Q2 2020 TreeHouse Foods Inc Earnings Call
Welcome to the Treehouse Foods second quarter 2020 conference call all participants will be in listen only mode.
After today's presentation, there will be opportunity to ask questions to ask a question simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question press the pound cake.
Please note this event is being recorded.
At this time I would like to turn the conference over to Treehouse food for the Brady of a safe Harbor state [noise].
Good morning, Thanks for joining us today.
Before we got started I'd like to point out that Weve always tricky accompanying slides for our call today on our website at Treehouse Foods Dot com.
This conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements include all statements that do not relate solely to historical or current FX can generally be identified by the use of words such as guidance may should could expect seeks to anticipate plan believe estimate approximately nearly intense predicts projects.
Potential promises were continue or the negative of such terms and other comparable terminology. These statements are only production the outcome of the events described in these forward looking statements are subject to known and unknown risks uncertainties and other factors, including Coven 19 that may cause the company fourth industries actual risk.
Oh bubbles of activity performance or achievements to be materially different from any future results levels of activity performance, where achievement expressed or implied by these forward looking statements Treehouse first form 10-K for the period ending December 31st 2019, Treehouses form 10-Q for a period ending March 31st.
2020, and other filings with the FCC discuss some of the risk factors that could contribute to these differences.
You are cautioned not unduly rely on such forward looking statements, which speak only as of the date made when evaluating the information presented during this conference call.
The company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward looking statements contained herein to reflect any change in expectations with regard there too or any other changes events conditions or circumstances on which any statement as they are.
For purposes of our discussion our results and outlook are provided on a continuing operations basis, which excludes the impact of the snacks Division, which was sold last August.
And the ready to eat cereal business I would now like to turn the call over to our CEO and President Mr., Steve Oakland.
Thank you PR good morning, everyone and thank you for joining us today.
Before I get into our performance and what we consider a very good quarter, let me spend a little time on the events over the last few months.
Since we last spoke in May 2020 has been more by more than the cobot 19 pandemic.
For me personally racial injustices and the events in the last couple of months stirred a wide range of promotions.
What I can't say for certain is that these injustices no place in our society in a treehouse, we have an opportunity to create chain.
We have plants offices and associates in the communities hit hardest by these amounts.
In those places, we're a different cultures races in genders, and we're better for.
We value each and every employee at Treehouse and it's more than what any one individual contributes to our business. It's about what we all collectively bring to bill or culture.
We've talked to you in the past about our Treehouse values and you can see those on slide three.
In particular, our values a better together speak up an owner.
We're helping guide the organization.
We are putting much more thought into how we think speak in that.
We are engaging our employees by talking about unconscious buyers and the power of inclusion and diversity.
But doing so we're further building our culture.
I'm proud of the way our teams are embracing the importance of supporting each other and our communities.
Our values have also been a key part of guarding our response through the pandemic.
Hopefully you've had a chance to go to your website you read about Ur Cobot 19 response, which you can see on slide four.
And the ways in which we're prioritizing employee safety as we deliver high quality food and beverages to serve our communities across the nation.
I'm very proud of how quickly we've adapted and how effective we become in this new environment.
So I'd be remiss why didnt start today by expressing my deep gratitude to our nearly 9000 frontline employees across the company.
These men and women are putting on masks every day and coming to work in our plants and distribution centers. So that we can do our par to serve the north American food supply.
I also want to recognize our employees who are working remotely.
Seamlessly supporting our back office and those were working to build and deepen connections with our customer.
These are difficult times for everyone and I truly appreciate your dedication and efforts.
I was I did last quarter, let me start by framing the macro environment.
We've updated slide five for Q2.
Showing how at home food consumption. This fair in our categories overall.
Versus private label for our two divisions.
As you can see what private label has grown nicely. This year the pace of that growth has lagged Brandon.
And I wanted to give some context for that.
Following the March spike when consumers rush to fill their pantries, we worked with our retail partners to prioritize higher velocity SK use.
This is a very complex exercised for private label.
Given the variety of formulations and packaging.
Well this limited assortment resulted in fewer choices on the shelves for consumers and enable us to run our plans more efficiently and provide retailers with more tonnage.
I feel good about how we performed in Q2 and I continue to be encouraged or the strength of demand.
I wanted to address the topline here because as we settled or last call. Our priority is the health and safety of our employees as we were our plans.
Our teams have been proactively monitoring cobot data in the counties and communities, where we have manufacturing and distribution operations.
As we all know cases were on the rise in the northeast Midwest early in the second quarter.
In a number of instances, we made very conscious decisions to temporarily closed certain locations. So that we could take additional sanitation measures and keep our people say.
This translated into underserved demand in certain categories in the second quarter and.
And Bill will give you more detail on that in a bit.
In most cases affected plants were down for a few days. However, we did have several plants that were down for a couple of weeks.
This week, all 36 of our plants in North America, and two plants in Italy are up and running.
Those of you who subscribe to syndicated data so private label grow year over year.
But at a rate below that of the overall category in May and June.
Branded manufacturers were able to more quickly restore assortment on the shelf.
Realizing this benefit which partially explains why private label lost a bit of share during that time.
As demand the stabilized we have now restored over 80% of the S.K. use we limited.
Most of which will be shipping by the end of August.
And we think our current plant protocols allow us to improve our customer service levels going forward.
In a few minutes Bill will take you through our revenue by channel.
Giving you the opportunity to see our retail grocery business in the quarter was actually much healthier than the syndicated data would have suggested.
On slide six our EPS of 58 cents was eight cents above the top end of our guidance range.
