Q2 2020 Earnings Call
With me this morning, our first Matt Vista outdoor Chief Executive Officer, and Mick Lopez, Senior Vice President and Chief Financial Officer before we begin I'd like to remind everyone that during today's call we will be making several forward looking statements and we make these statements.
Which is a direct result of the strategy, we have put into motion.
For those that attended our Investor Day Conference you understand that our fiscal year 2020 plan recognizes a strong second half based on seasonality trends and the timing of various internal initiatives and while we remain optimistic about the full year and believe our solid second quarter gives us a boost we still face a number.
For of uncertainties this fiscal year from tariffs to retail disruptions, such as walmarts decision to exit certain ammunition categories.
With the first half of the year in the books, we have more work to do however transformation efforts are bearing fruit and I'm excited about the direction we are heading.
My vision for Vista outdoors future is one in which our family of consumer brands are the premier providers of products in each of their outdoor recreation categories and ultimately the overall industry.
Leading brands combined with shared expertise resources and engagement of our corporate centers of excellence put the entire Vista outdoor enterprise on a path to success and an exciting future.
We have the REIT structure people and products, but we must continue to become leaner smarter and even more focused on outdoor enthusiasts wherever they choose to recreate and wherever they choose to buy their gear.
The roadmap to this future is our accelerated transformation plan. This five point plan was presented during our Investor Conference and now I'll provide an update on each element.
The first pillar of our accelerated transformation plan is optimizing our organizational structure.
We must have the right talent in place and organize our business unit to promote authenticity and the foundries mentality, while driving accountability and efficiency.
Pleased to report that we have made continued progress towards this goal.
As we've discussed on prior calls we've reorganized our business to be more nimble and focused on organic growth our structure drives accountability and reduces complexity for our brands, particularly in sales marketing and other customer facing activities that are crucial to creating authentic and lasting connections.
We continue to cultivate and elevate our best people, who are the heart and soul of our turnaround. However, sometimes we must go outside to recruit leaders to accelerate our transformation plan.
I'm pleased to announce the newest member of our team Chris Sword, the new leader of Bell in zero business unit.
Chris hit the ground running and has been in this position since October Thirtyth, Chris has a proven leader with a strong performance track record in diverse businesses, the outdoor industry and building brands.
Chris Most recently led growth Zoomy, which is a wholly owned subsidiary of Shimano American Corporation.
Earlier, Zumiez and apparel and accessories brand that serves enthusiasts and cycling cross country skiing triathlon running and other outdoor sports Chris has the right leader at the right time for Bell in zero and I look forward to what he brings to the team.
We also understand that optimizing organizational structure, sometimes means making difficult choices about where to invest our limited resources. This is why we've made significant reductions in our corporate overhead in the second quarter that further rightsized our organization freeing up resources that can be reinvested back into our brand.
As we discussed at our Investor Conference. The second pillar of our accelerated transformation plan is to create leading centers of excellence each with deep knowledge and expertise that can be leveraged to accelerate success at all of our brands. When I joined the company two years ago. The areas that were most in need of improvements were digital market.
King E Commerce and operational excellence. Since then we have stood up and integrated corporate centers focused on these strategic areas and I'm pleased to report that in the second quarter, we're beginning to see those investments bearing fruit.
I'll begin by sharing some specifics on digital marketing and e-commerce .
Improving our digital ecosystem and ecommerce capabilities are central to meeting our topline in margin goals. We believe these investments will increase profitability brand awareness and create new growth opportunities through sophisticated consumer insights data analytics and cross brand marketing.
Operationally, we have brought online 16, new website. So far this fiscal year Needless to say our team has been busy and we haven't simply focused on our biggest brands uncle Mikes Dot com and our CBS dot com deserve a special mention these sites like all of our sites are enabled for business to business and.
Direct to consumer sales loyal consumers can now find their favorite hard to find are always out of stock products directly from us.
Bronco Mikes and our CBS being part of the Vista outdoor digital ecosystem speaks to the power of our better together strategy and how our systems and strategies can apply to smaller niche brands, but also scale the larger brands such as camelback or federal as we look to the future. This is a big part of our strategy.
