Q3 2019 Earnings Call

October 24, 2019

This time I would like to turn the conference over to Mcmillan. Please go ahead Sir.

Good morning, Thank you for joining us Virginians, He's third quarter 2019 conference call.

Plan intend expect anticipate or similar expressions.

Because forward looking statements relate to the future they are subject to inherent uncertainties risks and changes in circumstance.

In early 2018, we committed to a long term process to reduce our leverage since that time, we've reduced debt by over $440 million and lowered our net total leverage ratio from five times the 3.6 times.

As mentioned on last quarter's call. We recently conducted numerous meetings with current and potential debt and equity holders. These meetings that led to productive and ongoing discussions and we believe that we are closing in on a longer term resolution for our capital structure.

Now, let's turn to the CIRCOR.

I should note that as customers increasingly shop across multiple channels, we believe a blended carbs most appropriate way to measure domestic sales performance.

As an 80 years GNC has helped people find products and build regimens that meet their specific needs. It's what customers have come to count on and what is always set us apart now.

Among our industry firsts, where our pre packaged individual vitapaks that were designed to target goals like energy or muscle growth.

This product is the next step in our journey to provide customers with truly customized nutritional supplement regimens, we believe the ability to deliver industry, leading personalization supported by our leading brands and quality standards sets us up to serve the changing needs of customers in ways others can't.

Energy drinks is another fast growing category and we're excited to launch Mad Pony, our first GNC branded energy drink during the fourth quarter. This lifestyle brand is targeted at young millennials in generation Z and gives us an opportunity to increase our reach with this important demographic.

There are certainly hurdles that we still have to overcome but we also have exciting opportunities in front of us and we're confident the GNC is taking the appropriate steps today to position the company for long term success.

I'll now turn the time over to Trisha.

Thanks, Ken and good morning, everyone. Our quarterly adjusted EBITDA was 37 million down 13 million from the third quarter last year, driven by the transfer of the need your manufacturing facility to the newly formed joint venture and softer sales in the international segment, partially offset by improvement in the Western Canada segment.

For the third quarter in a row operating income from our largest operating segment you asked in Canada increased compared with the corresponding period 2000.

Third quarter adjusted operating income in this segment was 33 million up 26% over the third quarter 2018, driven by lower occupancy costs in salaries and benefits as a result of our store optimization and cost reduction initiatives.

These initiatives helped drive improvement in adjusted operating income margin of 190 basis points in this key segment from 5.4% in 2018% to 7.3% in 2019.

Third quarter consolidated revenue was 499 million compared with 580 million in the prior year. The decrease is primarily attributed to the transfer and the nature manufacturing in China businesses to the newly formed joint ventures closure at company owned stores from our store optimization initiatives negative same store sales.

In company owned stores and lower international franchise revenue.

As Ken mentioned third quarter same store sales, including e-commerce were down 2.8%.

Revenue from our international business, excluding China was down 9 million as a result in the international franchise challenges can discussed earlier.

Certainly the transfer of the China business to the joint venture resulted in a 5 million dollar expected decrease in revenue.

Manufacturing in wholesale revenues, excluding inner segment sales decreased approximately 35 million, primarily due to the asset transfer to the newly foreign manufacturing JV as a result of the transaction with International Vitamin Corporation on March 1st of this year.

The end of 2018, we renegotiated contract with Rite aid and eliminated the consignment question and the prior contract, which created unique supply chain inefficiencies.

In addition, we eliminated the radius restriction that prevented us from selling GNC products within a mile of Rite aid stores.

Third quarter gross profit was 32.6% of sales compared with 31.8% in the prior year.

Improvement was due to the transferred the ensure manufacturing business to the manufacturing JV and lower occupancy expense as a result of the adoption at the new lease accounting standard store closures and rent reductions associated with the store portfolio optimization strategy.

DNA dollars were down 11.2 million compared to the third quarter 2018, primarily due to lower salaries and benefits associated with the store portfolio optimization as well as cost savings initiatives cost reductions in connection with the newly formed strategic joint ventures, and lower consignment commissions as a result of the termination of the consignment.

We ended the third quarter was 122 million in cash and an undrawn revolver year to date versus last year free cash flow increased 45 million to 87 million increase was driven by favorable working capital changes primarily due to an increase in accounts payable as a result of our cash.

