Selected Earnings Calls – Week of 3/30

  • Constellation Brands – Business is going well, new channels are bigger opportunities
  • Dave and Busters – Cut costs to survive, not spending any money
  • Carmax – Omnichannel, omnichannel, omnichannel – this is key for their business with the new environment
  • Acuity Brands – Undergoing/investing in a digital transformation, seemed to be a little ahead of the curve preparing for Covid-19, new CEO with track record of digital transformation
  • ConAgra Foods – Business is strong with people eating all their meals at home, e-commerce is strong channel and reaching new triers they haven’t reached previously

Constellation Brands Earnings Call

  • Covid mentions – 21
  • Bill NewlandsPresident and Chief Executive Officer
    • First, we delivered strong performance in fiscal ’20 led by our Beer business, which generated double-digit operating income for the year with accelerating IRI trends as Q4 progressed. And that momentum has continued in the early stages of fiscal ’21. We have ample brewing capacity to continue fueling the growth of our Beer business in the medium-term and we’re working with local authorities and government officials in Mexico to ensure we have ample long-term capacity as our business continues to grow and evolve.
    • Second, our high-end Power Brands, and successful new product launches fueled performance in fiscal ’20 that drove accelerating depletion trends in Q4 for our Wine & Spirits business as our premiumization strategy continues to take hold. And third, our strong performance and financial discipline generated record cash flow, reduced our outstanding debt and build solid momentum heading into fiscal ’21.
    • Our production facilities in the U.S., Mexico, Italy, and New Zealand are operational and our distributors are up and running. Our teams are also working hard to ensure our distributor and retail partners have ample supply of our products to meet consumer demand, particularly in the off-premise, which has seen accelerated growth as many restaurants and bars have suspended dine-in services to help mitigate spread of the virus.
    • During this time, we are focused on the channels the consumer is choosing namely 3-tier e-commerce, direct-to-consumer, and the off-premise especially big-box grocery, mas and club channels where we are working diligently to ensure high-end stock positions for our key SKUs. We’ve also adjusted our marketing approach to ensure our consumer messaging is in tune with current realities and by shifting our focus to digital and social media platforms as sporting events and other major gatherings are suspended. Bottom line, we are well-positioned to continue meeting the needs of consumers as well as our retailer and distributor partners. We will continue to manage our business with focus and discipline, while remaining flexible and are willing to adapt as needed to shifting consumer behaviors and I remain extremely optimistic about the long-term prospects for our business.
    • With that said, over the past several weeks, we’ve taken steps to build ample product supply across our warehouse and distributor network in the U.S. We have close to 70 days in the system. And we’ve shifted resources to accelerate production of high volume SKUs for key off-premise accounts. Our facilities are currently operating and we remain confident in our ability to continue meeting the needs of U.S. consumers and do not expect any near-term service disruption to retailers.
      • We are now facing an increasingly challenging operating environment and rapidly changing market conditions. As you can see from our press release, we are not providing formal guidance. However, we provided the targets that are included in our original fiscal ’21 plan prior to the COVID-19 crisis. My goal in doing this is to reiterate that our strategy remains unchanged and to provide the confidence we have in the growth prospects for our core business as I continue to feel very optimistic about our long-term opportunities. When we look at the beverage alcohol category, we are generally a recession-resistant industry
    • Dara MohsenianMorgan Stanley — Analyst
    • Hi guys. So I wanted to ask more of a longer-term question. In past cycles, we’ve seen some trade-down occur in the Beer category in the recessionary environment including back in 2008-2009. Can you just spend some time discussing how your product portfolio might be more or less at risk from a macro slowdown versus past cycles on a theoretical basis sort of ex the COVID situation? You’re at a much higher share level today. Your brand mix has changed over time. So just was curious for your perspective on the degree of trade down risk or macro sensitivity maybe versus what we see in the past cycles?
    • Bill NewlandsPresident and Chief Executive Officer
    • Yeah and I joked with Garth earlier today. I guess if you’re old enough you’ve been through a couple of these cycles so I have. What we expect to see is this. Brands are even more important at a time like this because many people are seeing the opportunity and our category is one of those for simple pleasures in life. Let’s face it, the more people are sheltering in place, the more that they look for those small pleasures in life, and our category is one of those that addresses that. But you often see even stronger brand behavior that occurs during this time. So let’s take let’s take our Woodbridge Wine brand example. We have seen significant pickup in the month of March for that brand, because as I said in my script, it’s a tried and true brand. People know it. They appreciate the quality for the price-value relationship that exists there. And we’ve seen quite a bit of an uptick against that brand.
    • We’ve seen the same thing with Kim Crawford and Meiomi and The Prisoner, brands that the consumer appreciates and the likes. Similarly in Beer — when you have a brand like Modelo that’s the number four brand now in the entire U.S. Beer business, you’ve got a brand that has a great deal of trust and you’re seeing the trends that support that. Fortunately, Modelo and Corona are two of the most trusted brands in the consumers’ mind. And therefore, we feel very comfortable that we will actually get a disproportionate amount of benefit that occurs when people go to the more tried and true brands. That’s what we saw in 2008. That’s what we saw in the previous recession before that those tried and true brands end up winning. And we think our brands are well-positioned across Beer, Wine & Spirits to take advantage of that. There is a little less experimentation during a recession environment and that’s why those core brands like ours will do very well.

