Q2 2020 Earnings Call
Good afternoon, everyone participating in deltas apparel fiscal Twentytwenty second quarter earnings conference call.
It goes from management or Bob Humphreys, Chairman and Chief Executive Officer, Deb Merrill Chief Financial Officer, <unk> Adults group before we begin I'd like to remind everyone that during the course of this conference call projections or other forward looking statements made by Delta Apparels executives, such projections and statements suggest prediction and.
These risks and uncertainty and actual results may differ materially.
Please refer to the periodic reports show by what the Securities Exchange Commission, including the company's most recent form 10-K, and its form 10-Q filed today.
Documents identifies important factors that could cause actual results could differ materially from those contained in the projections or forward looking statements. Please note that any forward looking statements or meet only as of today and except as required by law. The company does not commit to update or revise any forward looking statements units. It becomes apparent that any projected results will not.
Realized Oh, I'll turn the call over to Deltas, Chairman and Chief Executive Officer, Bob Humphreys. Please go ahead.
Good afternoon equal joining us on our fiscal 2022nd quarter earnings call.
I'll briefly discuss our business results, that's how I felt were managing through the business with a current golden Monkey pandemic.
Oh also.
Our business that had not been impacted Taco did not keep it in fact, sabic celebrating momentum, giving us confidence that delta apparel will prevail through this difficult feared.
Turning to growth and continue to drive value for all of our stakeholders.
I'll, then turn the call over to our CFO Deb Merrill.
For more detailed discussion of our financial results in an update on the actions, we're taking to strengthen our financial position.
Moving in minutes, you are U.S. credit facility, which provides additional flexibility within our asset based lending facility.
<unk> Dhabi into our business results I want to reiterate but as we navigate through this unique situation or talked already remains focused on the Hilton psyche far employees, our customers and the communities we serve.
I would also wants to take a moment to lift you reaffirm a few highlights you discussed on our business update call on April 17.
Well managed takes a couple of minutes statewide local children's place. It's like we're at home initiatives, we've been able to stay open and operating our business in compliance with these orders.
We did close our 15 branded retail locations in mid March to be in compliance with guidelines for retail store operations.
Most retailers, we're marking local state and federal guidelines to determine when and where it's appropriate to reopen all retail doors last week, we opened the Charleston, South Carolina, Salt watch store and our co stores in Greenville, South Carolina within chance I keep or protocols to protect our customers and our employees.
Also expects to open the salt watchful and Columbus, Georgia Tomorrow, and three salt watched doors in Florida on Monday, We will continue to margin developments in Florida, North Carolina in California to determine when it's appropriate to reopen the remainder of our salt life and so the retail stores.
All eight of our U.S. distribution centers and all seven of our digital printing facilities have been they continue to be staff and operational to service the needs of our customers and consumers while they get all night open. Many locations are operating at reduce schedules with more limited staffing in order to comply with local social justice.
And then guidelines and current business levels.
Our clutch so in decoration manufacturing facilities in the U.S. in new Mexico have also been operating since the start of dependent.
Our facilities in El Salvador on their doors have been temporarily closed since mid March due to government mandated countries shut downs.
Let me El Salvador schedule to reopen in early May I know warheads, Colombian yet a wouldn't Honduras will be allowed to reopen.
We're also working toward what level of social chip social distance and then and other protocols, maybe in place, which could limit the number of employees allow not facility in production begins.
It's important for hospitals and health care workers on the fault lines as well, it's all Americans badly the spread like along with bars, you're producing face masks in our so facility and say well North Carolina as well in our facilities in Honduras, and El Salvador, which does have provisions to utilize small weren't groups for this purpose.
Yes are being sold to the department of health and human services, the U.S. government for distribution to local needs.
In addition to the production on National the government.
Also producing and selling non medical grade they scrubber ops in are you asked in Mexico facilities.
Production of the Placemat in carbons allows us to keep more workers accidently employed and provides an additional revenue stream.
Given that we operate the Mark majority of our business based on at once orders, we have been and continue to be and a good inventory position. It's probably located in the U.S. base distribution centers the strength of our business model remains anchored in our broad geographic footprint across the U.S. Central America in Mexico as well.