We continue the process of evolving our digital ecosystem by migrating our business units to the best in class Salesforce Commerce and marketing cloud platforms. We are in the early stages of this program, which is already fueling dramatic DTC growth year over year. A good example of this is with our federal premium ammunition.
Dan.
This is a very broad product line, where dealers and distributors simply cannot carry all of federals products.
Federals D to C platform has sold over 300 different skus in the last 90 days alone with a significant percentage of sales representing products, our retail partners do not carry.
This validates our goal of becoming the first major ammunition manufacturer to sell direct and creating more channels for our consumers to get our products and especially those products that are hard to get.
Also within ammunition, we recently launched our custom shop. This is an online direct to consumer store were 100 shooter can get custom hand loaded ammunition that federal does not currently offer.
Through the custom shop web page consumers can build ammunition specific to their unique needs and federal we'll hand load the ammunition to the customers exact specifications no matter the manufacturer the bullet or other components. This is a groundbreaking initiative in ammunition industry and we are proud to once again resetting the.
Standard.
The custom shop has already received accolades in the media and with our end consumers.
Within Camelbak, we continue to see significant year over year growth in the digital and ecommerce space driven by successful promotional activities with retailers like Amazon as well as improved traffic and sales conversion on camelback dotcom.
We recently launched new B to B functionality on our custom design portal that Camelbak dot com.
This functionality enables our distribution partners to order customized bottles for their retail locations in a completely automated fashion.
This is one of the many ways in which we're striving to deliver frictionless customer and consumer digital experiences.
Lastly, within our hunt shoot business unit, our brand and digital ecommerce teams have stood up seven new direct to consumer web sites, including Bush now, which now Goff Black Hawk Eagle Onco Mikes pre most and our CBS . These website to provide a glimpse into our financial ROI of our digital efforts.
But also a sneak peek into our future while sales in total for this business unit were down 7% in the second quarter. They were able to deliver a gross profit rate expansion of over 500 basis points. This is largely the result of digital and ecommerce improvements and we're pleased to see continued growth and profit.
Ability improvements from this business unit.
So these are just a few examples of how we're advancing our digital and ecommerce program.
That brings us altogether and makes us an even more compelling opportunity for Vista are the consumer insights we gain along the way these help us to deliver even better brand building experiences expanded partnership opportunities with customers and to make smarter long term product line decisions.
Our operation Center of Excellence is also driving change on multiple levels. The team has brought significant SG in a cost reductions and supply chain savings.
This capability has improved profitability through margin protection or expansion in difficult market environments.
Operation Center of Excellence has also provided a competitive advantage in the face of unprecedented external developments.
The ongoing trade dispute between the United States in China has created countless challenges for our entire organization.
In some product categories more than 90% of global production capacity is in China simply relocating these operations to meet the political challenges of today is not feasible or even a realistic business strategy in the short term.
Despite these challenges our operation Center of Excellence has guided Vista through the trade war and minimize the impacts the team has laid out three focus areas that guide our actions first vendor cost reductions and or value engineering.
The team has secured many cost reductions or efficiencies from suppliers lessening the impact to our bottom line.
Second working with vendors defined non Chinese alternatives, where it makes sense.
Despite the monumental task of relocating production on short notice, we have begun to diversify our supply chain away from China.
And lastly, where possible and with support from our retail partners, we have implemented price increases.
This has been a delicate step as we typically drive pricing based on market demands, but tariffs have forestar hands in some instances for.
For example, tariff and news price increases at camp chef have negatively impacted the results leading to reduce sales profitability and American jobs.
As the trade War continues we will continue to fine tune, our pricing strategies to minimize the impact.
For the fiscal year, we anticipate as communicated our Investor Conference a full year impact in the range of $15 million to $20 million of which roughly two thirds we have mitigated.
On the ammunition side the operations team is driving efficiencies in the second quarter, we've made significant strides towards consolidating rimfire operations rationalizing skews.