We continue to expect free cash flow for 2019 to range from $90 million to $100 million.

We're working with an independent many of the board supported by independent financial and legal advisors as we conduct our review and have had a series of discussions with financing sources in the United States in Asia, We're pleased with progress to date and while there can be no assurances we are on track to complete our process in the fourth quarter.

With that James let's open the call for questions.

James If you would open the call for questions.

Thank you very much if you would like to queue for a question today. Please press star one on your telephone keypad ensure that your mute function is turned off.

We will now take our first question from Steph Wissink. Please go ahead.

Hi, Good morning, everyone I wrote.

And as the isolate the operating margin improvement you call on your you up in Canada business wondering if you can give us that you implied one is any sort of actions you've taken that are somewhat unrelated sale more cost reduction perspective in that unit specifically on pharma controllable side, what actions have you taken what you may expect from you.

So going forward and then secondly, any sort of thoughts around the promotional environment in the U.S. in Canada.

In an area, where you've been able to pull back and you some improvements in the leverage.

Okay. So that's how are you regarding actions taken we certainly.

To help absorb the sales. In addition, we've been focused on salary and benefit cost in our store environment as well as is our corporate office, but looking at U.S. in Canada those.

Line or in the marketplace and Amazon the marketplace, just remind us how the margin structure work when you're dropping sale through those marketplace model versus when you're calling traditional wholesale who are retailer.

Yeah actually we're agnostic to weather the products are sold online or in our stores because although.

Just as a reminder to want to queue for questions. Today. Please press star one of your telephone keypad, we'll now take our next question from Bob Summers from Buckingham Research. Please go ahead.

Comp trends, maybe talk about the the cadence over the over the quarter, maybe where we are quarter to date, and then I think that Theres a broader question on why the store closures and a 30% recapture on driving stronger comps in the company owned stores.

Decline and certainly our worse than they were last quarter as we mentioned before we're focused on those mall locations, neither improving the comps or exiting those stores opportunistically as those leases expire and we'll continue to do that.

So it's really just as a result in the mix of stores, that's driving the comp that we're seeing in addition to that regarding your question about sales transfer while there have been about 400 stores.

And that have closed what we see is that from a corporate from company owned store perspective. It is about a one point impact favorable impact on comp as a as a result of this transfers and frankly the franchise locations are seeing a more positive impact closer to two point on the franchise side because of smaller basis stores. It's benefiting from the same number of stores that are close.

Thing so there that really sort of sums up where we are from a comp perspective.

Okay.

And then just on on.

Canada, EBIT clearly the the improvement year over year or actually this quarter was pretty impressive, but we haven't had.

Clean fourth quarter.

Yes, this definitely seasonality plays a factor the fourth quarter as our.

Our lowest sales quarter as the year and therefore, you tend to see de leverage in both gross profit and SDMA I mean, I would continue to expect that going into fourth quarter I'm not aware I'm not at this point do we expect any unusual items hitting the fourth quarter. So I think that guidance, we gave regarding ranges on SGN.

Gross profit will help inform how that you have in Canada.

Segment will perform we still continue to expect that the U.S. and Canada will continue to show improvement versus the prior years ago and in the fourth quarter.

Okay and then just.

The.

When you think about Amazon him and Walmart can you just update us on.

And this and this arrangement and how you can I would I would argue you're probably accessing new customers, but how do you better leverage that going forward.

We we don't get a lot of information as you can expect Amazon's pretty protective of that certainly there's some inside on seller fulfilled prime as we understand the consumers or email addresses in there and the physical addresses aware, there where they're going.

Turning to partner to try to find as much as we can but there is certainly a limited amount of information.

Okay, and then and then last one.

You know I think a lot of US thought you might have something Don on on a new credit arrangement by now.

Clearly you think something will be done in the fourth quarter.

You could just maybe comment on the confidence interval around that and maybe at this point what some of the key considerations are that are either our imply our stalling the process from from our perspective or from my perspective.

From a confidence perspective, we're doing all that we can to get this is closed as quickly as possible we want to be prudent through that process as we do so.

Okay.

Just as a reminder.

We have no more questions in the Q.

I'll now turn the call back over for any closing remarks.

Ladies and gentlemen, this concludes our conference call for today. Thank you very much for your participation and you may now disconnect.

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