Q4 2019 Earnings Call
Thank you for your patience a conference will be beginning and just one minute again. Thank you for your patience.
[music].
Let me welcome to GNC Holdings, what her 2019 earnings call.
All participants are not listen only mode. If I didn't want you require operator assistance during the conference. Please press Star Zero and your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to about a lot of its head of Investor Relations. Thank you may begin.
Good morning, Thank you for joining us for GNC, its fourth quarter 2019 conference call.
We'd like to remind everyone. During this conference call GNC management will make certain forward looking statements about its outlooks that involve risks and uncertainties.
Forward looking statements are generally preceded by words, such as believe plan intend expect.
Anticipate or similar expressions.
Forward looking statements are protected by the Safe Harbor contained in the private Securities Litigation Reform Act.
1995.
Because forward looking statements relate to the future they're subject to inherent uncertainties risks.
In certain changes in circumstances that are difficult to predict and many of which are outside of the company's control.
Factors that could cause actual results to differ from expectations include but are not limited to those factors set forth in GNC filings with the ITC.
GNC is making these statements as of March 26, 2020, and assumes no obligation to publicly update or revise any forward looking statement.
In addition to the GAAP results.
GNC will provide certain non-GAAP financial measures GNC earnings press release for the fourth quarter of 2019.
Can be found it under the news release link on the Investor Relations page of the company's website at Www Dot Chianti Dot com.
The table attached to that earnings press release [laughter] include reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.
With that I'll turn it over to our chairman and CEO Ken Martindale.
Thank you, Matt good morning, everyone and thanks for joining us a this morning on short notice.
We find ourselves you know uncharted waters right now I'd like to begin by acknowledging all of our tremendous associates in the stores supply chain and offices as well as our committed franchise partners, who have been working tirelessly to provide health and wellness products to communities around the world that they serve.
I'd also like to extend our sympathies and best wishes to the thousands of people who have already been terribly impacted by the spread of coal that 19.
Let's start by talking briefly about our fourth quarter results.
Comparable sales in our U.S. stores were softer than we would've liked but our E commerce business delivered a 15% sales increased during the fourth quarter.
Consistent with our strategy to stabilize the U.S. and Canada business E. Commerce will continue to be an important source of growth more now than ever before.
While top line challenges, including a temporary issue is one of our wholesale partners resulted in SGN a de leverage during the fourth quarter.
Our work to reduce cost is still very much on track.
In the past year, we pulled more than $35 million in costs out of the business and our plan includes an additional 25 million in expense savings by the end of 2020.
As we work through the potential impacts of the Corona virus situation. Our focus on cost management will only intensify we cannot assure you however that any or all of these additional expense savings will be realized.
We're happy with the progress we made in stabilizing the domestic retail business in 2019.
Our store optimization efforts and cost savings initiatives contributed to another quarter of year over year EBITDA improvement in the U.S. and Canada segment.
For the full year 2019. These initiatives drove an increase in EBITDA in the segment, which is consistent with our long term strategy.
On a consolidated basis, our quarterly adjusted EBITDA was $26 million down 9 million from the fourth quarter of last year, driven by the transfer of the Nutra manufacturing facility and China business to newly formed joint ventures.
As a reminder in connection with these transactions we receive proceeds of approximately 100 million for the first installment of the manufacturing joint venture and $300 million for the issuance of convertible preferred stock to Harbin pharmaceutical.
As you know we've been actively pursuing opportunities to refinance our current debt with an independent committee of our board.
Although we have experienced slowing progress due to the worldwide impact from coal with 19, we continue to review a full range of options to refinance our capital structure in both the U.S. in Asia.
[noise] GM sees first priority has always been the well being of our associates, our customers and the communities, we serve and that has never been truer than it is today.
We face the Corona virus pandemic, we're working to educate the GNC team on the best ways to take care of themselves take care of our customers and do our part in keeping our communities healthy.
As of yesterday, we had approximately 900 stores in the U.S. in Canada that were temporarily closed for business, representing nearly 25% of the combined store base.
The largest percentage of these stores are located in malls.
In addition, we had nearly 700 stores operating unlimited hours.
This is a very fluid situation and we review at on a daily basis.
As you might expect our ecommerce business is running substantially ahead of prior year run rate and we're working hard to process and ship orders as quickly as possible. Although we are currently experiencing some delivery delays.
Our new order management system, which launched successfully in January will deliver buy online and pick up in store capabilities later in the year, but in the meantime, we launched curbside pickup in many of our strip centers to allow customers. Another convenient method to get products. They need during this difficult time.
All of our distribution centers are open and operating and we're working closely with our vendor partners to keep merchandise flowing as efficiently as possible through our supply chain.
In addition, approximately 95% of our corporate office team is now working remotely.
Clearly this unprecedented and rapidly changing situation is disrupting many businesses in many industries.
And while consumers trust in the high quality products and expert advice that we offer has become more important than ever in this environment. It is impossible for anyone to predict a link and severity of the current crisis.