Dave & Buster’s Entertainment Earnings Call

  • Covid mentions – 5 (didn’t take any questions)
    • Over the past three weeks we have been thoughtfully and quickly implementing a comprehensive plan with one simple goal, reopen our stores as soon and safely as we can so that we can welcome back our furloughed team members, turn our games back on and bring fun back into the communities we serve, something [Phonetic] that we believe will be very important as our Company emerges from this pandemic.
    • To put us in the best position to achieve this goal and recognizing that all of our stores are temporarily closed, we have had to make some very tough, but necessary, decisions. Our plan has four primary focus areas. First, in order to conserve capital, we reduced plan 2020 capital spending by 70% to approximately $65 million. Nearly $55 million of this has already been incurred with the remainder primarily contingent on the pace of store reopening. These reductions include temporarily halting all construction on the remaining 14 stores we had originally planned to open during 2020. They also include curtailed capital spending on all strategic initiative, store remodels, games, information technology and store maintenance. Note that we had already opened one store in March in Chattanooga, Tennessee immediately before the temporary shutdown. Second, we made significant reductions in planned operating expenses. Given the unprecedented circumstances that we currently face with the temporary closure of our stores, we made that extremely difficult decision to place all of our more than 14,000 store fellow team members on furlough. In addition we decreased store management personnel and corporate staff by nearly 90% and reduced the compensation of our senior leadership team by 50%. We also deferred payment of bonuses and the Board suspended cash compensation to all Directors for the remainder of the year. Finally, we significantly reduced planned store operating expenses, G&A and marketing spend.
    • In addition to those significant reductions we looked at all other areas of the business for additional opportunities to build our financial flexibility which brings me to our third focus area, capital allocation. On this front the Board ratified management’s recommendation to suspend both the quarterly dividend and share repurchase program. Suspending the dividend will conserve approximately $5 million of cash each quarter. We have not repurchased any shares from September 2019 and do not plan to do so for the foreseeable future. Our fourth and final focus area is our balance sheet. In the current environment, preserving liquidity is of paramount importance. We fully drew down the remaining funds available under our existing revolving credit facility. Including those funds, the Company had approximately $100 million of cash on hand as of March 31st.
    • As a result of the aggressive actions we have taken and while we remain in full temporary shutdown mode, we reduced our shutdown period expense run [Phonetic] rate to approximately $6.5 million per week. This consists of $3.3 million in rent and occupancy expense and $3.2 million in store operating expenses and G&A. In addition, our weekly guest service is approximately $0.7 million.
    • We have also stopped virtually all capital projects and are aggressively managing our working capital deficit by extending payment terms in an effort to limit additional cash outlays [Phonetic] and we continue to look for additional savings across all of those areas. We are also in active discussions with landlords and vendors to identify ways to further reduce cash outlay, extend payment terms, and obtain other payment concessions. As an example, we have notified our landlords that we do not plan to make our April rent payment which represents about 50% of the previously mentioned expense run rate.
    • We are also in discussions with lenders and outside debt and equity providers to amend necessary terms to our credit facility and further supplement our liquidity. Given the early stages of these discussions, we are not in a position today to project the benefit of these actions. Due to the combined effects of the current environment and the factors that I just outlined, we are also not in a position to provide guidance for fiscal 2020 at this time.
    • Despite the unprecedented disruptions that the COVID-19 pandemic has brought to our industry and to our business, we are sustained by the strength of our enduring brand and our incredible people. As a reminder, in 2019 we achieved record sales and EBITDA result eclipsing our recent expectation and past years’ results. We remain the leading category-defining brand in our industry. Our attractive store model has consistently generated industry-leading volume and EBITDA margins over many years and through many economic cycles and none of this would have been possible without our people.
    • Our entire leadership team is focused on navigating through this unprecedented environment. While the aggressive actions we have taken are extremely difficult, we believe they are necessary for the long-term health of the Company and will help position us to safely reopen our stores and emerge on the other side of this crisis and an even stronger competitive position.
    • Before closing this call, I want to extend a special thanks to those team members across the country who are working tirelessly for Dave & Buster’s as well as our team members who have now on furlough. We deeply value your passion for the Company and your effort that have personified the brand and produced industry leading results through many economic cycles. We understand the uncertainty created by the unexpected temporary closure of our stores and wish you and your families’ good health and safety throughout this difficult time. I’m proud to be a part of the Dave & Buster’s team. We are acutely aware of the importance of doing our part as a responsible business to support social distancing and the global effort to mitigate the spread of COVID-19. At the same time, nothing will bring me and this management team more joy than the day we reopen our stores and welcome back our team members and loyal guests so everyone can get back to working hard and having fun together.

CarMax Earnings Call

  • Coronavirus – 7 mentions 
    • Over the past few weeks, we put significant measures in place to reduce the risk of exposure and further spread of the virus in our communities. The health and safety of our associates, customers and our communities are very important to us. We are following the mandates of public health officials and government agencies, including the implementation of enhanced cleaning measures, social distancing guidelines, and in many localities, closing our stores.