Yes, the diversification of our sales channels combined with our unique business capabilities.
The board, particularly in our Navy and marine businesses.
Over 17% adult apparel sales of January I get to various E. commerce channels, including our brand new consumer web sites are brands being sold through the E. commerce sites of our retail partners and our digital printing business VTG to go.
In fact in April both our Saltlike and soapy consumer sites are on track to more than doubled their business from a year ago with Salt Lake Dotcom increase in about 120 per cent from last year.
In addition to the improve sales of soapy products on our side Sophie's also seem grow coming from other E. commerce site that carry soaking profit.
<unk> in our salt like Dot com and soapy dot com sides, not only provide a nice revenue stream until brick and mortar stores can open.
Clear signal that the salt life, and Sophie brands have a strong emotional connection with consumers.
What is also exciting trance, we are seeing and R.D.T.G. to go business and this time of supply chain disruption in consumer restrictions on traditional shopping habits. The advantages of D.T.G. goes proprietary technology and you need fully integrated business model have become even more clear to the market place.
Being the only digital prints supplier in the world providing customers through the seamless fulfillment solution integrate it with a vertical manufacturing platform and draw geographic footprint, there's a tremendous competitive advantage.
Our daily orders receiving April have accelerated to level similar to the holiday season.
The T.G. to go is receiving more business from existing customers as well as rapidly own boarding new customers that have been disrupted in their car supply chain during the pandemic.
We also it's parents further celleration independence duration of Delta catalogue, let usage into D.T.G. to go business, which jumped to 30 per cent usage compared to 12% and last year second quarter and 28% into December recorder.
Although the order backlog, it's tremendous we are somewhat limited in our production output as we've had to make adjustments in our facilities to comply with the six foot social distancing guideline and curfews implemented by certain local governments.
In addition, our facility in Reno has been operating said only about 25% of this normal output based on restrictions in that area. However, we remain very encouraged by the positive trends we are seeing for digital printing throughout this pandemic.
And believe adoption range for the own demand supply chain model will mean for meaningful the increase in the Patriots company to evaluate their ongoing business model post code at 19.
Anticipate a leveling off a business as the U.S. begins to open up we do believe that we are uniquely positioned to exit with banned in it with a larger base a business and well consideration for continued growth.
Adult to catalogue business experience and outside impact from the Soviet 19 pandemic as much as a business is driven by traditional retail advance and corporate branding.
Retail closed in virtually every event didn't involve they're gathering of people will cancel orders and mid to late March when nearly nonexistent when you're a slowly say in business return has mass retailers are beginning to replenish apparel inventory and the discipline way.
We believe the U.S. as the U.S. starts to reopen we will see certain businesses began to pick up including add specialty and promotional products, which historically have done well impose pricing situations.
Overall, our cat log business does well during recessionary times, 'cause decorating decorating t. shirts.
Product that allows consumers to make the modestly priced feel good purchase during tough times.
In January we launched our new distributor model, providing our customers with a broader range of product categories with nationally recognized brands and products, including whole seller exclusive original paying one callaway and Jack Nicklaus lines of golf layer.
Continued to do this new disk distributor model is that long term additional revenue stream has mentioned earlier. We are also now selling our delta produce takes coverups, which we believe will be a staple I don't need it by small and large existences, we were happy to be that one stop shop for them with our distributor model as they also nightmare apparel.
Purchases.
Are fun things business ended the second quarter with double digit sales growth as we benefit from our customer diversification that we've been working on for the past two years.
That's a supply chain partner, we offer full service supply engineering management and technology, along with our manufacturing platform, which is compliant flexible and the products than retail rating services, you can provide and importantly, close to the United States.
<unk> with nationwide distribution coverage, along with our broad customers.
They also began shipping retail direct programs, which subsets successfully launched the stall. While currently in fact about the retail shop now we are confident but as soon as I reckon retail partners reopened we'll see the business continue to grow.
Summarized prior to code at 19, we were experiencing broad base strength across all of our business segments of it 19 has forces us to that quickly and manage prudently.
We were operating on a solid foundation that approximately 25% of our business not being hurt like of at 19.
<unk> portion of which is actually accelerating during these times.
