Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for standing by and looking to the Hanesbrands first quarter 2020 earnings conference call.
At this time all participant lines are in listen only mode.
After the speakers presentation, there will be a question and answer session.
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I'd now like to and the conference over to your hosts today Mr. TC Weblog Chief Investor Relations Officer. Please go ahead Sir.
Good day.
Everyone and welcome to the Hanesbrands quarterly Investor Conference call and webcast. We're pleased to be here today to provide an update on our progress after the first quarter of 2020.
Hopefully everyone has had a chance to review the news release, we issued earlier today. The news release updated SBQ document and the replay of this call can be found in the Investor section of our Haynes Dot Com website.
On the call today, we may make forward looking statements either in our prepared remarks or in the associated question and answer session.
These statements are based on current expectations or beliefs and are subject to certain risks and uncertainty.
He is that may cause actual results to differ materially.
These risks include those related to the impact of the cobot 19 pandemic as well as related measures to combat the pandemic taken by governmental regulatory authorities on our business and operations as well as the business and operations of the consumer our customers suppliers business partners and Labor Force.
As well as those risks detailed in our various filings with the FCC, which could may be found on our website as well is in our news releases.
The company does not undertake to update or revise any forward looking statements, which speak only to the time at which they are made.
And the Dk and why intimates license.
Additional information, including a reconciliation of these and other non-GAAP performance measures to gap can be found in today's press release.
With me on the call today are Gerald Evans, our Chief Executive Officer, and Scott Lewis, Our Chief Accounting Officer in interim Chief Financial Officer.
For today's call Gerald and Scott will provide some brief remarks, and then we'll open it up to your questions.
Ill now turn the call over to Gerald.
Thank you TC good morning, and thank you for joining our first quarter earnings call.
Given the uncertainty in the market, we understand that investors are more focused on how our business is positioned to perform in both the current and post pandemic environments.
Well, we'll discuss our first quarter results, including our better than expected Innerwear performance through mid March our focus for today's call will be on our current business trends our cost reduction initiatives the creation of.
From a new business line for cloth mask and personal protection garments, and our substantial liquidity position, which we believe provides and.
Well capital cushion, even under a prolonged shelter in place an area.
This combination maximizes our operating flexibility in the current environment strengthens our long term earnings growth profile and positions us to take advantage of current and future opportunities.
Before I speak to the quarter's results I want to.
Recognize the efforts and sacrifices being made by Hanesbrands employees around the world.
They have allowed us to continue to serve our customers and consumers during these uncertain times.
There are also did.
Driving force behind Hanesbrands established reputation for corporate citizenship and social responsibility.
As an organization we have committed to help fight this global pandemic, which includes shifting our manufacturing to produce cotton face mask our employees, our greatest asset, which is why I would like to personally thank each one of them for their contributions.
Turning to our results. The first quarter was marked by to radically different periods as the global spread at the Corona virus accelerated in March.
We expect variance than unprecedented sudden drop in sales and profit late in the quarter, Although we have seen orders resume in April.
Our global shipments in sales essentially stopped in the last two weeks to the quarter as our customers reacted aggressively to the shelter in place announcements by delaying or canceling their orders.
This abrupt reaction by our customers more than offset the strong revenue and profit performance across our businesses through the second week of March, particularly within U.S. Innerwear and U.S. activewear.
Through mid March U.S., Innerwear revenue was down less than 1% over prior year well ahead of our initial forecast as our turnaround initiatives, we're gaining momentum.
During this period point of sale at our top seven customers, which is where we focused our new innovations revitalization efforts increased 3% and both basics in intimates.
And our market share improve meaningfully and basics bras in shape, where.
And in US Activewear revenue through mid March was up mid to high single digits driven by champion.
For the quarter, our cash flow performance was strong and ahead of our plan. Despite the sudden cobot related fall off late in the quarter.
Inventory reduction initiatives timely supply chain actions and strong working capital management delivered a year over year improvement and cash flow from operations more than $100 million.