    • Our team has also done a great job in mobilizing our associates at corporate locations to work remotely from home with only a critical few remaining in our offices. During this challenging time, we remain committed to living our values. We are currently providing pay and benefits for up to 14 days to our associates who have been impacted by store closings or required to be quarantined. In addition, we’re assessing options for those to go beyond 14 days. We also continue to get back to our communities by supporting our national partners in their response to the coronavirus.
    • Regarding our business, approximately half of our stores are currently closed or running with limited operations. We have a central response team in place, developing and implementing plans for multiple scenarios, as this is a dynamic situation, with new store openings and closings daily. Our goal is to keep our locations open as long as possible to support the essential needs of our customers, while also providing income to our associates. Throughout this time, we will constantly monitor and operate according the requirement provided by each locality.
    • As noted in our news release, our omni-channel experience was available to approximately 60% of our customers. For our remaining markets, we are pivoting and implementing the most relevant parts of the omni experience such as online self progression and curbside or express pickup as quickly and broadly as possible, given the current needs of our customers.
    • While not our usual practice, we are providing insights into March sales to allow visibility into current conditions. In all of my years at CarMax, I’ve never experienced a month like we had in March, which was the most volatile month I’ve ever seen. The positive momentum experienced this past year carried into the beginning of the month with robust comps through the first week of March. Since then, the coronavirus situation within the US has rapidly escalated and our sales have dropped significantly. Over the past few weeks, approximately half of our stores have closed or are running under limited operations, and consumer demand has progressively deteriorated.
    • For wholesale, approximately one-third of our auction locations are closed due to state mandates, and almost half of our wholesale vehicle sales are now taking place online. Advancements in technology have enabled us to quickly move sales to an online platform, and we will be moving all sales online in the coming weeks. For both our retail and wholesale GPUs, we anticipate pressure for a period of time, as we look to right-size our inventory levels in light of the current environment. At this time, we’re unable to fully quantify the size of the impact as it largely depends on the duration of store closures, which is constantly changing, consumer demand and how large the changes are in the underlying valuations.
    • We are the largest buyer and seller of used cars in the US, and we believe it is important that we keep our appraisal lanes open where possible so that customers who want or need to sell their cars can. We will continue to leverage our professional buyers [Phonetic] and proprietary algorithms to ensure we are offering our customers the right price at the right time in this dynamic environment.
    • As we focus on managing our national inventory, I want to emphasize our diversified business model with a powerful store footprint and sophisticated logistics network is a huge competitive advantage. In addition, we have been through challenging times before, and we know the experience of our associates and strength of our inventory management systems are instrumental, as we need to quickly and efficiently move cars out of markets where stores and auctions are closing.
    • We’ve always said that it’s our associates, culture, financial stability and operational excellence that set us apart, allowing us to expand our market share in all economic cycles. We believe the proactive steps we are taking today will help us withstand the current environment and emerge from this crisis as an even stronger company.
    •  Prior to the coronavirus, it was our intent to open 13 new stores during fiscal year ’21 and a similar number of stores in fiscal year ’22. We have paused on store expansion activity and our remodels until the situation stabilizes.
    • Armintas SinkeviciusMorgan Stanley — Analyst
    • Great. Thank you for taking the question. As I think about the world pre-coronavirus and post-coronavirus, we were thinking SG&A would be up year-over-year in fiscal ’21, albeit a lower magnitude than fiscal 2020 because of the omni-channel expansion. Now, you mentioned pausing capital expenditures and store opening. How should we be thinking about the expansion of omni-channel? And in some sense, it makes sense to push with the expansion because customers aren’t coming into the stores, it makes sense to try to reach them in other ways that they see fit. But if you could help us think through your pace, if you’ve accelerated, paused, slowed down, and the impact on SG&A as well, that would be helpful.
    • Bill NashPresident and Chief Executive Officer
    • Okay. Sure. So, look, if we talk pre-coronavirus, as we were coming into FY ’21, I think what we’ve said in the past, FY ’20, we needed 5% to 8% comps. And if we had come into FY ’21 just only focused — continue our focus on omni-channel, we felt like we could actually do a little bit better than that, assuming that we weren’t doing some other initiatives. And to be frank, we were planning on doing some other initiatives. So we would have still taken probably a 5% to 8% comp to leverage for FY ’21.
    • Obviously, we’re in a different world right now. Enrique talked about some of the things that we’re doing. I agree with you on the omni-channel expansion. We’re going to continue to push forward on that. As I said, we’re going to focus on some of the things that are most relevant in this environment, first. And I think, what might help a little bit is to explain how we’ve been doing our roll-out and how it’s going to change. So historically, when we’ve been rolling out omni-channel, it’s been very systematic. We’ve got a great change management and process. We generally start the process six weeks beforehand. We go in, we train the managers, we train the associates, and then it’s a very systematic roll-out as we continue to ramp up our CECs, our customer experience centers so they can support those waves [Phonetic].
    • Obviously, the in-store training is out the window at this point. But the stores obviously have less volume, so we can focus more on training, which is why we’re going to go as quickly as possible to make sure that we get, first of all, the customer self progression. So that’s the hub online that really allows a customer to do the whole transaction or as much as they want to online ahead of time, as well as the express pickup, which in all cases, we’re calling it the curbside pickup, so — but think about it as what we used to refer to express pickup where customer can do everything online, they can swing by the store, and previously they could take the car for the test drive, they can come in and sign in a few documents that remained. We’re now calling it curbside because literally, they never have to come in the store. They can come, the car can be waiting there for them, really touchless.