Second quarter net sales of 1.04 billion grew almost 4% on organic basis, and our profitability was very strong.
Adjusted EBITDA was up 13% and adjusted EBITDA margin Rose 110 basis points versus last year.
Our results demonstrate not only the leverage we havent RPL, but also that the structural changes we've made over the last several years had been tremendously beneficial in this new environment.
Screaming, how we think about this as you see on slide seven.
At the base and as a foundation of everything we do have the pillars of our enterprise strategy.
Operational excellence commercial excellence portfolio optimization and people and talent.
At the top is our growth algorithm, which in a normalised environment has not changed.
As we think about the potential of our portfolio and I talked about this a bit and the last call.
Move to two divisions allows us to more closely aligned our customers goals and strategies with how we think about operate and sell our categories.
Importantly, Neil prep on the left we'll drive cash generation by optimizing it's mix and simplifying the business while maintaining sure.
Snacking and beverage on the other hand represents an opportunity to grow the top one through innovation and distribution.
Both businesses will continue their focus on our team us and lean continuous improvement principles.
Bye segmenting, our business and providing clearly defined goals and initiatives. We're in a much better positioned to manage our categories in a manner that aligns our efforts with how our customers think about them and how they manage their private label strategy.
Our new to division structure has been serving is very well during the pandemic and I believe our second quarter results in our outlook for the back half, which we're raising today are testament to that.
With that let me turn it over to Bill to take you through the numbers and the details of are improved outlook.
I'll come back at the end wrap up.
Thank you Steve Good morning, everyone. Thanks for joining us today.
I helped us once again, thank you well and enjoying your summer.
Steve took you through the high level results around that sales and profitability.
Let me start by providing more detail.
Slide Ain't provides a scorecard for the quarter given already that 70, we phase three months ago Ah results were largely on track in our profitability was strong.
The net sales live for the quarter came in at $1.04 billion.
Which is about $10 million short of the bottom end of our guidance range.
$30 million below the midpoint.
This isn't really driven by three things.
First the biggest driver was the answer a demand <unk> talk about earlier.
And the second quarter, we deliberately held back production in certain geography's in order to keep our employees safe and healthy.
This impact with spread across a number of categories.
Namely dry dinners creamers and pretzels.
<unk> had sirio also challenge in the quarter.
Second the patient recovery for the food away from home sector, and Q too was a bit slower than we anticipated.
Particularly within restaurant and institutions.
And third we had a couple of retailers who's order patterns, where a regular due to actions they took around eliminate foot traffic and shortened store hours.
We also saw temporary closures as a result of protests around the country.
This impact with Saint primarily in Red sauces bars preserves and dressings.
Adjusted EBITDA of $190 million at the top end of our guidance range.
It just Cps 50, 808 cents above the top end of our guidance.
About recent of our beat was driven by tax as we were slightly conservative in our tax rate guidance, given the uncertainty of culvert on our business around expenses channel mix and various tax implications due to the cares that.
As we look ahead, we have a better sense of how these issues impact us in the second half.
That said, there's a new round of cares that legislation that as pending and could have impact going forward.
Trying to slide nine you can see our P&L, which shows that the vision direct operating income grew dress over 13.5% to 154 $8 million versus last year.
Division DIY margin improve 160 basis points versus the same period.
I am, particularly pleased with the quality of our results this quarter watching flex the strength of our business model and the fixed cost leverage as we added a mental volume.
Slide 10 luxury across the adjust EPS drive was year over year for 40 cents last year to 58 cents this year.
Volume and mix, including absorption was 15th better than last year as our plans continue to work hard to replenish inventory drawdowns in the first quarter.
Pricing that a commodity costs contributed 16 cents year over year, driven by favorability and warehousing and logistics.
Operations with a negative 12 compared to last year.
While our plants ran very well the benefit was outweigh by a combination of higher employee expenses and negative variances due to a temporary plant shutdowns caused by Colbert related interruptions.
Before going further let me address covered 19 related costs as we focus on keeping our central frontline employee safe.
And the second quarter, we incurred a total of almost 30 million and cobot related expenses.
Of that we treated approximately $20 million as one time expense, which is included in the culvert line in a reconciliation table.
This includes things such as third party sanitation costs temperature screening PPE and supplemental pay.
Those casket netted against a $5 million benefit related to tax driven by the cares Act.
The remaining almost $10 million in Colby costs, such as overtime and staffing have been absorbed in our adjusted P&L.
SG&A was a negative three versus last year as we approved for higher variable incentive compensation expense and that was mostly offset by favorable tax another.
Turning now to slide 11.
You can see the topline growth by division driven primarily by increased demand.
Organic net sales with a milk that division grew one 8%, while snacking and beverages organic growth with 7%.
On the right. We shared are quarterly net sales growth, which is turn the corner from being negative last year to positive this year.
<unk> been able to successfully service the higher demand overcoming the carryover volume loss, which was significant.
Next let's turn to slide 12, and a second quarter revenue by channel.
Here you can see the results for the retail grocery channel was better than our overall reported results posting growth and the double digits as a result of cold with demand.
<unk> was the largest beneficiary of the increase in grocery demand <unk> beverages also posted solid improvement year over year.
This has in turn driven positive absorption our plans and operations are ready fallout and a number of categories.
Next you can see on the orange by the we pulled out the carryover wrap of Los distribution in pricing adjustments, which shoulder about 80 million and Q too.
Next is our foodway from home business, which declined approximately $40 million or 47% compared to last year.
This was more than we anticipated when we provided second quarter guidance.