In the quarter, we estimate that cobot 19 impacted revenue by approximately $181 million operating profit by approximately $86 million and earnings per share by approximately 20 cents.
Adjusting for the Kobin related impact first quarter revenue would have increased 1.6% on a constant currency basis.
Operating profit in operating margin would have been consistent with prior year and earnings per share would have increased 14%.
Make no mistake, the cobot 19 environment is a true channels.
However, we're encouraged by our pre coded performance and underlying business trends.
This underscores the health of our brands the building momentum in our US Innerwear business. The continued consumer demand for champion.
And the strength of our cash flow model.
Given the long term stability of our categories were confident our business can return to these performance levels in time.
We have seen orders resume in April as consumers and retailers have begun to adapt.
Online growth has rapidly accelerating each week, reaching triple digit growth rates across a number of our customers online platforms as well as our.
Oh champion Dot com and Maidenform dotcom sites.
Same as are also buying arch categories at stores within them.
Mass hypermarket dollar store and drug store channels.
The basics reset at a large mass retailer is progressing.
And we have back to school orders from some of our large customer.
Yes.
Over our 120 year history, we have faced a number of significant.
As a result, we developed a pandemic strategy designed to maximize our operating flexibility under any of our modeling scenarios. While also strengthening our long term business model and positioning us to take advantage of opportunities.
This strategy consist of four initiatives.
One support our current customers to reduce cash based expenditures three ramp new revenue opportunities and four and sure we have ample liquidity, even under our conservative stress test scenario.
Touching on each of these initiatives first.
We're supporting our existing customers that remain open in a safety first manner.
We're starting to see a new baseline of orders within this customer set and we're focused on aligning our inventory in production to be able to meet their back to school and holiday plans.
The second initiative is to reduce cash based expenditures, we reduced our capex to critical needs as well as suspended share repurchases.
We are aggressively manage our working capital we've taken a number of timely actions to reduce inventory, we're working with our suppliers to extend our payable terms and many of our largest customers continue to pay on schedule.
We have also implemented approximately $200 million of cost reduction initiatives. The majority of these savings are from the Tim.
For a salary reductions in furloughs that began in mid April.
The remainder our mix of discretionary spending areas, including media and marketing. However, we're continuing to invest media and marketing dollars within a digital channels as the pandemic is driving further penetration of online shopping.
The third initiative in our pandemic strategy is to ramp our mask and protective garment business. We believe this has the potential to be a substantial contributor of incremental profit and cash flow over the next several years.
Our ability to quickly shift our manufacturing operations to produce new products.
Underscores the competitive advantages of owning our manufacturing network that is balanced across hemispheres.
We're currently manufacturing reusable base mass for the U.S. government as well as launching a haynes branded consumer program for several customers.
Combined we believe these programs can generate well over $300 billion of sales in 2020.
Looking forward, there's an expectation that the cobot 19 pandemic will result in more wides.
Spread mask usage by consumers and businesses globally.
Over the past several weeks, we've seen strong influx of inquiries across a number of geographies from governments retailers large corporations and individual consumers.
Based on the current interest from potential customers as well as the anticipated changing consumer behavior around the world, We believe our mask and protective garment business.
To be a sizable revenue opportunity with growth potential over the next several years.
And the fourth initiative in our pandemic strategy is to further strengthen our substantial liquidity position.
While this may prove to be overly conservative we want to be prudent and proactive given the unpredictability of the virus.
Subject to market conditions, we intend to secure approximately $500 million in debt financing with the proceeds used to repay our revolver, thereby increasing our liquidity to nearly $1.6 billion.
We believe this level of liquidity provides us with an ample capital cushion even under stress test modeling scenarios.
So in closing.
Our brand positions are strong our supply chain continues to create substantial value. The combination of our pre cobot performance and the addition of a new protective garment business points to a strong growth profile once the environment stabilizes.