We already decided about in the momentum we are seeing on our branding sites and then our D.T.D. to go business Delta apparel is uniquely positioned to exit this pandemic in a position too quickly returned to profitability Ingram.
I'll now part of the discussion over to build up to the U.R. financial results in more detail Yep.
Thank you Bob.
We didn't proximate have preliminary results to me the Guy I like second quarter salesman negatively impacted I totally 19.
Last month of the quarter are strong gross margin performance more than off something declining tail and drove solid earnings like a quarter, but <unk> earnings per share up 46%.
Frame to worry about going a little bit more detail.
One quarter Kinkle 2020 pounds, we're down 6% in 96.7 million in mind with a preliminary results, we provided with our business updates.
Prior to 19, we are on track to deliver sales approximately 9%.
A key then another quarter a strong gross profit and gross margin results registering your over here and quarter over corridor.
Despite the plans had when a temporary plant curtailment cost.
Healthy gross margin performance is driven by manufacturing process improvements and integration efficiently.
He has got a quarter came in at 19 that nearly 50 per cent increase compared to eat P.F. and 13, then and the choir your second quarter.
<unk> any approximate $2 million pretax 20 cents per share a plant curtailment costs, <unk> 39 band, which represent over eight 200 per cent easy compared to the priory.
But the second quarter, our galaxy breathe in Salt Lake both registered sales declines of approximately 6% and they were both impacted by 19 during the final month of a quarter.
But then I don't think group, which represents roughly 87% of our second quarter sales and strong growth in our front teeth business was more than offset by the decline and outside of lump it more in March related to Kobe.
<unk> early March or actually were business was on track to deliver strong sales crap.
Felt life experience nearly 20% growth in E. commerce marked corridors and we are seeing strong branches just felt like rebuild the work in at wholesale for for the March retail sat down.
Gross margin increase 200 in 1984 points to 21.3% versus 18.4% and acquire yard and 60 basic point increase compared to our first quarter results.
In addition to lower vomiting, real costly benefited from the conversion constants agency compared to the prior year.
Adjusting to the clan curtailment expensive, what we talk about gross margins wouldn't have been 23.3% during the March 2020, Porter and improvement up for some during the 90 maintained points from the prior here any 260 basic point increase from the Kids go 2020 December.
Order.
I don't see an expensive 17.9 million, representing an incremental $800000 of expensive compared to the choir here with with that eats primarily related to investment in our distribution expansion.
Even with a hint that can't be mostly healthy in the corner. All she may 10th of a percent you just have increased to 18.5% compared to 16.6% and the prior your second corner.
Operating income increased the 3.6 million compared to 2.7 million and the prior your second quarter.
The 1.7 million increasing don't think are operating income is attributable can astronomers margin expansion, partially offset by the lower say out in a fire distribution expensive.
But the Salt Lake segment. The operating income declined 1.3 million and was primarily attributable to the lower sale as well as the union acting tariffs on imported bed, coupled with lower income from it justice to the contingent earn out liability in the current year compared to the prior yet.
Yeah, I didn't compare the quarter with 1.3 million for 19 cents per deleted chair compared to 900000 or 13 cents per diluted share in the prior year period.
But even temporary manufacturing close your cost that more expense during a quarter nanny from there to we didn't share for the second quarter of the full 2020 would have been 39 cents, which represents the 200 per cent increase over the prior yeah.
Looking at had we have already did fast we do expect our overall third quarter performance across our segments to continue to be negatively impacted by the curve. It 19 crisis in sales leveled affected C.D. dramatically lower than the prior year.
Well I never knows when the U.S. will begin to fully reopened and what impact and what the impact will be a retail.
A great deal of uncertainty remains regarding the level of recovery in this <unk> of the recovery curved.
Also as I mentioned I plan things on direct you know Salvador remain in <unk> temporary shut down under government orders and the degree of it impact is difficult to determine.
Well, we are unable to give details what all with me on a forward result pressed his shirt that we're taking all actions we can't can't prevent me navigate through these difficult time.
It's actually probably including reducing our capital spending in non critical area. We do you think <unk>.
<unk> Furloughing are permanently terminating approximately 300 employees in the U.R.
