exciting products to consumers is another way that we hope to continue to retain their loyalty.
Great. Thank thank you that's it for me Thank you Ron.
And Mr. My Merlin there are no more questions at this time.
Okay, well. Thank you all very much for your time today and for your interest in flowers, and we certainly hope that that each and every one of you continue to stay safe take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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