And we are a strong cash flow generator with ample liquidity. We believe all of this positions us to once again emerge from a challenging environment as an even stronger company. One that is well positioned to take advantage of opportunities and with that I'll turn the call over to Scott.
Thanks Joel.
Like the unprecedented rapid fall off in consumer demand in March due to the global pandemic, we're still able to reduce inventory a 12% over prior year improved cash flow from operations, a more than $100 million and demonstrate that we have the right turnaround plan in place for us innerwear.
In addition, we identified and ran a new business line, a lesson 30 days in the midst of the crisis.
These are all indications are the strength in the flexibility of our business model.
Turning to our results first quarter sales declined 12% over prior year to $1.32 billion foreign exchange rates accounting for 145 basis points of the decline.
Excluding the cobot related impact we estimate first quarter sales would have increased 1.6% over prior year on a constant currency basis.
Adjusted gross margin of 37.6% decreased approximately 300 basis points over last year and more than half will decline due to the impact from curve in 19, and foreign exchange rates remain or the decline was driven by the expected transactional FX and mix related headwinds.
Adjusted operating margin of 4.8% decline approximately 520 basis points.
All the decline was due to the estimated $86 million impact through the night team, which includes an accrual for anticipated bankruptcies.
Lastly, $11 million or three cents per share.
Interest and other expense declined $12 million to approximately $43 million due to lower average debt balances throughout the quarter restructuring and other related charges were approximately $29 million recall that the majority of our full year supply chain restructuring actions and program exit costs were plan for the first quarter.
Our full year restructuring and other related action plans remain unchanged.
In the quarter, we repurchased approximately 14.5 million shares for the vast majority purchased in February.
For the remaining three quarters of the year, we expect average diluted shares of approximately 353 million.
Adjusted earnings per share was five fan while GAAP earnings per share was a loss of two cents. Excluding the estimated 20 cents per se.
Or canceled orders and reaction to shelter in place orders around the world.
Looking at the pre K. the transit our segments.
Innerwear segment performed well above our expectations through the second week of March as revenue was down less than 1% over prior year.
During this period, we were experiencing solid trends across all channels, including strong basics outperformance within the test stores large mass retailer.
We believe our pre coated performance, including point of sale and market share trends and demonstrate our innovations and intimates revitalization efforts are working.
Turning to us actively or with the second week of March revenue is tracking up.
Mid to high single digits compared to prior year. It was ahead of our expectations.
The strong performance. During this period was driven by continued demand for champion as well as growth and our other active wear brands led by sports licensing in the mass and mid tier channels and seasonal activewear and the online channel.
Switching to our international segment.
The timing of the krona virus and patent varied by country and region on a constant currency basis revenue through February increased at a low single digit ray and all of our main geographies.
Growth in Latin American Australia was innerwear, driven by Europe spread over this time was led by champion.
Touching briefly on our global champion business excluding scene.
On constant currency revenue for the quarter declined over prior year, both domestically and internationally.
Adjusted for the S.
Im going to coated related impact global champion sales would have increased approximately 7% over prior year.
Turning to cash flow and the balance sheet.
We delivered a strong cash flow performance in the quarter cash flow from operations improved by $111 million over prior year over the head of our forecast. The strong performance was driven by previously planned inventory reduction efforts continue to working capital discipline and timely actions taken within our manufacturing network, including plan.
And as long as are the.
To manufacturing face masks.
With respect to our balance sheet inventory declined approximately $270 million or 12% compared to last year, we ended the quarter.
We ended the quarter with nearly $1.1 billion of cash on hand leverage was 3.6 times Lane net debt to adjusted EBITDA basis, as compared to 3.5 times last year.
Our currently liquidity position is strong however, given the unpredictability of co. The 19, we want to be prudent.
Therefore, we have taken to proactive steps to maximize our operating flexibility and further strengthen our substantial liquidity position.
First we closed on a 15 months Covenant Amendment, our senior secured credit facility, which includes the suspension of our leverage covenant till the end of the second quarter of 2021.
