Q2 2020 Earnings Call
Good morning, and thank you for joining our conference call to discuss CF Industries' second quarter results for fiscal year, 2020, and an update on our outlook for fiscal 2020 sitting with me today, It's Chris mine in our President and Chief Executive Officer.
During the course of this call will be providing certain forward looking information. We ask you to look at yesterday's press release and read through the forward looking cautionary statements. We've included there. In addition, we will use certain non-GAAP measures in our discussion. This morning, and we ask you to read through the sections of our press release, but it.
Dress the use of these items.
That's really unrelated tables can be found on our investor relations portion of our website at CF industries Dot com.
Chris will begin our discussion by providing some opening comments related to our second quarter.
Thanks, Jamie good morning, everyone or second quarter results were slightly below our prior expectations, Although net sales decreased 15% to 96 million in the second quarter as compared to prior year quarter. The company had net income of 3.5 million the second quarter compared with net loss of 4.9 billion the prior year quarter.
Our second quarter results reflect the impact of our previously announced cost savings initiatives, which we continue to focus on in order to maximize the cost containment plans. We have implemented we also expect to work on additional business improvement plans during the remainder of fiscal 2020.
Every back from the quarter two highlights there are two things that I would like to underscore first we're very pleased with the financial results were tracking well ahead of prior year, even with lower sales.
Second we're confident in achieving our previously announced cost savings initiatives, which we evidenced by both our Q1 and our Q2 results, but again. These two initiatives mentioned in yesterday's press release that I'd like to take a moment to discuss.
The first one am I like to touch on relates to debt and liquidity. We ended the second quarter was 45.3 million compared to 46.4 million a debt at September Thirtyth 2018, Despite operating at a net loss free cash flow in the first six months of current fiscal year improved 17.4 million compared to the first six months to prior fiscal year.
Which was driven by the cost savings actions.
We to the second item I'd like to touch on our continued cost savings initiatives. The company continues to implement successfully execute its cost savings actions continue to seek to identify new areas spending reduction during second quarter. We recorded 700000 of restructuring expense relating to a resource alignment restructuring plan.
That is expected to drive expense reductions of approximately 6 million on an annualized basis.
Additional cost savings efforts made during the second quarter included two location consolidation initiatives, one with ceasing the use of one of our New York City offices and the other was shifting distribution certain products for one facility to work technologically advanced inefficient facility. We also continue to review underperforming product line, specifically focusing on profit improvement initiative.
Within the specialty components of our gift business, we plan to continue developing implement the plans to try performance improvement within our gift business in fiscal 2020, now I'll turn it back to Jamie who will cover the financials in detail.
Thanks, Chris.
Turning attention to the financial result will walk for overall sales performance and results by category as well as comment on our income statement balance sheet and cash flow.
Net sales for the second quarter were 96 million, which was 16.9 million for a 15% decrease over the prior year quarter impacted by lower crop gift and seasonal sales.
Looking at our sales by category crop that sales were 35 million in the second quarter compared to 42.5 million in the prior year quarter, representing 17.6% decline.
The decline was driven by lower replenishment orders, a ribbon needle arpin kids crap further increase by lower button sales due to the timing of a button program reset from the prior year corridor.
Our gift category net sales were 23.6 million in the second quarter compared to 30.6 million in the prior year quarter, representing a 22.8% decline. The decline was primarily due to lower replenishment or a social stationary products within our specialty gift business as well as declines in package.
King and wholesale product and everyday term a package product.
Additionally, the decline was impacted by a placement of a new program within the drug channel in the prior year quarter.
Our seasonal net sales were 37.3 million in the second quarter compared to 39.8 million in prior year quarter, representing 6.2% decline. The decline was primarily due to lower sales of Christmas cards, and bags and the previously announced exit of the company's sports license back to school Prada.
One partially offset by higher sales of Christmas Bourbons in both.