As we continue to work our way through the impacts of covert 19, I continue to be in or the entire GNC team.
They remain focused on taking care of our customers and meeting the needs of their communities during its very difficult time.
With that I'll turn it over to Trisha.
Thanks, Ken and good morning, everyone.
Our quarterly adjusted EBITDA was $26 million down 9 million from the fourth quarter last year, driven by the transfer of the nature manufacturing facility in China business to the newly formed joint ventures.
For the full year adjusted operating income from our largest operating segment you asked in Canada increased $20 million or 15% compared with 2018, driven by lower occupancy cost and lower salaries and benefits as a result of our store optimization and cost reduction initiatives.
These initiatives helped drive improvements an adjusted operating income margin and 160 basis points and that's key segments from 6.7% in 2018% to 8.3% in 2019.
Fourth quarter consolidated revenue was 470 million compared with 548 million in the prior year.
Decrease is primarily attributed to the transfer of the nature manufacturing in China businesses to the newly formed joint ventures closure of company owned stores from our store optimization initiative, a negative same store sales in the U.S. company owned stores [noise].
Fourth quarter same store sales, including E commerce were down 2.4% breaking apart the pieces U.S. domestic brick and mortar comps were down 4.9% an E commerce was up nearly 15%.
E Commerce sales increased to 11.5% of U.S. in Canada revenue in the current quarter compared with 9.3% in the prior year corner.
As we shift the business started true omni channel model, we believe a blended comp is the best way to look at the business. So going forward, we will no longer be breaking apart the pieces of our omni channel external comp.
Revenue from our international business, excluding China was down slightly.
As highlighted on prior quarters, the transfer the China business to the joint venture resulted in a 9 million dollar expected decrease in revenue.
[noise] manufacturing in wholesale revenues, excluding intersegment sales decreased approximately 34 million primarily due to the asset transfer to the newly formed manufacturing JV as a result of the transaction with International Vitamin Corporation on March 1st of 2019.
Wholesale revenues declined approximately 6 million largely driven by a reduction in consignment revenue with Rite aid and a decrease in wholesale sales due to ride is focused on working capital reductions in the fourth quarter.
At the end of 2018, we renegotiated a contract with Rite aid and eliminated the consignment portion of the prior contract, which created unique supply chain inefficiencies.
As a result, the elimination of these down does not have a material impact on profitability.
In addition, we eliminated the radius restriction that prevented us from selling DNC products within a certain mile radius of Rite aid stores.
This change which went into effect in January 2019, freed us up to explore new strategic partnerships some of which we highlighted on the last call Dick's Sporting goods Hudson News and Albertsons.
Fourth quarter gross profit was 32.9% of south compared with 31.5% in the prior year.
The improvement was due to the transfer of the nature manufacturing business to the manufacturing JV and lower occupancy expense as a result of the adoption of the new lease accounting standard store closures and rent reductions associated with the store portfolio optimization strategy.
Additionally, as a reminder, in the fourth quarter 2018, we had a 2.5 million dollar prior period correction related, especially manufacturing in our nature manufacturing facility on a $2.5 million reserve taken for balance sheet risks related to a third party vendor.
At 29.4% of sales fourth quarter adjusted EPS DNA was at 230 basis points from last year, primarily driven by de leveraged in salaries and benefits associated with the decrease in sales as well as an increase in marketing and consulting fees.
As she and $8 were down $10 million compared to the fourth quarter of 2018 on adjusted basis, primarily due to lower salaries and benefits associated with the store portfolio optimization and cost savings initiatives.
As Ken mentioned earlier, we delivered over 35 million in cost savings throughout 2019.
Moving to the 2019 on it and our refinancing as previously disclosed our 2019 audit opinion includes a going concern explanatory notes, resulting solely from an upcoming maturity date under the tranche B two term land and the net.
As we have been discussing we're exploring several refinancing options in Asia in the United States.
We had been in discussions with certain lenders in Asia with respect to refinancing option.
We became aware last night by those wonders that they're no longer pursuing a refinancing with that.
We will continue to explore all option to refinance restructure our indebtedness.
Well, we continue to work through a number of refinancing alternatives to address these maturities we cannot make any assurances regarding the likelihood certainty or exact timing of any alternative.
We ended the fourth quarter 117 million of cash [laughter] and Undrawn result, revolver for the full year versus last year free cash flow increased 4 million from 77 million to 81 million.
Okay.
[laughter] increase was driven by favorable working capital charges changes, primarily due to an increase.
And accounts payable as a result at the company's cash management efforts as well as the establishment of payables associated with the manufacturing joint venture as a cautionary measure.
Given the current macro environment, we recently dropped 30 million on a revolver, resulting in over $130 million in cash as of yesterday.
Although we have historically taking questions at the end of each call either unusual times, presenting many unknowns and as such we will not be taking questions on the call. Today. Please feel free to reach out to myself not only to match, our John Mills that I see our.
Thank you.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.