Away from home as well as the industrial contract manufacturing export business each represent about 10% of <unk> revenue on annual basis.
Slide 13 shows you are net that position.
Net that at the end of the quarter was down to one $8 billion and our leverage ratio by Ned that EBITDA per our bank covenants finished below three four times.
Our balance sheet as strong and we have sufficient liquidity.
We generated positive free cash flow and Q2 of $29 million, which came in ahead of our expectations.
We continue to focus on paying down debt anticipate that will finish the year with Ned that up around one 6 billion.
We will leave the right leverage ratio for our business as in three to three five times range, and we anticipate being in that range a year and.
Turning now to our guidance of 5014.
Is Steve mentioned, we are raising are just EPS guidance for the year to a range of $2 55 on the bottom in and $2 75 at the top.
We anticipate sales for the year to be the top half of our original guidance range of 414 $4 billion.
We've also raise our EBITDA outlet by $5 million to arrange a $485 million to $515 million.
Free cash flow is expected to fantasy or the top of the range of $250 million to $200 million.
We've also provide a number of the key line items.
A quick worried about interest expense last quarter, we've had a bit about timing and delays in certain initiatives that were plan this year or that structure is one such area.
A number of you are aware that we have about $376 million of our 2022 notes that became callable earlier this year.
Given the attractiveness of of that markets prior to that had demick prices. We we're evaluating various options for those 2022 notes.
So when we provided our original guidance in February the intent was we opportunistic and refinance the bonds.
The volatility in the market's has settled a bit in that situation has evolved so our guidance revisions takes that into account.
At this point, we continue to monitor that markets and see the high yield market, improving we will continue to access our options.
We provided R Q3 guidance on slide 15 and are anticipating.
Sales of one plain old $4 billion to $1.08 billion, which contemplates the June temporary plant closures for pickles, and refrigerated, though as well as other categories, such a stray dinners that continue to see demand greater than available supply.
We expect adjusted EBITDA of 112 to 127 million and adjust EPS, a 55 to 65.
We believe this guidance revisory balanced perspective on the upcoming quarter that takes into account both the risks and opportunities.
Turning out a slide 16.
Thank you may we talked a lot about the interplay between these bars in the back half of the year.
We've considered a carryover lost business, new commercialization Colby related demand and a negative impact of food right from home.
This situation continues to be dynamic, but based on what we see today, we are raising our expectations for revenue in the back have to be flat to up 2% Ah reported basis and up 2% to 4% on our organic basis.
You'll notice that we have combine the bar, representing new business and Kobe related demand. So let me clarify what we anticipate here.
We continue to expect new business outweigh any carryover losses and the second half.
And our expectations for carry-over, Los has not changed.
We're really proud of what our commercial teams of accomplish over the last several months given the virtual environment.
Oh I do have a couple of new items that have been delayed into 2021 and some retailer plans are still evolving. We also have a number of successes to talk about.
On slide 17, you can see some of the new items that we are commercializing.
On a lap are some of the new pasta Lindsey items gluten free lintel based pastas and various flavored varieties.
On the right hand side of the page mainly by recognize our house brand new stock under which we first launch rated drink coffee beverages.
Now selling a radio during beverages in new packaging format, such as the glass pocket theory style bottle.
<unk> cans and Nitro for Cole Bro.
We're also offering <unk>, no creamers and accept a card and format. The team the ability to drive innovation. During this time is really encouraging.
Slide 18 is our free cash flow walk.
Given the increased our earnings guidance, we are now comfortable guiding or 2023 cash flow to the top end of the original range of 250 that $300 million.
Our expectation is that we will be cash flow negative and Q3 as we build inventories in preparation for a seasonal fourth quarter peak.
Before I turn over to Steve opposed by saying that can be more pleased with how our employees have come together this year.
Demonstrating our values like agility commit to excellence.
I'd like to Echo my thanks to the entire Treehouse organization your energy commitment and contribution to our results continuous and inspire me everyday.
Steve.
Thanks Bill.
Similar to the way in the store to my remarks today, let me comment on the macro environment.
Wrap up with my thoughts on how we are positioned to treehouse, which fuels my confidence and optimism about the future.
This pandemic and economic and political and frankly cultural state of our nation continues to be something that we're all learning to navigate.
Well there is uncertainty have come back to the underlying dynamics that support opportunity and growth for private label.
We've shared the three key themes on slide 19, before demographics, the economy and the retailer landscape.
The first is demographics, we've all seen the data showing buying power was shifting away from boomers who's on the rise from millennial <unk> Z consumers.
Those generations for more supportive.
And have a higher propensity to buy from unbelievable.
Second because you all know the data suggests that the U S economy has been in a recession since March.
Unemployment numbers peaked that just under 15%.
Historically recessions bode well for private Liberal.
So we have yet to see the total effect these economic realities on the consumer.
At this point, we believe that consumer has yet to field.
And one of the governments unprecedented stimulus to date, we have not seen this recession translate into changes in consumer habits, including how we shop at the grocery store.
And whether you want to believe in a U b R. A W shaped recovery, it's hard to forecast anything, but Ah recessionary to win for the legal.
I would argue but it's only a matter of time before we see the consequences of these trends today, our business is in a much more favorable place to be able to benefit and then we've been in the past, especially with retailers private label better positioned versus previous reception.
And then third the retailer landscape on the right you can see one of a number of church recent consulting study.
Retailer's expect allocate more shelves space to private label over the next two to three years.
Private label is more profitable per unit for the retailer and today more than ever retailers are looking forward and strategizing about how to further develop action and grow their private lingual program.