And second subject to market conditions, we intend to secure approximately $500 million of debt financing with the proceeds used to repay our revolver, therefore, increasing our liquidity to nearly $1.6 billion.
While these precautions may prove to be overly conservative we want to ensure that even under our stress test scenario, we had a significant capital cushion and they were able to maximize our operating flexibility to be well positioned to take advantage of opportunities.
Due to the uncertainty and unpredictability of the Kobin 19 pandemic as well the current lack of visibility in our business environment.
We're not providing second quarter or full year 2020 guidance at this time, however, I will like to share a few thoughts to help frame some of our key levers within our business model.
Currently stores that represent approximately half of our sales or closed.
We have modeled several different financial scenarios driven by the timing of these doors reopening.
And our base case, we assume these stores gradually reopened beginning in late may and our downside scenarios, we assume doors.
Began gradually we opening in early July.
We haven't ran a stress test scenario that assume these doors the not we open until early October.
Each one of our financial modeling scenarios indicates that the second quarter expected to be the low point for revenue profit and cash flows and there were able to generate positive cash flow for the second half.
On the other key assumptions that are consistent across our various modeling scenarios include.
Our mass revenue comes primarily in the second quarter.
We have a high 30% detrimental.
All of which we believe maximize our operating flexibility strengthens our long term business model and positions us to take advantage of current and future opportunities and with that ill turn the call back over the Tc.
Thanks Scott.
That concludes our prepared remarks, we'll now begin taking your questions. It will continue as time allows I'll turn the call back over to the operator to begin the question and answer session operator.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time. Please press Star then the number one key on your touched on telephone to withdraw your question press the pound.
And the interest of time, we ask that you limit yourself to one question and rejoin the queue for any follow ups.
Our first question comes from the line of Omar Saad with Evercore ISI. Your line is now open.
Thanks for taking my question good morning, gentlemen.
Congrats on a decent quarter given the given that backdrop I appreciate all the information.
I'm going ask my question, a little bit more on the offense versus the defense side of equation is pretty interested.
And some of your commentary around the E com trends you're seeing.
Especially champion dotcom as well as the masks program.
On the economy E. Com side, you could you could give your thoughts in terms of the traffic how steep.
If you think it is there where we are on the champion website.
Yes, absolutely will be program Haynes dotcom to maybe give us a little update there what's happening on the Haynes side.
And just a little bit more color on the mass program. It sounds like you think it's more than near end, maybe more medium or long term opportunity. Some color there in terms of what you're able to do.
What types of.
Customers, you'll be you'll be working with and is the number you put out there for this year is that all government programs I got 300 million dollar numbers that all government programs are done.
Including consumer as well thanks.
Good morning is Joe let me take you through that.
We are as we came out of April as of March and April we did see orders resume with our consumed in the doors that we're opening we did see consumer behavior began to normalize where we were selling products and we've seen nice improvement in trends in our doors that are open across the mass channels in dollar stores and so forth and importantly online to.
Specifically to your question, we've seen strong an increase in sales across our categories and I'm talking to you really globally here, we've seen a generally a doubling of sales over the last few weeks to a normal level in our online sites and indicates a champion dot Com. For example, we've seen a tripling of rate and where you would get into rates that are at the black Friday.
Cyber Monday rates, so we see a real strength coming in and TD and Haynes dotcom as well as been delivering extraordinary results and maidenform dotcom as well that would just ramp last year. So we're very pleased with how they're performing we do think that the effort. We've put into building a direct businesses is paying back for US right now and were encore.
Doors and I think that we're convinced that is going to be an increasingly important part of our businesses. As we go forward. So we're very pleased with that it tells us that consumers out there and they're looking for our products and I think specifically in champion. That's a great example is some of the brick and mortar outlets went down a founder side and they've been buying regressed aggressively in that channel looking for the brand a low.
From the standpoint of the mass program. We are very pleased with the mass program as well we got in initially as a way to supplement a shortage of supply working with him a government consortium and much of the number that.