    • We want to make sure we get that rolled out everywhere. And then, we’ll continue to ramp up, make sure that the CECs can support. But in the interim, you’ve got some stores that are going to be doing what the CECs are doing until we get that ramp-up. So, we’ll get everyone there. Our goal coming into this year was to finalize the roll-out. We’re just approaching it in a different way.
    • Armintas SinkeviciusMorgan Stanley — Analyst
    • Okay. So, you’re not so much changing the pace of the roll-out and sort of your end targets. You’re more changing how you’re approaching the process, it sounds like.
    • Bill NashPresident and Chief Executive Officer
    • I’d say, the pace we are changing that we’re going to be putting out these two features as quickly as possible. We want to have curbside pickup in all of our locations within the next week or so. So, we are pushing some pace on some of these things. But we’re going to continue to roll omni. I’m really pleased with the fact that we started this investment both in the technology and the whole omni experience several years ago. I think, given the current situation, having these alternatives for customers, albeit the volume is down low, it’s going to be really important. And we see customers on a daily basis for a variety of different reasons, and they need reliable transportation. And we want to make sure that we give them an experience that they feel safe in transacting with us.
    • Derek GlynnConsumer Edge Research — Analyst
    • How do you think the used to new value equation will evolve for the consumer in the context of this economic shock? And also, in an ultimate recovery, would you expect to see a notable shift in demand from new to used similar to what we’ve seen in past downturns? Or do you feel this is a completely different type of downturn that may throw off [Phonetic] that relationship we’ve seen historically?
    • Bill NashPresident and Chief Executive Officer
    • Yeah, Derek. I tell you it’s a tough question. Coming in from the fourth quarter, what we saw was the new-to-used spread widen. So, I think that was a little bit of a tailwind for late model used vehicles. I think in this current environment, I’ve seen some numbers projections on SARs. It’s going to be down dramatically, I think, for this year, given some of the numbers that are coming out from the manufacturers. I think part of it’s going to depend on what the manufacturers do from an incentive standpoint as the consumer start to rebound. But as I’ve always said, this market — the wholesale market is very quick to self-adjust. So, if used car prices come down because of incentives, an increase in incentives, that will ripple into the wholesale market and the wholesale markets will adjust quickly, which is another reason why you want to manage your inventory very quickly.

Acuity Brands Earnings Call

  • Coronavirus – 1, Covoid 9
    • Neil M. AshePresident and Chief Executive Officer
    • I’m pleased to be with you today to talk about Acuity. Obviously, we all wish the global context were different right now. We are embarking on the next generation of Acuity. As we start on that journey, we are dealing with the shocks caused by the COVID-19 pandemic. As we manage through the current situation and begin to change our Company for the future, we do so with a strong financial footing, with a market-leading position in our core business, and with the strong team to navigate the Company through this.
    • Given that we’re new together, I want to outline what we will cover today. First, I will give you some perspective on our second quarter performance and Karen will go into more detail about the financials. Then, I will cover how we prepared for and how we are handling the shocks related to COVID-19. I will provide you with some of my initial observations of the Company, talk to you about digital transformation, and give an outline of who I think Acuity is and can become. For consistency, we will continue to discuss the business and present metrics that you’ve traditionally seen for at least the remainder of this fiscal year
    • Neil M. AshePresident and Chief Executive Officer
    • Thanks, Karen. Obviously, the effect of the coronavirus pandemic have turned the world on its head. I’ll spend a few minutes updating you on what has happened and what we have been doing about it. I’ll begin to say — by saying how pleased I am with the Company’s resilience, beginning with the supply shock when China went on lockdown. As China began to shut down, we were able to use our preferred position in the industry to gather additional supply. Other than some specific finished goods inventory products, we so far have been able to largely buffer our customers from the effects of the supply shock. As companies are forced to reevaluate their supply chains, we can report that our diversified supply chain has performed well. As the potential worldwide ramifications started to become clear, we began to work to prepare our people, facilities, and operations for what would come next. Our priorities were and are the health and well-being of our people, while addressing both the risks and opportunities that the situation presents.
    • Beginning in late January, we started making changes at our manufacturing and distribution facilities to ensure the health of our associates and the continued operation of our facilities. We reengineered the people flow in our buildings to create more social distance and to limit the number of people that any one person could come in contact with. We also changed the sanitation procedures to proactively eradicate as many contaminants as possible. At the same time, we have been working with various jurisdictions to respond to their directives to help slow the spread of the disease. In almost all instances, we have been deemed an essential business and remain open. However, we have scaled back some less essential parts of our business to spread out our operations and to reduce the number of associates that we have in our buildings. So far, the vast majority of our manufacturing and distribution facilities are operating at the capacity necessary to meet demand.
    • We were also able to transition our other functions to completely work from home. As a newcomer to the Company, I was amazed at the seamless transition. We made the decision to work from home on a Monday, and on Tuesday, it was business as usual. Our product and go-to-market teams and our enabling functions transitioned overnight from altogether to completely virtual. We also transitioned our communication with our channel, so that we could effectively conduct business. We have been able to continue our important product work and to maintain our communication and alignment with our important independent sales network through this transition.