Refocusing the team on higher margin products and improving operational efficiency for seasonal builds.
The third pillar of our accelerated transformation plan is reducing our debt and ultimately delevering.
Here, we've made substantial progress we made significant payment towards the junior term loan in the second quarter and of since paid off the remaining balance in the month of October .
The fourth pillar of our accelerated transformation plan is a return to organic growth. We acknowledge that we still have work to do particularly in light of the continued softness in the market for our products and unexpected challenges like Wal marts decision to exit certain ammunition categories.
As we looked at the ammunition industry, leading indicators, we continue to see signs of stabilization.
Outside of the categories in flux as a result of walmarts announcement.
At our Investor day, we signaled the full year risk of up to $40 million and still believe this to be the case.
In the second quarter. We also saw one of our competitors when the contract to operate the Lake City Army ammunition plan.
This will limit our access to the commercial supply the ammunition produced at Lake City.
Including two to three and 556 and presents a topline impact in our fiscal year 2022.
We always planned for multiple outcomes with Lake City and a knowing outcome has been part of our contingency planning as the Lake City contract on lines over the next 12 months, replacing the sales volume will be more challenging than replacing the profits as the market stands today. This is simply not a profitable category and the net effect.
Of Lake City will be a reduction in sales, but not EBIT.
We anticipate being able to maintain our EBIT through a combination of mix internal efficiencies and growing existing and new contract opportunities should the market recover we have multiple avenues by which we can pursue profitable growth to respond to demand.
The ammunition market has historically shown to be prone to sharp and or short spikes in particular categories and as the world's leading ammunition manufacture product innovation, which is critical to our organic growth in the last year alone in ammunition, we've introduced more new products than in the company's history.
Several of our most exciting breakthrough examples are one hammer down a partnership with leading rifle brand Henry firearms that offers the industry's best performing in ammunition for lever action guns.
This firearm platform is still one of the most popular for hunting small and big game and our co promotion with Henry will reach a large dedicated audience.
We're also proud to announce an exclusive agreement with the hottest new media company and outdoor lifestyle brand meter and its founder Stephen Rinella are reaching a new audience with a focus on sustainable hunting conservation and the celebration of Wild foods.
Federals meet either line of ammunition will feature and Ella's likeness and a recipe on each box.
No premium black cloud TSS for waterfowl, Hhonors is a state of the art ammunition, featuring a combination of patented flight stopper steel with ultra high density TSS.
This tungsten based product is now the preferred ammunition of internationally acclaimed Ducs unlimited and will be featured at top Ducs unlimited banquets across the country and lastly, whenever most exciting new products revolutionizes ammunition for the modern muzzle loader.
Buyer stick is being launched with industry leaders traditions, and hogs and powder to offer hundreds a safer more efficient products that charges from the breach.
Our top capital allocation priority continues to be reducing debt, but we do factor M&A into our long term plans, while M&A is not part of our media operations time Horizon I wanted to briefly comment on our philosophical approach, we will take a disciplined approach in identifying categories.
Costs in businesses, including their size operation model and other integration factors will be focused on businesses of bolster our current portfolio and fit into a better together model to increase chances of long term success.
Our team understands this approach and we'll be ready to execute when the time is right.
Much of my comments have focused on the financial performance the accelerated transformation plan and sharing our vision of what success looks like over the long term.
These are important topics and I believe we're on the path towards meeting our short medium and long term goals in summary, I will share personal observation about the big picture.
In my career I've had the good fortune of working with some great companies and I work along side some of the best and brightest business lines in light of these experiences my belief and passion for Vista outdoor is as strong as ever working alongside the leadership team and employees and Vista outdoor inspires me our team is singularly focused on.
Serving the end consumer meeting, our financial goals and shaping the future of outdoor recreation for this generation and beyond.
Im proud to lead this organization and proud to be associated with the company, whose core mission is making a positive difference and People's lives I'll now turn it over to make to share more detail our financial performance and outlook.