Which brings me to where treehouses today on slide 20.
I'll say it again, we are a much stronger organization today, and we were a year ago.
Work over the last three years has been difficult and it's been time consuming.
But it has strengthened our foundation and optimized our network.
Our operations team continues to do a phenomenal job.
They are putting process and metrics in place to harmonize our operations.
Still continuous improvement mindset, nor plans.
Furthermore, the work over the past several months to keep our people say, there's been nothing short of remarkable.
Not work has enabled us to build our commercial organization.
I'd like to congratulate our commercial team, who recently celebrated their one year anniversary.
They have not only been selling the power private brands and treehouse through the pandemic further strengthened our customer relationships.
So I'll close today similar to last quarter on people and talent.
The last several months the boat tested and challenges.
We have taken great pride in what we've accomplished a treehouse and we're we're going.
We want to thank each and every one of our employees for a job will do.
And we will continue to put your health safety and welfare first.
2020, shaping up to be a year very good results in our higher guidance as a reflection of that.
Organization today has been built for this and we remain confident that we were emerging stronger healthier treatments.
With that let's open the call of the questions.
You would like to ask and audio question. Please crestar one on your telephone keypad.
One to ask and audio question.
Question comes from the line of credit.
Stifel.
Hi, Good morning morning gross.
This quarter there.
I wanted to ask you first of all just don't understand for your second half expectations, what sort of at home food consumption rates to expect him not to be so exact but just the surface to continue through the year or do you ever built up through the third quarter, and then kind of more of a normal condition on the fourth quarter I'm just curious how your expectations are for at home food consumption overall.
Good morning, Chris.
I think we will see similar trends to what we see now.
There's a lot of uncertainty is whether kids are going to go back to school I know here in Illinois.
Bouncing back and forth right in this looks like more kids will be home and then maybe we would've thought even a week ago. So.
I think we're we're expecting the rates that we see today to be stable through that period, and we're not seeing recovery until into 2021, so to back to normal I guess, so we're seeing what we see today through the rest of the for the year.
And then just to.
Second question in relation to your supply chain over operations and it sounds like all your plants are operating today.
Okay, you're talking about like.
Whether it's days or weeks. It was those were sort of clothes through the quarter and then given where you are today are you able to pick up.
Sure because of your supply chain now operating fully or is that where your competition is generally.
It's hard to speak to private label competition, but let me, let me sort of reconstruct what we talked about as far as the plants being down we all know that the last couple of weeks of April we saw this big onslaught of volume or less couple of <unk> excuse me and it rolled into April So March and April we're very strong.
We came into May we had new protocols, we started to see these these cases spike in the Midwest in the northeast.
Quite frankly that was all very new to US right. This was pre mask. This was premium pre a lot of the protocol that we have today that we do is standard.
So we were conservative there we closed plants. We did we brought in extra sanitation. We did all of those things right and I think if you look at the cases.
Population compared to work the data that we get on the industry I think we did pretty well keeping our people say it did cost of some business right. It cost of some volume.
Now why would tell you the <unk>.
June was was a great month right in the in July and August we've got protocols that I would argue in place to allow us to run through much of the stuff. We've got plexiglas barriers. We've got masks. We've got all of those things we've got people separated so.
I think we're in a good place to operate and serve more of the demand.
We did in the second quarter right.
It'll be interesting about taking sure it's really hard and private label to speak to your competitors their.
I do think as we said and the prepared remarks that the brands got their assortment backed quicker I think you'll see private labels assortment come back over the next.
Four to six eight weeks, so I think you'll see the assortment better than a much better position and I think that'll help us.
Okay. Thanks, so much for your time.
Your next question comes from the line of Robert.
Credit Suisse.
Hi, Thank you.
A couple of questions.
I'll get a follow on what you just said no.
You said that only 80%.
R R.
Volume hits your business from your remaining 20% Orange.
No, it's 80% of the skews that we limited so.
That's a really complex number to figure out because.
Something like pasta, it would be less than something like maybe single served beverage parts or something so so we took.
We took.
A portion of the <unk> use the lower volume Sku's out, which really freed up capacity that takes away changeovers. It takes away formula cleanups all of those things.
So that we can provide more tonnage for those those cor weeks to get the retailer back in stock after that March April rush.
Those we put about 80% of those sku's back quite frankly, I don't think of 100% of those excuse will ever come back I think the retailer and US we will work together to determine.
Did we have stuff in the system that just didn't make sense. So I'm I'm not thinking that that last 20% and remember that's 20% of just what we limited.
We will impact us at all long term in fact, I think it may.
As you saw the margin results it may make us more effective more efficient.
Okay and then the second question.
Bye.
To what you're you're seeing private label growth and how it's lagging.
Okay.
If I look at it.
It seems to average out maybe 3% roads for private label overall.
And maybe 300 to 400 basis points below categories and would you participate.
Am I correct. It that's kind of how you are looking at your second half retail grow.
And then I guess the follow on his.
Retailers are.
Emphasizing the big brands more aggressively.
Because they're supply chains are are able to adapt quicker.
What makes you feel comfortable that this will eventually shipped over to.
More space for private label.
We just have to wait for direct payments to consumers to kind of phase out and.
Where do we have to wait for the retailers to kind of get get their breath and have time to make changes to their their shelves. It sounds like this is more.
What what might happen, rather rather than what's going to happen for private label is my concern sure sure why I would tell you the data that you see.
In IRI or an Nielsen is really consumer data.