    • From a financial perspective, we entered the shock with a solid balance sheet as Karen discussed. We’ve taken steps to ensure that we are prepared for as many scenarios as we can imagine. Our priorities have been to ensure our liquidity and to use this as an opportunity to make our Company stronger after the event than we were going into it. We are scaling our variable costs to respond to the changes in demand and we are reevaluating our fixed cost investments as well.
    • None of us can predict exactly how this will play out over the coming months. With that in mind, we are taking responsible actions in light of the current downturn in demand, but that do not inhibit our ability to rebound when things return to normal.
    • With that, I’ll talk about what we all expected to be talking about on this call. I took over as CEO on January 31. I’d first like to thank Brian for his outstanding leadership of the Company. He led the transformation of the Company from a diversified conglomerate to a market-leading lighting business that has led many of the technology transitions in the industry. I’ve spent the last eight weeks getting to know the Company and our people and working through this crisis. I have visited all of our largest facilities, some multiple times. I’ve met and worked with many of our talented associates and here are my initial thoughts.
    • Our lighting business is an industry leader. Our lackluster performance over the last few years obscures the underlying strength of our go-to-market, product development, and supply chain operations. Our lighting business can compete effectively at the top, middle, and bottom of the market. The recent revenue trends, however, will not fix themselves. There has been industry deflation. We have additional work to do on our business and product portfolio to position us for future growth. We cannot and will not take for granted our market leadership position, as we evaluate future trends and competitors. Our independent sales network is and will continue to be a strategic differentiator for Acuity.
    • Acuity has led many of the technology transformations in the industry and we need to continue to do so in the future. Our existing technology businesses, including Atrius, has potential, but we have real work to do to realize it. We have a very talented team of can do, will do people, who work well together. They are and will be the foundation of our future success. Our business model is adaptable and durable. We have the ability to generate cash and to continue to deliver efficient returns on our committed capital.
    • Now, let me spend a minute on digital transformation. Although digital transformation has become one of the trite, overused, and ill-defined terms of late, the reality is that every company that was not originally digital needs to adapt itself to what is a fundamentally different world. In a sentence, what used to be a push-based world is now a pull-based world. And through this lens, Acuity is a push-based Company in a push-based industry in a pull-based world. Acuity is no different from other successful companies. The better we were and what got us here, the harder it is to adapt to this new world order. We can and will adapt Acuity to these new realities.
    • I have had the opportunity to lead digital transformations at some of the largest and most important companies in the world. In my experience, this process has four key components, all of which apply to Acuity. Transformative customer experiences; everyone has new and expanded expectations. Business model transformations; we need to understand the whole value chain and adapt our business models accordingly. Using technology to improve business operations; data can simplify and accelerate the business. And run like a digital Company; we can capitalize on the tools and methods of digital companies to be faster and more effective.
    • As I’ve gone through these transitions at Walmart, CVS, and CNET, there are two things that have been true. First, in all instances, the core business has gotten stronger as a result of the changes. The second is that by building from and adding to the core business, we have created larger, more vibrant companies.
    • You may have noticed that we changed our boilerplate in this release. This will begin the process of defining Acuity for who we plan to be. We have the opportunity to be a market-leading industrial technology Company. We already have leading or developing leadership positions in lighting controls and building management in addition to a market-leading lighting business. We have the potential to be a leader in location-aware applications. Through the necessary changes of our digital transformation, we can improve our existing businesses and their market competitiveness. We can continue to develop new businesses that are focused on defining the future of the industry. Those changes will strengthen our core business model. We will continue to be a strong cash generator. We have the opportunity to use that cash to grow our Company to reinvestment and acquisitions.
    • In conclusion, we have a strong Company in a period of great change. We are aggressively managing to the uncertainties caused by the COVID-19 crisis. We have the financial strength that resolve to get through this and also to emerge a stronger Company. Over the long term, we have the opportunity to more broadly adapt the Company to expanding opportunities in our core businesses and to develop new ones. We have the market position, the people, and the cash flow to become a larger, more dynamic Company that delivers to our customers, our associates, and our shareholders.
    • Ryan MerkelWilliam Blair — Analyst
    • Hey, thanks, good morning. So, first off, Neil, you mentioned opportunities that COVID presents. So, I’m curious where in your business do you see revenue opportunity and where do you see the biggest challenges.
    • Neil M. AshePresident and Chief Executive Officer
    • Thanks, Ryan. As I said, we’re trying to deal with both of the challenges and the opportunities. So the challenges are obvious, as we scale the business appropriately. We feel like we entered this period with a — with developing momentum around our product portfolio in the core lighting business and we have the opportunity to continue that process as we emerge from this.
    • So, the combination of the strength of our supply chain as we’ve been able to manage and have consistent supply through this process, as well as some of the new product portfolio that we’ve been rolling out, give us momentum for the — whenever we emerge from this and we think those are real opportunities.
    • We also think there’s opportunities to do some of the hard work under the covers that we need to do to evolve the Company. While we can’t solve those and make those changes in months, we can get a little bit of a head start, while we’re — while we have folks that have more time on their hands than they would have otherwise.