Moving further into our income statement, our consolidated gross profit on a GAAP basis was 24.7 million for both current year and prior year corridors.
Gross margin was 25.8% in the quarter compared to 21.9% in the prior year quarter <unk>.
The increase in gross margin was primarily related to lower inventory step up amortization related to our simplicity Mccall and philosophy acquisition and a nonrecurring write down of inventory and royalty guarantees in the prior year quarter related to the restructuring of the company's specialty gift product line.
These savings were substantially offset by the lower sales volume and the mix of sales.
Our adjusted gross profit was 25.3 million for the second quarter compared to 30.9 million in the prior year quarter.
Adjusted gross margin was 26.4% in the quarter compared to 27.3% in the prior year quarter, driven by the mix of sales.
Selling general and administrative expenses were 20.4 million in the second quarter compared to 28.3 million in the prior year quarter. The decrease was attributable to lower cost, including consulting salaries medical benefits and travel expenses as a result of our cost savings initiatives.
In addition, the company also realized a benefit related to the remeasurement adjustment other fit lots to be contingent earn out consideration.
Restructuring expenses were 700000 for the second quarter, primarily attributable to severance expenses, resulting from resource alignment related to the company's previously announced restructuring plan.
The company had restructuring expenses of 2.1 million for the prior year second quarter attributable to the consolidation of operation in the United Kingdom, and Australia pursuant to the company's previously announced restructuring plan.
GAAP operating income for the second quarter was 3.5 million compared to an operating loss in the prior year quarter of 5.8 million <unk>.
Operating income was 5.9 billion for the second quarter and 4.5 million for the prior quarter.
The GAAP net income was 3.5 million for the second quarter compared to a net loss of 4.9 million for the prior year quarter.
Adjusted net income was 5.2 million compared to 2.9 million for the prior year quarter.
Diluted net income per share was 39 cents compared to diluted net loss per share a 54 cents for the prior year quarter.
Adjusted diluted net income per share was 59 cents compared to adjusted diluted net income per share of 32 cents for the prior year quarter.
Adjusted EBITDA was 9.1 million for the second quarter compared to 7.9 million in the prior year quarter.
Turning to the balance sheet and cash flow. We ended the second quarter with 5.2 million of cash and cash equivalents compared to 15.1 million at the end of the prior year quarter.
Lower balance was primarily due to funding up working capital needs for our overall business.
Inventory decreased to 105 million at the end of the quarter from 116 point Fourmillion at the end of the prior year quarter, partially related to lower fair value step up adjustments of inventory relating to previously acquired inventories.
Excluding the effect at the lower step up inventory inventory levels were $9.4 million lower at the end of the second quarter that at the end of the prior year quarter, which was driven by our inventory management improvement.
Accounts receivable decreased 20.1 million from 101.8 million at the end of the prior year quarter to 81.7 million this quarter, primarily attributable to the decrease in net sale.
Accounts payable decreased to 36.7 million compared to 37.7 million at the end of the prior year quarter. The company ended the second quarter with operating lease right abuse assets and operating lease liabilities of 46.9 million and 46.2 million respectively.
Which are recognized commencing in fiscal 2020 as a result of the adoption of the new lease accounting standard.
Cash used for operating activities with 28.4 million for the six month ended September Thirtyth 29 team compared to 45.8 million for the first six months of the prior year.
The decrease was primarily due to lower build up of accounts receivable attributable to lower sales volume cash used for investing activities with 5.8 million for the first six months of the current year compared to 11.6 million for the first six months of the prior year.
Capital expenditures were $6 million compared to 5.9 million for the first six months at the prior year.
Cash provided by financing activities was 22.2 million for the first six months of the current year compared to 14 million for the first six months out of the prior year.
Free cash flow was the use of 13.5 million for the current your second quarter compared to a use of 33.1 million for the prior year second quarter and 34.3 million for the first six months in the current year compared to 51.7 for the first six months in the prior year now.