Taylor has an impact on that but it's consumer data and with the consumer with all of the stimulus in the consumers hands with the availability of brands that consumers, we're able to buy brands right.
The complexity of private label the work through that we talked about I think affected our sure.
Do you think about pasta, if if there's a particular cut a pasta and the brands get it back quicker they get a 100% of share of that item until we get it back right. So I think there's some mechanical stuff here I think the consumer was was quite frankly.
As I said in my prepared remarks not.
Has not felt the pinch of this year.
But I think if you think about where the retailer is and the message that I hear from the retailer is one thing cover this pulled forward as the E commerce impact on their business right, whether it be click and collect whether it be home and whether it be in Stuttgart, whether it be home delivery all of which are much more expensive venues for them. So as they look to how they recover how they.
Complice.
How they manage in this new world, where they're going to have a higher sure become and their business private labels got to be a key part of it they have to find a way to margin up their business to pay for those extra costs.
So it may take them some time.
I think the reason we combine the in the the chart, where we are we reconstruct and we show the coven impact versus new business reason, we combine those two.
Because of the interplay between those two.
If kobe demand softens in the retailer has more time execute on initiatives will see the initiative bargo up.
Quite frankly, if we see code would demand increase over the next few months.
They'll have less time to do that so I think there's a direct interplay there.
But my comments on where I think private label will go.
R. I think they're strategic and I think the retailer will not have a choice going forward. So I'm not sure. It's a what we wish would happen I think it's what we think will happen.
The hard part is going to be to define the timing.
Okay alright, thank you.
Your next question comes from the line of David Trustco with D. D Research.
Great. Thank you and good morning, worrying David morning.
So I just wanted to go over the Covid impact and just make sure I understand something and really the where I'm going with this is just how it is going through next year, but.
Yeah.
Thank you putting this line.
Cost with an impact of 25 cents to your adjustments from gap earnings to your adjusted earnings.
So you exclude that 25% impact from continuing operations. However, the benefit for Kobe is in the revenues. So if I do include the cooling costs EPS would actually have been down year over year, and what I'm trying to contemplate first point is is kobe to actually a benefit.
Company in the quarter.
I don't think it is because I think you'd be S would've been down.
Really where I want to go with this isn't the next year that as Kobe feeds then presumably you would eliminate all of these extra cooling costs.
Maybe the way, we think about a lot of other package he'd companies is that they're going to be seeing very tough comps next year, but I don't maybe think that's the case for you given just the mathematics of what we're seeing in the quarter can you respond to that.
Sure David Hi, Good morning, and this is bill I Hope you and your family are well during these certain times.
How we think about Cove. It is just really two pieces first and foremost we've been consistent and applying a policy of adjusted earning so that you can have great transparency into.
Ongoing results versus one time in nature results and you would note even in this quarter as well as last quarter. We had some positive tax items that will one time in nature that we excluded as well so to your point about puts and takes.
You know to write in terms of what we excluded in terms of.
Earnings, but as you think about the P&L overall, the majority of costs related to production shutdowns. Those costs are included in our adjusted results. We would think that if there is no cove. It that result is better because of it.
But to your point, we did get incremental volume, there's an incremental expenses. Some of these new things around sanitation and and just social distancing in space. Those are big ongoing costs that will logo forward as we get into next year will lay out for you pretty cleanly, what the merger profile looks like in a post corporate world.
But until then we do a good job we think of excluding things that are just one time in nature and when you look at our adjusted earnings you should get a really good feel for the trend.
David One thing I would say you do you do capture one one important point.
I know some of our some of the appears in the in the grocery business have had higher topline numbers and us. So we will not have a steep until the last next year or maybe some of our competitors, but there's also one thing one benefit that is going to going to carry in the next year and that's the improvements in our balance sheet.
And this this volume in this operating efficiency has allowed us to pull forward.
The improvements in our leverage ratios that we were working on so the fact that we will hit or target leverage ratios in the fourth quarter. I think is a significant pull forward that's going to allow us flexibility as we go forward. So I think we'll have a slightly slightly less steep slope decline, we will have a slip client let's be clear but.
Steep as maybe many in the industry, but we will do with from a much stronger balance sheet and from a balance sheet that'll give us more options. Then we would've thought we would have rolling as of 2021.
And just one follow up on this would you expect the $20 million of Kobe costs, you experienced in the second quarter that were excluded with that type of expenditure continued Q3 Q for.
It was it unusually high into Q.
Figure begins to feed because you've got your plexiglass barriers in place and we don't need another one how does that work.
No I would think that.
Who knows exactly how the environment what will happen in as Steve is mentioned many times will do all that we can keep our employees.
Safe and healthy.
Pay ongoing cause related to screening and and and we've done some waves things et cetera. So that will probably continue David to your point. So I would not expect until there was some step down in the cold with world that those costs with moderate are anticipations that that would be very similar for us for the balance of the year.
Thank you so much.
Thanks, David.
Your next question comes from the line Dickerson with Jeffries.
Great. Thank you so much.
A question on on on the back half Borough Margaret I mean, it seems like.
You're Gonna Hills Grove.
Extra pickles or.
Or the back half.
Sounds like you're part of that sort of it comes back alright hope for the ZIP code words.
The macro backdrop.
That's what we see the the margin up as much as it wasn't too.
That we see where the sales are now expected to be in the back huh.
Total year Guy.
It's up I think what five note yet.
So maybe just some color.
What could get that EBITDA up even more theme potentially.
Fire than expected a higher than guided.
Mark.
Martin.
Excuse me.
Good morning, and thank you. Thank you for your question. This is bill I'll address part of it and then maybe Steve can.