    • Ryan MerkelWilliam Blair — Analyst
    • Got it, OK. And then maybe just on the bigger challenges that you see. I think the retail segment is a big market for you. Are you seeing push-outs and cancellations there? Is that an area that we should expect to be pretty weak?
    • Neil M. AshePresident and Chief Executive Officer
    • So on the retail side, obviously, I’ve got a new set of eyes on the situation here and we’re going to evaluate the retail side for the long term and for the short term. And so, let me address a long-term question first. So, we’re evaluating the customers that we reach with our products through the channel generally and try to get a better understanding of who exactly we’re serving through that channel and how effective they feel like they’re being served through that channel. So, we’ll go through that process.
    • Specifically, on the short-term, we’ve seen fairly consistent results so far, but we expect the demand shock to flow through them as well. We just don’t know exactly when that’s going to happen.
    • Brian LeeGoldman Sachs — Analyst
    • All right. No, I appreciate that. That’s super helpful context. Second one from me and I’ll pass it on. Just on Tier 3, Tier 4 sales, I might have missed it, but did you break out what the percent of sales in the quarter was or what’s the growth in that category of products was year-on-year?
    • And then, I guess, just as a segue into the question, I know a big part of why you joined the firm is around sort of digital transformation opportunity and given your background you obviously have a lot of experience with that. As you think about beyond COVID-19 and sort of as we move into more of a normalized environment, whatever that may be coming out, do you see kind of at a high level a need to sort of pivot the strategy around information [Phonetic], given what might be the fallout in the retail environment? I know a lot of the initial rollouts have been with that community of customers, but are you thinking about it any differently? I know we’re only about three or four weeks into this pandemic, but it seems like the retail end-markets would see the most amount of transformation potentially coming out of this and wondering how that might impact the strategy around your digitalized approach in in Tier 3 and Tier 4 specifically.
    • Neil M. AshePresident and Chief Executive Officer
    • Yeah, Brian, I’ll queue on some of that and then Karen or Ricky jump in here at the end with any specifics that you feel like I left out. So, Brian, just to start where you finished, I think it’s undeniable that this will be one of those events that after which nothing will be exactly like it was before. So, we are — as we imagine kind of the strategy for the Company going forward, we are mindful that we expect there to be pretty major changes coming out of this.
    • To spend a second again on digital transformation, I think one of the things that people often do is think that digital transformation is somehow using technology in the organization, which is why I went through the four things, but it’s really what we do and how we do it. So, you picked up on the strategic part. As we think about kind of what services we can provide with our technology to other endpoints, both retail and otherwise, it really falls into two buckets, which is we can either be in the business of moving market share or where we can be in the business — our data can be in the business of moving market share or delivering efficiencies for our partners.
    • So, as you think about kind of the technology that we’ve obviously rolled out in retail first, there are real opportunities to do both in those categories and those needs will probably be more precedent after this than they were before this. The efficiencies necessary also will translate into other examples. Ricky mentioned the impact in industrial facilities and the opportunities that that presented. I was in our Des Plaines distribution and manufacturing facility and we run Atrius in that facility to manage all of the materials in that. So, we have an app that we use there that manages or evaluates the productivity of forklifts. It’s — on the face of it, it’s a small thing, but it’s a window into the different ways that this technology can be used. So, I think it’s a tourism of technology that the impact is overestimated in the short term and underestimated in the long term. And I think our location-aware applications that we’re describing here will continue to — will take longer than we expected to realize, but the potential opportunity may even be larger than we originally expected.
    • And then second, on just kind of a general technology evolution, I would say that like all parts of the business, both the lighting part of the business and then the controls and other kind of — and ultimate location where applications will continue to walk themselves up a technology curve. So, I often describe technology companies is really not about ones and zeros or about technology products, but about really the length of the product life cycles. And so, as we shorten those product life cycles, we can be continually moving customers and products up the curve of technology. So that will happen. We expect — we all expect that to continue to happen in our core businesses, both the lighting businesses and the controls businesses that we’ve historically lumped into tiers.
    • So, big picture, I think that it’s going to take a while and it might be slightly different but the — on the kind of location-aware applications, but big picture, they’re about data that you lose market share or creates efficiencies for customers and company and they have applicability in multiple different verticals over time, feel pretty confident about that. And then our controls business can and will continue to be a grower and has real market opportunity.
    • Richard, Karen, do you want to add into any of those specific answers?
    • Richard K. ReeceExecutive Vice President
    • Just a couple of comments from me and then Karen, you may want to provide some of the specifics on the percentage of sales and growth of Tier 3, Tier 4. But I will say Tier 3,Tier 4 continues to be a focus. The solutions we’re building that are much more than just the Atrius. We do have the network energy-focused type solutions that we sell, the unified system is getting traction and so forth. So actually pretty excited on the development and all side of Tier 3 and Tier 4. Obviously, the current situation may slow down sales of those products, but we are going forward launching some new solutions into that Tier 3, Tier 4 world, leveraging some of the technology we got with the recent acquisitions, but also further integrating the businesses in the technologies that we have. Examples is single-room control, we’ll be launching here later this year, a very exciting product, that I think will be well accepted as a way to very efficiently commission a single-room control that would be co-compliant and provide the energy savings. So, a lot of activity continues in Tier 3, Tier 4 and we see it is a good growth engine for us.