Sending share repurchase old and taking advantage of the payroll talked about credit for 40 to company of our size under the chairs out.
We ended the marks quarter with over 30 million of available funds for the business, including over 9 million of cash on hand.
And clean three point that earlier this week, we secured at Brigham then back to our U.S. revolving credit facility with our lenders.
The amendment provides additional flexibility can tap into the availability provided comfortable company got that played funding arrangements. Yeah Amendment among other things it's up for financial Covenant per gauging the end up fiscal year 2022, effectively lower minimum availability threshold and remove it takes charge coverage ratio.
<unk>.
It gets affected only gives us approximately eight to 10 million of additional funds to utilizing our business between now and the end of the fiscal year.
This will be as long as it turns on the bridge amendment can be found in our quarterly financial statements, which were filed this afternoon.
Oh, we believe this amendment gives us and necessary flexibility to operate our business in Utah.
Also looking other available debt financing options that may be proven.
As mentioned earlier, we expect revenue in our June order to be dramatically less than what prior year and even within trend of higher grades Morgan's we've seen in recent quarters on the current status we've taken to reduce our fixed costs. We believe that are June quarter will not be profitable.
As a reminder, in on March quarter, we incurred about 2 million in cost to think even with two weeks of manufacturing curtailment in El Salvador in Hungary, and leads to qualities have yet to reopen.
Ball recently in the coming months will be too difficult, we believe the company and wealth admission to navigate through that we continue to have great opportunities in front of us to gain market share and operate profitably once we get through the impact sense of it 19.
Let me now trying to call back I read about before we open up for classes.
Thanks, Deb, we're operating the business prudently magic previous on certain period.
Fully integrated diversified business models, allowing us to not only continued to operate and generate sales that has also created an opportunity for adults will fail to expand our reach with listening customers and got a new customers and certain cells channels.
In a good financial position to whether the current form and I'm <unk> will emerge from this pandemic stronger and ready to comfortably grow our business.
I think our board of directors and employees, who are truly been amazing for their patients and hard work throughout this difficult to.
Operator will be glad to open up the corporate questions now.
Thank you she's like the ask a question three signal by pressing star one on your telephone keypad Sears using a speakerphone. Please make sure your you'd function is turned off to like a signal to reach our equipment again for star one to ask a question of pause for just a moment hello, everyone an opportunity to signal proportions.
Well I'll take the first question from Dan <unk> <unk> <unk>, It's healthy Advisory group. Please go ahead.
Good afternoon bobbing dad. Thank you very much for the insightful information.
You think of this time period, and just would love a little bit more context of unpacking is you think the balance of the fiscal year and how you move through that's how do you think of the level of cash Byrne and the order is that comes that that come through and how do you see the manufacturing facilities coming back.
'cause given the fact that not everything comes back automatically to 100% operation how do you think of that flow through indicated.
<unk>.
Okay, well, that's a lot of important information and important questions and I'll I'll address of it of it and then let the jump in as well, but you know we've we've gone through April with the same availability as we started so our cash burn.
There was a very little the way, we managed to that that again all it does speak more to that I think it is according to realize that are Mexico. So <unk> facility and print facility is still operating and so we can use that to fill in our inventory levels as we need to we can also do probably label programs too.
Mexico and friendly package and have them retail ready so take our diversification of manufacturing is helping us a bit in this situation.
And so I think the next thing that will be interesting and important call is when and how we open up our other manufacturing facilities.
We would like to be able to start producing product in El Salvador sooner than later, we have product that we can run in there now and garner you know sales from it.
And then our two plants in Honduras, mostly produce our blank unemployed.
In some private label programs and so we will look and see what articulatory levels are in our U.S. distribution centers of how businesses picking up and you know make the decision or when and how to open up those facilities as the government allows us to do so.
Also on the cash for on you know as we sell our existing unemployed that's highly cash pause it to us, particularly when we're reducing that with all that they'll talk more about that and and cash burning and availability.
Okay things stops again, a couple of call out in some Bob probably did see but I'll, just give a little bit more color on it.
You know we are we are basically now it's real art month April we thought about 25% of other business has not been really in pocket in in some areas are certainly growing as we went through April we seen rather need at about that 25% some a year ago, but.