At a bit more color here.
To your point, we we're very pleased with the middle of our P&L this quarter.
Structural work, we've done a treehouse over the past several years has really given us a strong foundation and it really a ils's necessity ramp up the production during this time period.
You had mentioned in the script, we were bill for this and.
Our operations team is doing a fantastic job.
You saw the margins really improve sequentially from Q1, Q too as well as over a year ago.
I would expect that.
We will have similar.
Margins of the cue to exit right in Q3 Q for his are larger quarter and most profitable so I think.
We have accounted for we think we have accounted for <unk>.
Incremental volume in that leverage we also are anticipating again, we are running in a in a covered environment and we have to anticipate some costs related to that as well. So it may not show too as much as you would've thought but the idea of of the efficiency of the middle of P&L is something we think will will continue.
Yeah, and I guess, the the thing that will be whether it's up or down would be do we have shutdowns and what are the magnitude of those are they greater than what we have anticipated in this in this.
And this forecasts. So if we are able to run better than that and we were able to run more than that will probably be a little better. If it's if it's a little software than that we will have a negative impact, but we think we've covered ourselves in this in.
The only time will tell me.
The beginning of when we talked to you and May things change an awful lot in the next six weeks so.
We think we have a much better handle on it we think we are much better protocols on our plant Lance. So so there must have a much less risk and they were maybe three months ago.
So.
That would be and I think if the volume if things do shut down if we see states re shut down obviously, another volume spike would be.
Would be beneficial to us alright.
Okay Super and then just a quick follow up.
And your comments around the retailers looking all set some of the potential increased expenses.
Heightened online penetration.
Yeah, and maybe you're looking to private label.
To support some of that.
Profitability head.
All set.
Is that is that something that you sit down with the retailers now and.
2021, and you say, okay well.
We kind of lag a little bit this year and big brands, but you are in your expenses.
Really looked into kind of course disorders that as we think about 21.
Thompson.
You're making that you're kind of question to an extent would be that private label, especially given the.
The macro backdrop would really theory accelerating.
And the next year, given com alright, so you're not gonna talking about 20th guidance as a lot of uncertainty, but I'd be thinking right.
If it all the lining up to be fairly positive.
Then it would in theory imply that you're topline broke at least next year.
Yeah, it should be.
It'd be better than we would have expected free copay.
Yeah, I think there's potential.
I think the questions. We got earlier today about the cost of Kobe costs that are going to go away for us for probably true right. The new world is going to have less.
We're not sure exactly how much less with less of what we're expensing now.
I'm not sure the retailer How's that right. If you think about how much. This is pull forward. This is consumer behavior been pull forward, what I think they believe and we believe is permanently so they're going to have to deal with these ongoing costs and that's where private label really comes in is how do we have how do they improve the margins from the center of the store private label does that so yeah.
Yes, we are having those dialogues now now that we're not sitting down with them and they're all virtual obviously.
And so we just had F. M. I just did their big business conference suites, virtually and those are the kinds of conversations we're having with the retailers at the more senior level. So they're trying to think about how they move forward now they still have their they still have themselves very much in today right to be fair.
Trying to have their noticed the grindstone in a couple of lies on the horizon, but they've got some they still are trying to figure out how much impact are they going to have through the holiday season, what is Thanksgiving.
Those kinds of things so I think it will be a little while before they have a chance to really listener.
And and focus on 21.
Alright. Thank you so much I'll pass it on.
Your next question comes from the line of Kihn Goldman with J P. Morgan.
Hi, good morning, Thank you.
Ken.
Hi, I wanted to follow up.
On your commentary I don't think you use the word surprise necessarily but.
Surprised a little bit.
Recessionary environment private labels not doing better. It also seems to me that the price caps widened between.
Store brands and manufacturer brands.
What's the risk what are you hearing from your customers about them, saying you know what consumers aren't going to buy private label in volume right. Now maybe we should just take our prices up and didn't even better margin on private label, which wouldn't necessarily be great for you going forward. So I'm just trying to.
Retailer I would think at least I think I would let me think about that to try and get some extra margin out of my store brands. So just curious if you're hearing anything along those lines.
Those price caps of wind and it hasn't necessarily driven tonnage up.
I.
Can I think the retailers really well aware that those price caps or if you look at the data that gives you the irri data, depending on which slice of it or Nielsen do look at.
It's really lack of trade spend from the brands right and so that in fact.
I think probably frustrates a retailer more than.
Then then.
And make some things that they should raise private label pricing. So we've been in a very stable price environment right commodities has been very stable. So probably the label margins are good at the numbers that they are at now.
I think there's probably mixed thoughts on the brand of trade spend I mean places where they can't get product I honestly don't want to promote but I think the other places they do so I think they realize that those things will come back to normal.
Whenever things whenever normal it's going to look like so.
I think they're looking much further out than that I have not had one of the conversations I've had with the senior folks that retailers talk about raising prices.
I hear a more talk about how do they improve their margins right.
So an industrial volume of mix and those kinds of things right. They haven't had a lot of time to do big reset. So I think Rob asked that question.
It's expensive, it's time consuming and it's a lot of labor in a store for the large national guys to move sets around the smaller guys are doing it. The original guys are doing it but the big guys. It's a lot of expense and a lot of time and people and that's just not something they've wanted to do.
Current environment. So I think that will happen afterwards, after we start to see this and whenever lettuce.
Okay, well, thank you for that and then for my follow up.
What can you tell us about the status of the serial business I imagined a lot of things around hold right now but.
Any additional color there would be would be helpful.