ConAgra Foods Earnings Call

  • Covid-19 mentions: 17
    • Sean ConnollyPresident and Chief Executive Officer
    • Today, I’m going to address two main topics; our response to COVID-19 and its impact on our business as well as the underlying trends that we saw in the third quarter, which ended just before the impact of COVID-19 started. Rest assured that we’re taking all necessary precautions to protect the health and safety of our employees and our ability to safely and reliably meet consumers’ needs. For the most recent status of our efforts to respond to COVID-19, please visit conagrabrands.com.
    • We’ll continue to provide updated information on our site as the situation evolves. As I’ll describe in more detail in a moment, we’ve taken a number of steps to ensure our supply chain continues to operate well. We’re incredibly proud of our teams who have been producing and delivering without disruption. While we all remain focused on executing through this rapidly evolving situation, I don’t want to lose sight of the fact that we’ve made significant progress against the operational objectives we established for fiscal 2020.
    • In many ways, our progress against these objectives is enhancing our ability to navigate this crisis. Recall at the outset of fiscal 2020, we set out to execute on integration, synergy capture and deleveraging, drive strong consumption growth in Frozen and Snacks, improved trends in Hunt’s tomatoes and Chef Boyardee and the trend in the Legacy Pinnacle business and drive innovation and growth in Gardein. I’m proud to say that through the third quarter, we remained squarely on track with all of these objectives.
    • And from a financial standpoint, the third quarter results are in line with the expectations we provided at CAGNY. As we previously described, industry softness, which started in December in foodservice and pivoted to retail in January put pressure on consumption trends in several of our key categories, which more than offset share gains.
    • As expected, consumption trends recovered in February, prior to COVID-19 impact. It’s important to keep in mind that our third quarter ended on February 23rd. At that time, there were very few reported cases in the U.S., and notably no widespread change in behavior.
    • As we all know, that has changed significantly in recent weeks. From the second week of our fiscal fourth quarter to-date, we’ve experienced the unprecedented impact of COVID-19 as consumers have stocked up on food and shifted rapidly to eating more at home. Given the quality of our brands and the categories we participate in, Conagra is well-positioned to serve consumers during this time of disruption and extraordinary demand.
    • Our team is hard at work, in close coordination with our customers to ensure that consumers have access to the food they need to stay safe at home. At this point, the magnitude and duration of the COVID-19 impact is still uncertain. However, I can tell you that we expect to exceed our prior full-year guidance for total Company sales and profit metrics, assuming the end-to-end supply chain continues to operate effectively.
    • We will provide more detail on the impact of COVID-19 in a moment, but first we would like to walk you through the highlights of the third quarter. During the third quarter, our performance was in line with the updated expectations that we provided at CAGNY. Organic net sales growth decreased 1.7% while our adjusted operating margin was 15.7% and our adjusted diluted EPS from continuing operations was $0.47 for the quarter.
    • As we noted at CAGNY, we saw category softness in January that was greater than anticipated. At the time we told you that our more recent data was improving and we expected to bounce back and that’s exactly what happened.
    • As you can see on Slide 7, Total Conagra retail sales returned to growth in the final four weeks of February and sustained a normal rate into the first week of Q4. Clearly, even before the current disruption due to COVID-19, we were well on track and had already seen the expected rebound in consumption trends. Not only did we see growth of 0.9% in the four weeks ended February 23rd but what we saw in the week ended March 1, which is in our fiscal fourth quarter, reaffirmed this return to consumption growth.
    • And, during the quarter, we continued to deliver on integration, synergies, and deleveraging. On integration, we have been converting Legacy Pinnacle plants over to SAP. And through Q3, this multi-year process has been progressing on plan. We captured $33 million in incremental synergies, increasing our total through the end of Q3 to $145 million and we made further progress on reducing our net debt position by paying down $450 million of debt during the quarter.
    • Now let’s turn to the current quarter and the balance of the year. Typically, we would be spending our time on this call reaffirming our guidance and discussing the shortlist of initiatives under way to close out the year. But this year is unprecedented and the impact of COVID-19 will be significant.
    • Let me start by saying that our top priorities right now are the health and safety of our employees as well as our ability to safely and responsibly meet customer and consumer needs. With respect to our results, the magnitude of the impact is difficult to predict. What we know to-date, the Q4 retail demand surge is significant and spans multiple retail channels, including e-commerce.
    • While our Foodservice segment is facing headwinds that impact is more than offset by increased demand in our Retail segments. Given the depth and breadth of our portfolio, we are well-positioned to meet this increased demand for at-home consumption. Having all these brands and capabilities under one roof is enabling us to meet a wide array of customer and consumer demands.
    • Importantly, we’ve been able to address this retail demand surge because of a strong business continuity plan that we were able to activate as soon as the market disruption began. I’m very proud of the extraordinary efforts across our Company and the way our teams have supported each other and our business all in the pursuit of ensuring that consumers are able to access food during this time.
    • We have decided to temporarily delay some Legacy Pinnacle plants SAP implementation to prioritize supplying customers with the food they require now, but our integration plans are otherwise on track. We will continue to consider and prioritize our business needs as the COVID-19 situation unfolds.