Thank you, Chris and good morning, everyone. We would like to start this morning with a brief update on our capital structure and debt Paydown progress, which as you know remains our first and foremost primary financial goal at the end of our second quarter, we had around $562 million in net debt. This includes a 20.
Million dollar reduction in our higher cost junior term loan of $40 million were pleased to report that we also paid off the remaining balance of 20 million in fall during the month of October while our intent was to pay off the higher cost junior term loan by December 31st we had sufficient free cash flows to accelerate the payment in the first.
A few weeks of October .
The full payment of the term loan provides a 50 basis points improvement to our interest expense on our asset backed loan credit facility as of now our fixed charge coverage ratio requirement is lowered to one times from 1.15 times previously.
As you can see on slide five our leverage ratio. After the second quarter was approximately 5.7 times adjusted for the sale of firearms are fixed charge coverage ratio, which is the only major asset backed loan Covenant was 2.03 times at the end of the second quarter, which is substantially.
Evolve the new 1.0 times requirement.
Our finance team priorities are to strengthen our overall cash performance through improvements to inventory and reduced capital expenditures as well as improve profitability through cost management and pricing optimization. So.
Now, let's review our second quarter consolidated results. We have provided you today with both as reported and address the results on our organic basis in our press release My comments today are going to focus on our adjusted organic results turning to slide six the company reported second quarter sales of $445 million down nine.
Teen percent from the prior year quarter or down only 7% on an organic basis. The year over year decrease primarily reflects continued softness in outdoor products due to tariff impacts and continued challenges in ammunitions rimfire market. There were notable revenue increases in tactical and a strong start to the snow season for Dara.
On a GAAP basis gross margin was 90 million for the quarter down from 109 million in the prior year quarter on an adjusted organic basis gross profit was $91 million down 3 million from the prior year quarter. However, the overall gross profit rate increased positively by 38 basis points coming.
Were going to prior year quarter, and up approximately 77 basis points on an adjusted organic basis.
On a GAAP basis operating expenses were $89 million down 31% over the prior year quarter adjusted operating expenses for the second quarter were 81 million down 14% from the prior year quarter and accurate adjusting for the sale eyewear and firearms operating expenses decreased about 1% the prime.
Mary driver in the decline of operating expenses is the result cost reduction actions taken within our business segments that mitigate salary increases and inflation in the back half of the year, we expect to see additional reductions in operating expenses from actions that have been taken already.
Interest expense for the current quarter was $9 million compared to $14 million in the prior year quarter. The average burn rate in our second quarter, 5.5% compared with 5.8% in the prior year quarter. The net debt balance at the end of our second quarter was $562 million.
On a GAAP basis, our tax expense was at about $1 million or a tax rate of.
Minus 8%.
Adjusted tax rate for the quarter was 107% you adjusted tax rate was primarily affected by continued unfavorable discreet items, such as interest expense on uncertain tax positions and non deductible expenses.
GAAP net income for the quarter was negative $11.9 million, resulting in a GAAP EPS of negative 21 cents compared with a negative 57 cents in the prior year quarter.
Our adjusted net income was close to zero, resulting in adjusted earnings per share of zero pennies compared with five pennies in the prior year quarter, our adjusted earnings per share for the quarter was better than we expected as a result of a focus on higher quality sales greater than anticipated savings from the result of operational.
Excellent projects and an unplanned insurance settlement.
Sequentially from the first to second quarter the change in free cash flow was a positive $21 million as a result of account receivable collections and controlled inventory actions youre today free cash flow negative 23 million, we anticipate the usual seasonal cash inflows that come the back half of our fiscal year two assistant.
Feeding our full year guidance.
Before we get into our operating segment performance I wanted to briefly give color on the nature of the year to date non-GAAP expenses, which can be found in the appendix of the presentation.
Roughly half the expenses incurred a noncash charges, including a write off of that acquisition costs of just over 3 million and asset impairment charges of approximately 3 million remaining expenses are approximately 1 million related to the final arena from the cabin chaff acquisition.
Approximately 4 million, which is related to our most recent restructuring activity, which also includes sector.
Our adjusted results we have.