We re kicked off that process, there's a tremendous amount of interest in that business.
It has benefited from the current environment.
So if anything is that track this is attractive or more attractive than it was when we started the first time so.
We don't have anything to announce but we would expect that process to run.
We're starting to see those kinds of deals go through we're starting to see people do plan towards people do due diligence you can people are much more comfortable with a with a zoom management presentation than they might've been six months ago. So.
I think that process will run.
Over the near term and we'll have something too soon as we can.
Thanks, so much thank you.
Your next question comes from the line of Bill Chapel with two of Securities.
Are you on mute Bill.
Fill your line is open please state your question.
Good morning.
Hi, Bob ago.
He just wanted to double check on the kind of the outlook for.
The remainder of the year of kind of a 1% to 2% organic growth and just maybe I missed it but what are you going to expecting for the.
Glory growth in terms of assume still people are at home schools are still going virtually yeah, you would seem like the category will be pretty robust. So I'm just trying to Peter that with your kind of 1% to 2% outlook sure well hopefully the deconstruction, maybe I'll give some of the bill here, but hopefully we want to build a deacon.
The business a little bit our grocery business was up nicely right and so the balance in our business.
[noise] times will help us in the scope of time is a little bit of a headwind not not as much as books with a larger foodservice business, but.
We expect our grocery business to be up similarly to what it's been up.
To date.
Yeah. So.
Sure a bill I think just to clarify.
T point here are one of 2% is our long term topline girls algorithm for.
<unk> to view in our scrip in the deck I think I said that the <unk>.
Expected expected H organic growth will be 2% to 4%. So we think we'll be up.
In the.
And the second half answers to these point, we thank thee categories that will will drive that growth.
I was just trying to understand you expected categories to be up to the cord present your in line with the categories or can you.
Can you catch up and grow faster.
Boy I think that's going to dependent awful lot on what happens with the a consumer and I think as we know everyday there's there's debate on stimulus on will it be $600 will be $400. What will it be will there be another $1200. So I think it's really hard for us to say.
Should that stall and should the consumer start to feel more of a pinch I would I would assume we'd get a little bit more of that.
If not I think we will get what we've got it too.
Got it and then.
Last one for for me just any any updated thoughts on.
Kind of commodity outlook is everything is is.
Certainly moving around of these past few months and just kind of how that positions you for 21.
Yeah, I think right now.
The current environment is relatively balance we think we expect a bit of a low single digit pressure.
For the balance of the year.
You see that in some of the key ingredients that we use things like sugar we coffee.
Residence using packaging, obviously oil has been.
Has been has seen dollar pressure and that's been helpful. As well if I ever were however, we're pretty well hedge in that space. So again, we think it's not much to say they are commodities at this point and we are looking again towards the the 20 to 2021 I'm planning timeframe as well.
Great. Thanks, so much.
Next bill.
Your next question comes from the line of Carla Costello J P. Morgan.
Hi, My question relates to input costs as well, but more on the transportation logistics side. If you just give us a sensor whether you're seeing I'd pick up as things reopen and there's more demand across.
Cross the industries for your transportation logistics costs.
Hi, Carlos is bill.
We've had a really good performance there.
And freight.
Go ahead to even this time last year, we put an RFP process and we've done a really good job of.
Managing that and so it's a bit of a tough lab for us.
In terms of Sunday incremental benefit we're laughing from a year ago. However, this incremental volume that we're seeing that goes through our warehousing.
Places as well and so we have we absorbed that overhead pretty strongly so.
We had a good performance in our pricing that a commodities and that is driven by the work we've done entree and then obviously the volume pull through and warehousing distribution network.
Okay, great. Thank you.
Your next question comes from the line of Jonathan Feeney with consumer age.
Hey, good morning, Thanks, very much just one question for me.
Look at.
Apparently under shipping.
Under shipping takeaway, you've talked about supply Caine, how cautious you were and that all makes a ton of sense, but.
I think for a long time, there's been an element here trying to focus your business on the most profitable customers and I think partly you're getting a break you already mentioned that somebody's skewed went away I won't come back but is there any element of you trying to just focus your assets on the most profitable customers and well demand as strongly b.
Taking this opportunity to get pricing and margin across your supply bass as opposed to your shipping all of the product that you, possibly could how much of this has been proactive and will that continue thanks.
I would I would say there's been a real effort to work with the customer on what's the most important.
SK used for both of us right. So.
I wouldn't say that we totally optimize the right margin mixed by category customer.
I would suggest though the all the work we've done you all the T month's worth we've done all the money. We spent in our plants was really design. We talk about we say we were built for this well there's there's organic growth in private label and we plan to get it through normal commercial mean, starting in the in the end of the of the second quarter into the third in the fourth quarter right. So that will.
Simply pull forward so what you've seen as soon as all of the effort that we've done and all the money we've spent.
Organic volume does or what volume does to that business right. It and it makes it more profitable.
Now simplifying the skew mixed doing that is sort of is the strategy or the meal prep side of our business and their performance has really you've seen that performance pull forward because quite frankly, the Kobe thing helped us supply that strategy. So we are working in the sooner the store specifically in the Millbrook division with the retailer on what else can you.
Should come back and what are you shouldn't right and so we will work very collaborative with a retailer will find the right mix. That's the most effective mix for both of us.
So I wouldn't say that we're managing it down onto the customer I think we're managing it with the customer there isn't a customer out there that's not trying to get their mix appropriate right. That's not trying to optimize and take skews out that don't make makes sense. So it's not.