    • And I’d like to take a minute to talk a bit more about the Conagra team, and in particular, to highlight the exceptional work of our supply chain team. While demand has sharply increased, our order fulfillment rates so far in Q4 has remained above 90%. This is a testament to the systems we have in place and the commitment of our people. This has been remarkable to see and I’d like to thank our Chief Supply Chain Officer, Dave Biegger and the entire Supply Chain team for their incredible efforts.
    • Our supplies of ingredients and packaging remains sufficient and we’ve experienced minimal disruption so far in the quarter. All of our North America manufacturing facilities are open and running at high levels of utilization and our distribution network remains fully operational. Our plants and locations have the resources and critical equipment they need to operate in full compliance with current regulations and CDC guidance.
    • And I’m proud of the remarkable level of collaboration among our sales, customer order management, and supply chain teams. That collaboration, along with the work we’re doing with customers is enabling us to ensure we are able to supply consumers with the food they need; great job all around. Although providing specific Q4 guidance is not possible due to the uncertainty of this situation, we do want to give you a sense of our experience so far.
    • The chart on Slide 20 shows what we’ve seen in the market to-date. You can see that there has been a material increase in demand the past few weeks. While some categories are benefiting more than others, all categories and all temperature states are seeing increases. In addition to a significant uptick in sales, our execution has enabled Conagra to outperform and gain share in the categories in which we compete.
    • The data we’re showing in the chart is only measured channel data. It’s important to note that demand has surged broadly across retail channels, including e-commerce as well as for pickup and delivery, most of which are not reflected in this data. Similar to our measured channel retail business, our e-commerce business is also up in sales, outpacing the competition and gaining share.
    • Overall, we made good progress during the third quarter of the year. Our quarterly results were in line with our updated expectations and we remained on track with all of our fiscal 2020 operational objectives. Going forward, our teams are prioritizing health and safety, adapting well and operating effectively to ensure consumers are able to access food they need. And while this is clearly an unprecedented time, we will not lose focus on executing the Conagra Way playbook.
    • Our brand building and innovation processes remain critical pieces to our long-term success. We’re updating our full year guidance today to note that we now expect to exceed our prior full year guidance for total Company sales and profit metrics.
    • Beyond fiscal 2020, it’s important to note that we are also working with customers as they reevaluate the timing of promotions and shelf resets as they look to minimize in-store disruption during this time of surging demand.
    • Finally, while the situation is still evolving, we believe the sharp increase in at home eating occasions is generating trial among new consumers that we did not anticipate accessing. We view this dynamic as a long-term opportunity for our portfolio overall, and in particular, our leading Frozen business.
    • Andrew LazarBarclays — Analyst
    • I’ve got two questions if I could. First Sean, I wanted to dig in, just a little bit, on your comment around the potential maybe over a longer period of time for some stickiness maybe given — in light of the very significant unanticipated trial that you and a lot of your peers are getting in relation to the current crisis. Is there any data maybe that can add a little context around this?
    • I know it’s early, but maybe from some of your panel data that you track around some of the increases in either household penetration that you’ve seen with some of the quality enhancements you’ve done particularly in the Frozen space, maybe what some of the repeat rates look like or the ability to gain some of the new trialers that might not have, let’s say, tried this product in the last several years or so and any perspective there would be really helpful? And then I’ve just got a follow-up.
    • Sean ConnollyPresident and Chief Executive Officer
    • Okay. Sure, Andrew. Let me tackle that. The concept you’re raising is that because we’ve got this crisis situation and people are eating much more at home and not away from home, products like ours are getting levels of trial that were not anticipated and that could turn into consistent users over time as that trial converts to repeat.
    • I would tell you, that makes sense to me both intuitively and in terms of the very early data we’re beginning to see. There has been a massive amount of transformation in our categories in the last five years. Frozen in particular doesn’t even closely resemble the category that it used to be. The quality of the food is in a completely different place.
    • And we’ve seen consumers so far who have tried that new food respond extremely favorably to it and large established brands that had long been forgotten are growing strongly again. Now, because of this crisis situation, people are at home. As you know, everybody can see it, they’re stocking up and they’re stocking up with foods of all kinds, across all temperature states including categories like Frozen.
    • So just logically, we know we are getting higher levels of trial here during this phenomenon. In terms of data that that backs it up, quite frankly, it’s just too early to point to a lot of data points. The one place I can tell you that we do look that tends to be a leading indicator is e-commerce. And in the world of e-commerce, what we are seeing is that we are reaching a large number of new triers that we had not reached previously.
    • Now, as you think about how that might convert to repeat, you all are probably accustomed to looking at national average repeat rates. Repeat rates will vary depending upon the user. So early adopters, super heavy users will have higher repeat than light users. When you get new triers like this, you tend to be getting lighter users. So it may not be the kind of repeat rates we get from super heavy users.
    • But the point of all of this is, it should help categories like Frozen. It should help some of our other categories that people may have forgotten about, but it’s just too early to quantify the impact of that. I would also tell you that we do expect, as this thing gets behind us that we’ll see a return to people eating out. Americans love their restaurants. They love to eat out and obviously the foodservice space is hurting badly right now and so we’re rooting for that side of the business to bounce back as well.

If you found this interesting, you should read: How to use a 10-K for sales outreach.

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