We discussed in the in the call was that program with.
We ramped very rapidly now and where we're distributing to the government we have though identified an opportunity for a consumer program as well we've been getting.
Two questions from some of our retailers and so forth. So we're launching a hanes math program right now so there's a modest amount of a volume and the number we quoted which has that program as well, but looking forward. We think there's potential for this business to do not only be a permanent business, but to be a bigger business over time, we see the changing.
And consumer behavior, we see the fragmentation in the supply base and we're getting lots of inquiries from governments around the world is just not an American thing is as a global a global need we are getting a from government.
Since we're getting from businesses as they begin to think about opening up and we're getting it from retailers wanting to reach consumers and there is an online possibility here as well. So these are the kind of katich categories that when they emerge that we think we're uniquely qualified to to take in managing frankly.
Drive sales and margin and we look across at the the opportunity to bring a trusted brand like Haynes in combination with innovation and run it through our large scale production and sell it through our annual International network really tells us as a business to build upon.
Our next question comes from Susan Anderson with B. Riley FBR. Your line is now open.
Hi, good morning, Thanks for taking my question.
Job managing that Didnt happen the cash flow in this environment.
I was wondering if maybe you could catch on the production side of things it sounds like you're kind of running your plans based on supply. So I guess does that mean ill open it for a few weeks and then share and then how does that kind of flow through that Pierre now.
Are there any cost that way on the system I guess, just start and stop and then it sounds like digital is after a strong start and I don't know how much detail you can provide just on the cnine launch on Amazon Uninsureds clouded by the environment any thoughts there would be great. Thanks.
Sure. Thanks for that question Susan on the supply chain side, we saw the as we saw the March sort of abrupt into sales or.
This locked out of markets come we took very aggressive action in taking down our supply chain.
To keep our inventory in line and as you can see from the strong cash flow and our inventory positions inventory was an important part of delivering that cash flow that did create some additional de leveraging the quarter about $12 million of variances did come through as we took the time to take that down and protect the cash flow.
Since now pivoted, our supply chain to making mask in many cases as well as we have demand adjusted in some of our facilities to protect.
The facilities in the production so that as we see demand ramping back up we are prepared ramp backup into that back back to school period, and like everything else. We're planning a number of scenarios to ensure that we're ready to service the businesses around the world as they ramp up the cash flow was an important achievement for as we came in.
Over $100 million lowering usage this year than last year on cash flow and if you look at down on a 12 month basis now that look I would put our operating cash flow it over $900 million, which was the objective. We we set out in our 2018 Investor day. So very important milestones speaks very strongly to the underlying strength of the business as we.
Emerge from from this pandemic.
From the standpoint of Cnine, we did launch Cnine mid March March so just not too long ago now.
And it's off to a good start as we go Waterloo smaller with them on a small basis with Amazon we've seen it performs well I think we're both very we're both pleased with where it is and we'll see how it ramps it did get a little mass by all the other noise in the market, but I think its performance expectations at this point.
Our next question comes from Jay sole would you be.
Yes.
Sure Bob your inventory.
No one is going on.
Good morning.
Apparel, that's kind of seasonal has some.
Colors that are seasonal looking just walk us through.
The Activewear segment gear for sports nights alternative like what kind of maybe more so what percentage of inventory.
More seasonal on that in that business.
And then maybe international thinking about bonds and some of the other parts there that maybe I'll talk about as much what kind of actions might have Mike you have to take in Q2 to sort of move through that inventory get claims have strong rebound in fiscal 21.
The initial actions, we took or were they take the supply chain down immediately in mid March, but what I would say beyond that as we look over the horizon, we been thoughtful as we look in the active wear business into a narrowing our offering working specifically with the customers that we think will reopen and ensuring that we have the sets for them, but we're not.
In any risk on overhang, if we don't believe the products going to be sold while we are not producing at this point in time. So we don't feel that we're going to have a lot of active wear overhang or seasonal overhang as we look to the next season in the instance of our.