It's not on us versus them thing. It's really are we think we can work with them on that on exactly what you're talking about they are the same goals.
Understood. Thanks for your perspective good quarters.
Your next question comes on the line of John Anderson with William Blair.
Good morning, Thank you for the question.
John.
Hi, So my my question is around the guidance.
On the second half.
We came in.
This quarter, a little bit shy of the.
Sales guidance range for the reasons that you cited.
But.
Bumped the full year outlook on sale.
Which implies as you pointed out a couple of times organic growth of 2% to 4%.
Second half that's a step up from what you would previously forecast for the second half, which I think was a modest decline.
I'm just wondering if you can highlight the one two or three things.
Give you confidence.
Gave you the confidence too.
To raise your second have expectations on the top line, because what happened to Miss second quarter.
Whether it be under serving demand because of plants being down or irregular retailer order patterns would necessarily provide that confidence. So you could talk a little bit more about that.
Sure.
<unk>, we missed the midpoint of our guidance find like $30 million the bottom of the range by $10 million. It doesn't take long when you showed a plant down for two weeks it doesn't take long to burn up $10 million and potentials shipments right. So and we weren't going to make the tradeoff right. We we're not going to put people at risk for 10 million Bucks and topline alright. So.
That was an easy decision.
I think we feel better about the protocols on our plant. So if you think about how much more mature all of US all the manufacturers and the food business are.
Four months into this thing five months into this thing when you think about it.
When we started.
We feel like our plants will run through things that we would've shut them down for.
Early in the second.
Because we have the protocols in place and we'll run through those and feel really good about that are people are say right.
Our product to save so I just think we're in a much more mature position a few months in and we were then.
Think we also have visibility to that will have covered demand.
In the back half and I think when we first talked about.
If you think about three months back we're all talking about opening our offices in September I enter August.
Our office won't open until next year right.
And do you think about the the changes in what we all know I'm, assuming you all thought you'd be back at your office for this conference call.
And now we want so I think we just have a better look and what the demand signal is going to be and we have a better protocol on how to run to serve that demand signal that we did just a few months ago.
Okay and then.
The second question is on the 80% of.
Skews.
That.
You paired back on.
Are now coming back.
What's the timeframe for those that 80% to get back on shelves and.
I guess.
And then my question is with the benefit of the.
Return of those Sku's.
And perhaps maybe the consumer feeling some of the impacts of this recession, which is very unusual to your point because of all of the stimulus.
Do you think we.
Would you look out to the second half maybe later second half of the year that private label share games.
Will be restored that will start to see private label sure.
As opposed to what we've seen the past couple of months. Thanks.
John I would just say that there's no question. The when you take away the niche items and brand comes back and they are the only the only offering and that niche category. They get a 100% of the share. So now they are by definition niche items. So can that helps us a little bit I think it can.
I think it's really going to determine the consumer behavior and when they're recessionary when the recessionary pinch really hits. The consumer is when we have that biggest opportunity right. So and I think it's just too hard to guide right. So.
I feel good about what we guided I feel that we can run the product that we need to make that will happen.
Obviously everybody's guidance as barring any kind of enormous impact cove it but.
We feel we feel like what we put up put forward is the right number for what we don't know so great. Thanks, so much congrats and carefully thank you.
Our final question comes from the line of Brian's Plain with Bank of America Merrill Lynch.
Good morning, everyone Hi, Brian.
Hey.
Two quick ones for me. The first one is just simply just want to make your understood that had you had those plants that were shut down running for the quarter you would've sold Moore right.
Politically in terms of just contextualize in.
Revenue minutes, it really came down to it wasn't that the demand wasn't there you just couldn't produce enough because you have closed plants, though that is exactly the case, yes. Our service levels were several points below where they should've been.
They would have been downwards after that April and March April pool, they would've been down a little bit anyways, because everybody's inventory got got it pretty hard, but we were three or four points and if you take that on $1 billion 345 points probably <unk>.
Service slower than we should've been in that period, that's that's really the $30 million or more of that we would've shipped had we had the product.
Okay, and then second one just with the shipped to with the bigger shipped to online.
Purchases, how does that affect this.
<unk> of private label, because you're not the consumers not standing in front of the shelf being able to see.
The different.
Offerings for pasta right. So are you having to do anything different or with the retailers do something different to make sure that if they're looking at it.
The private label option comes up.
And they can they can see that price comparison, just don't understand again with underneath my question is.
E Commerce.
Either help or hurt.
That label proposition, especially at that point of sale sure.
I would tell you the we have to build new skills and the commercial organization in my comments I said, we gave it's only a year old right. We did it in July a year ago.
And so one of the things we built there was an experienced <unk> and we brought people in that understand how to help the retailer do that.
We manufacturer our partners brands right, where their partner and that they are the marketers and 99% of the cases of those brands and so we have to help them have the tools to marketed.
And then and he come maybe in some cases, we have to help them learn how to do that appropriately how to help them do that.
The big guys understand it really well, obviously, the pure play folks understand it really well.
We're trying to build a knee come team that can provide those resources and typically it's content. It's photography, it's that kind of stuff right to make it easy for them.
And so we're building a team of experienced folks to help them do that I would say to date.
Private labels under represented in he come in that provides an opportunity to going forward.
Thank you.
Oh, what do you like to turn the conference over to Steve Oakland for any additional are closing remarks.
Well I would just like to thank you all today I know, it's a busy day, there's a number of calls today. So I'm sure we'll have a chance to speak to many of you personally and I wish you a great day, and thanks again for being with us.
Thank you for participating in today's package.
Thank you lines at this time.
[noise].