Great thing is that every single week that has gone by during the month of April we are seeing revenue increases week to week and so we're just now starting to see area of of that country beginning to open up and so we would hope to see that weekly increase continuing and up to 10, certainly we accelerating.
And more in the country begins to open in.
On so I think hopefully I found out that song for where things are and the growth areas and we'll things that should open up a week a week by week things started happening in the comes rate a couple of things on them acquainted he has problems and briefly we did and the March we had started with approximately.
30 million of liquidity between the class on hand, and the availability under our credit facility.
It it's great to report that we still have about 30 million of liquidity available to us. So we've been able to navigate through the last five week I'm really not burned through any of that so you know part of that is.
Mention like reseller inventory and we're not replacing that it can become very cash flows javier tends to that business and so we would expect to see that shopping means.
Through the upcoming months, Bob also known so obviously, we would like to be bringing manufacturing back online and especially for our private label them as well.
These days is that we have been able to support that they're talking about six how operations on that certainly have in order book that our El Salvador operation can begin that we do have products that we can mean, you factor and generate sales from that so with that I think that we'd insert.
Some questions that you had you know, but yeah, you can follow up one clean clean glottis now.
To click follow up you, you're having new customer ones lately, which is encouraging can you hold onto those customers. After this crisis and how do you think of the Onboarding costs and just on the gross margin an X.G.N.A. How do you think about the inventory backlog for others that brings in promotions and your ability to manage grow smart.
<unk> and how much of your S.G.N.A. costs are fixed versus variable. Thank you.
Sure.
Yeah, right and and and I was up in there without the great News is that with you know D.C.G. tigo business, because that inspection technology driven business, that's where we're really be eating our customers right now and that Onboarding clock is not significant because the the technology that we have.
We have garnered a number of new customers in that and having have have more that are currently wanting to our partner up with US now realistically all of that business at the current level with you would not expect for it to continue at its current level, we think that that will that will.
<unk>, some but as I said, we also have you'd customers that are still wanting to on board.
One that we get on board, where their supply chains have been disrupted I think a positive thing is is that D.T.G. can't go has been there I to support their business during not and I think as everybody starts accepting that that that the heart of that prove it 19 people are going to take a look at what their supply chain and what their fulfillment network.
Sorry, and have really come to realize the benefit that we have it D.T.D. to go with those benefits, including the geographic seven locations. So we have been able to navigate through in day, where we have a location to remain open and there's a lot of places that have not been able to do that and then you.
Couple about with the integrated facilities that we have lived in just that in our own distribution on now earn distribution centers that we have and you know again through the times for various and sundry reasons to supply chain.
Even blank garments has been impacted but we've been able to maintain with our supply of our delta blank.
Support that so I think.
And strategic advantage is that we have have really come to light how powerful those are two businesses and we would like to believe that that will continue as they want to make sure. They have a backstop for any future destruction about credit card. So we feel positive about what what were cheating.
And positive about how will exit and continue with a nice strong growth path for D.T.G. to go as you were mentioning it S.G.N.A. you know again, we've talked a lot about this stuff that we've taken.
Lower the cost in there lots of people are asking obviously about a six versus variable I'm coughing aereo and what percentages are and I mean, we didn't feel like that kind of a tough question because lots of time things that you think are fixed costs actually become variable costing you figure out that.
You might have thought it was a fixed costs, you really don't need anything you're able to reduce those takes crofton wow. So.
At the end of the Guy we had absolutely worked through and talks with auction from the things that we couldn't reduced that we also thought through the additional numbers that are out there depending on how their recovery <unk> and so we obviously problem in our for fun, but do you believe that we.
In the pruning actions to reduce the the level of business that we have now and eliminate those unnecessary short term expensive and and will continue to evaluate like going.
Thank you.
Sorry will now take her next question from Jamie really really management. Please go ahead.
Partial sure.
<unk>.
The girl, you're talking about running or cut.
How are they levels you have you have.
Some plants, which has to be running it for British levels or code insertion changed your closer.
Spatial requirements, she could probably from labour due for completion hiring people <unk> are you running the contract Trashy wrote now.