Bookstore business and so forth, we produce that to order for the accounts, we produce small run productions to to meet the end of the visual needs of the book stores. So we again, we feel that we're well positioned there and inventory and as we look at our goal.
Global businesses and I'll use bonds is a great example that as a business. It is is heavily retail in it.
Well, thank you and good morning.
You guys spoke to orders for back to school could you generalize the degree to which these are below prior year or prior expectations and then a point of clarification on the 200 million spending reductions did any of this amount get captured in the first quarter.
Yes, hi, Jim as this year.
So let me let me take the first and I'll, let Scott talked about in the second part of that that question on the savings from the standpoint.
Okay.
Looking at back to school as we noted in our in our comments about half of our doors are open at this point in time, certainly the mass channels and so forth are open in the dollar stores and they are very.
Actively planning back to school with as it's a fluid situation the sound standpoint of.
The entire account base that we advocate summer still.
Shutdown at this point, but the ones that are open are very actively planning for back to school were in dialogue with the ones that are.
We're still close and looking at multiple scenarios.
With those accounts as well and as I noted one of my prior comments were aligning our production under various scenarios to be able to ramp up to take advantage of that so early days you know exactly how big back to school will be in total, but I think with our our key customers that are open we're expecting a good back to school in annual plan with the others as they ramp back up.
Yes.
Things when they come back on the other the this the discretionary spending focus right now as the reducing as is and every place. So we can I suppose.
I see very focused on media and marketing reducing spending in those areas really not much and none none in the first quarter variability and the first but again most heavily in the second quarter.
Our next question comes from Polish way with Citi Research.
Your line is now open.
Hi, Thanks for taking my question Kelly Halsor Paul.
Curious if.
And that your exposure to sunlight.
Maybe you can weaker.
Hi, Larry out there in the Department store channel, we've we've heard some.
On top of selling it starts may not reopen it often what is your exposure to some of those bigger.
Mr., Joe how does the question is going with with your customers. There and then secondly on on the math down program could you give any color on the margin profile there. Thank you.
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I am sure let me, let me start with the customers, we constantly monitor our exposure with all our customers as well as we're in conversations with them as you know we sell across all channels of trade.
Hey, Dan and summer opened some are not open at this point in time, and so we feel weve adequately covered our exposure at this point in time and we'll continue to stay in touch with our kids customers certainly as we assessed.
So our liquidity models were very thoughtful about pressing on the receivable side as well to make sure that even in the lowest scenarios, where we're well coverage.
So we feel we've we've adequately covered it from from the channel.
See there and the margin profile, we think as we run it through our our mass production.
Capabilities could be in line with with the corporate average.
Our next question comes from Tiffany Kanaga with Deutsche Bank. Your line is now open.
Hi, Thanks for taking my questions.
And our suspended leverage covenant foreigner correct.
Thanks, net debt to EBITDA, you anticipate exceeding that threshold in the coming quarters.
Ladies and gentlemen on what color around where do you see the most flexibility when all to preserve cash beyond the measure you've already successfully implemented.
Yes, sure good morning, and thanks for your question actually earlier this week, we put in place.
A temporary amendment to our senior secured credit facility that suspend our leverage covenant until the third quarter of 2021.
The current challenging and uncertain environment, we felt like.
We're in the we wanted to do that now and help us with maximizing our operational flexibility as we manage through the crisis. The coven does contain some additional financial covenants the.
But maintaining minimum liquidity balance and EBITDA levels, but we're very confident.
That will maintain compliance where these covenant recall.
Comments.
Please now open.
Okay.
I guess my maybe on mute.
Okay.
Our next question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.
Hi, This is Keith you gotten on for Michael Thanks, So much for all the color today.
No you talked about a couple different scenarios it out reopening timeline that as you look to that back to school orders you have so far in sequence their retail partners.
What are your outlook for what the ramp but consumer spending could look like post.
Reopening like are there any big differences you see between the ramp.
Hi that.