Now I'm going to turn it back to Chris to discuss our fiscal 2020 outlook as well as provide closing comments.
Thanks, Jamie.
What were asked you name results of our first and second quarter demonstrate the company's commitment to driving cost out of our business. We move ahead planning for continued declines in revenue was previously communicated which we partially offset by cost savings initiatives already implemented as well as additional cost saving measures to improve overall results. We acknowledge continued weakness in our gift business.
As well as ongoing pressure from China tariffs and will be addressing this in fiscal 2020.
Our domestic Christmas ready to go production remains on track to ship on time, such that we did expect to see the execution issues experienced in the prior fiscal year.
Lastly remain optimistic about our combined legacy an acquired craft businesses as we continue to bring newness and innovation to the marketplace.
Our message remains the same which is to maximize cost cuts drive working capital improvements aggressively pay down debt drive profitability and free cash flow.
We expect for your fiscal 2020 net sales to be in the range of 346 million to 352 million, probably driven by retail customer reducing orders as a result of the impact of U.S. tariffs imposed on certain goods imported from China.
Our GAAP net loss is expected to be the range of two to 4 million compared with net loss of 53.5 million in fiscal 2019, and adjusted EBITDA is expected to be the range of 21 to 23 million compared to 15 million in fiscal 2019.
Expected growth in adjusted EBITDA was driven by the realization was cost saving initiatives, partially offset by lower sales volumes.
We also reaffirming our guidance range on free cash flow from fiscal 2020 defined as net cash provided by operating activities minus the purchase of property plant equipment.
We expect free cash flow to be the range of 14 to 16 million driven by the combination of cost savings working capital improvements and reduce capital expenditures fix expected range compares to our fiscal 2019 free cash flow of negative 9.6 million.
Lastly, I would like to touch on the short term stockholder rights plan, we announced earlier this week on.
On November 11th 2019, our board of directors adopted for short term stockholder rights plan declared a dividend distribution of one right for each outstanding share a common stock with a record date of November 22nd 2019. The rights plan is similar to stockholder rights plans adopted by other publicly held companies and will expire without further.
Action by our board of directors on the earlier on November 11, 2020, or the business day immediately following the company's next annual meeting stockholders absent any extension being approved by the company stockholders. The adoption of the right plan has tended to protect CSS into stockholders for the actions of third parties that our board of directors determines may not be.
The best interest of CSS and its stockholders today, but all the stockholders to realize the full potential value their investment in CSS and protect the interest of CSS into stockholders by reducing the likelihood that any person or group gains controlled CSS through open market accumulation or other tactics without paying it appropriate control premium.
In addition, the rights plan provides our board of directors with time to make informed decisions that are the best long term interest of CSS and its stockholders and does not prevent our board of directors from considering any offers that considers being the best interest of our stockholders. Further details are available at various publicly though documents filed by CSS with the securities.
Brian which are available at W.W. FCC Dot Gov.
Operator, let's open it up for questions.
Thank you at this time, if you like to ask a question empty press star one on your telephone keypad, if you'd like to withdraw your question passive hanky. Thank you.
Your first question comes from the line of China Walton football fans and company. Your line is open.
Oh, yes, Chris.
First of all thank you very much for the.
Great details that you provided in there of course is 10 makes Uh huh.
Easier to understand what's going on.
But on the on the faster than expected decline in sales.
Really surprised me was the crew group following that far and it.
Sounds like.
A mission. So so this is held in pretty well, but the ribbons and needle arts must do for light weight quite sharply can you talk about what's going in that market what to sell through and whether we.
Seen an erosion of retailers who are carrying those rights.
John Thank you for the question and I mean for one we don't see anything thats endemic within the category, that's causing problems. What we did experience. This summer with a few retailers in that segment was as tariffs were starting to increase it affects those retailers many of them, who directbuy from Asia. They were constrained with by dollars So retailers man.