Yeah, we are g. or writing it out what we would call the new capacity that we have and what I mean by the new capacity is based on what the output that we can get for the hours that we're working because we are not so at holiday season, when you're running 24.
Sabban during that time period, and we're not running over night again comply with perfume in different areas. So we are at Max capacity for what the times that were open at the difference. It's only when we are and the outfit that we can gap right now or or or income.
Orders are exceeding our ability to produce those orders all which means our backlog in increasing every day. We certainly are working on <unk>. That's as much output as we can while still keeping our employee faith in complying with the restrictions that are out there but.
You know I say right now we are running just it's full and working on every bit of ways that we can get more production through under the guidelines they have.
Can you comfortable pork for what you might expect your volume program at Christmas for sure.
Oh, well, we're not I mean, no we're not getting it for a whole coke outlook, but I would say right now we are back in growth mode in that business and based on on the order book I would certainly effective theme that strong growth.
Carry all the way through you know June really yeah city end of this this whole year. So I say this box half of the year, we would expect to be back on growth half a in gross pay that we had been talking about before you know what to our holidays, even with with the challenge is what they certain calendar there but.
The last two quarters, we think we're back on that that trend we've been talking about which you know couple about with the Delta environment, you know should be in the the double digit growth rates and be much higher production utilizing the doctor Berman.
<unk> worse required more capital expenditure for new equipment.
At this point in time the equipment that we have we think should support the business again as we can open up the rest of the facility time frames that we have.
So we don't anticipate any short term expenditures, but again, we'll see how we end through December to see if they wouldn't be any requirements before we go to the holiday season.
<unk>.
Resort rocard, what percentage of yourself like stretching lower coming from from Hong Trail supposed to <unk>.
Well, it's it's really the vast majority Ah.
You know because so much of our retail customer base you know just 'cause close right now so yeah. We are still show a ship and some small retailers and anticipate the I'm starting to open up in the Carolinas in Florida, you know in the coming week or two but there's <unk> a lot of wholesale business there right now.
Okay.
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Industry to fall can can purchase of change.
And everybody's trying to reduce certain <unk>.
Repression and margins moving forward.
Yeah, well I would say in general it's too soon to tell but we haven't seen you know.
Or an ordinary discounting out there or anything like that so far.
Okay, unless you're on the Middle School <unk>.
<unk>.
Yeah, we didn't say you know where they you know we.
Oh, Okay, we publish the number on every day.
No we don't we have not.
Okay for you you you will use that basically to keep your parents running to keep your employees very spiritual regarding the African anyway, it's not really and.
Profit center for third during there's more difficult times it is covering some research.
Exactly and you know there will be particularly in these you know the next month or two in August say revenues challenge there'll be a nice additional piece of revenues it'll be meaningful to us.
And gave me I just don't have been also clarify doing I just wanted to also clarify that in El Salvador Hunter S. right now, while we aren't manufacturing those.
It is a very small work group that we haven't been permanent T.U. the lights for them. So I don't want to give the impression that you know the vast majority of our workforce is able to work because it that it is eight varying lying error work group that we have 40 minutes to allow it to manufacture the fake that strike.
Okay.
As far as Starbucks distributor models that you're just starting to work shorter than before transfer down are you sure and attraction, there and how much inventory to accumulate <unk>.
Yeah, So Jamie over all the amount of inventory that we invested in is is not significant you know and and and probably the kind of a rounding number to our overall inventory levels, they not a significant amount.
We were starting to get a little bit attraction, but as as you know we really just falling asleep at the end of January they really had only started a marketing it in February are right before the pets. So she's doing to tell about any traction although there's certainly interest in it and I think I think pick off and.
Now we are again, providing are are dealt with pretty safe hovering see you again. These small businesses that this whole one stop shop is what we were going after I think I think the path, we'll get back on the on tape once again businesses get back starting on and people are looking for their products.
Okay.
First quarter.
Thank you.
And once again once again that is star one if you'd like to ask a question of US are just a moment.
[noise] currently there are no further questions I'll turn it back to the presenters just go ahead.
Okay, well. Thank you all very much for doing us on our earnings call today, and we'll look forward to a a button in about three months on the current color results psyche.
[noise] today's Kostick you for your participation you may know disconnect.
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