Outage by dollars based on retail by dollars as well as physical dollars of inventory in their shelf, so as towers were coming in and being.
By the retail chains, they were constrained so during the summer months until the early fall. We had several items that were actually recently shipped in where they turned off replenishment as they had to shift inventory dollars within their store, but that is changed.
Now kind of since late September into October , but we did experience that in core areas patterns were not affected because patterns are are mostly pay by scans.
Okay.
Yes.
Yes.
Uh huh.
I'm sorry, we're talking over each of these sorry I hear you.
Sorry, John just things, where we hold the pattern inventory because it's so we're able to make sure patterns are highly in stock, but there were definitely out of stocks that occurred in and I think that they were just really trying to manage what's happening in the tariff world and manage their inventory levels.
So the fact that you can see that the.
Centers were selling through suggest that the demand is there for further ribbons and years, if I understand you correctly.
They are they're buying constraints caused the retailers inventories to go no go low side, which we should Ted do.
The.
Plus for you in the next few quarters.
I mean over time, they have to do bread they'll have to bring inventory in but I think as everyone is trying to figure out really what's going on I mean, the expectation now is tariffs are here to stay.
Earlier this year before the G. Seven there was a lot of you know kind of managing inventory levels and try to figure out really what's happening with tariffs.
Okay I guess the bigger question that is obviously.
It's good to see you reaffirming your guidance and free cash flow.
Adjusted EBITDA, but seeing the sales expectations decline again yeah.
I guess the real question is.
With the seasonal business largely completed by now and the other businesses largely being replenishment, where do you see the risks.
Short of your reduced guidance.
Sales and.
And earnings for this year and then.
As we look towards next year, because obviously we can't.
We continue to suffer this rate and sales decline what do you see they could.
We recovered eight.
Sales.
To get back to a flatter growth pattern in sales.
Certainly I can it thank you, but in terms of where we kind of took guidance down was really to account for potential further slower reorders. We still believe it's not tied to share change item last change at retail or even the fundamental weak consumer interest in those items as much as really the further risk of further type.
Yes, and how that could impact retailer buys and further inventory management at the major change and that was really kind of what we built into that I think eventually that will have to all bounce back, but I still think there's further risk as we finish out our year, we have seen orders bounce back we had a very nice October .
Orders for non seasonal products, but we do think that the risk going forward and I think without guiding into next year.
Dictation is we are certainly not going to repeat a year like we had this year at all and that we have belief that with what we're seeing with new placements that we see into next year, both in gift in craft and its seasonal of that we're going to have a much different revenue outlook going into fiscal 21, that's going to our goal is to be.
Minimal, but the flat level.
Okay and my final question then in order to say congratulations I think another role as CFO or.
No that's really.
That's a welcome back but can you talk about the reasoning behind that.
Well I mean, we're still meet recruiting for CFO and we're just being cautious to make sure we bring the right person in so it's just Jamie run going Who's our Vice President controller is doing a great job for us and her team but.
I have a CPT to financial background. So I felt it also dude in depth review of the financial statements every month as I have always done and I felt that was better than putting Jamie the position. So I'm very comfortable signing as chief financial officer as well.
Okay and it gets there is another question because that reminds me of the monthly reports you have to do.
The projections, you're making suggests that you really will be high that.
Net cash positive by the end of your fiscal year is there any reason to suspect the will not be able to renegotiate your current credit agreement at that point.
I mean, I can't comment to the future, but I mean, I think as the business continues to improve we're going to be at a better positioned to always worked with our banks right and I think we're doing all the right things and that in terms of driving costs down.
Getting out of assets, we don't need rationalizing our footprints.
And working to stabilize our sales that I think are going to be.
Continue to be good for the banks and us.
Thank you Chris.
Thank you John .
Hi, Ken if you like to ask the question. Please press star one on your telephone keypad.
There are no further questions at this time. Thank you for your participation today you may now disconnect.
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