Q3 2020 Delta Apparel Inc Earnings Call

[laughter].

Good afternoon, everyone participating Delta Apparels classical 2023rd quarter earnings Conference call.

Joining us.

<unk>.

Sure.

Sure.

<unk>.

Yeah, I'd like to remind everyone not during the course of this conference call projections or other forward looking statements.

Delta Apparels executive.

Such projections and statements suggests that action and involve risks and uncertainty and actual results may differ materially.

Please refer to the periodic reports filed with the Securities and Exchange Commission, including the company's most recent form 10-K and form 10-Q filed today.

Documents identify important factors that could cause actual results to differ materially from those contained in the projections.

Forward looking statements. Please note that any forward looking statements are made only as of today and except as required by law. The company does not commit update or revise any forward looking statements. Even if it becomes apparent that any projected results will not be realized.

Today's conference is being recorded.

I'll now turn the call over its adults as chairman and Chief Executive Officer, Bob Humphreys. Please go ahead.

Yeah.

People, joining all Philadelphia, Skokie, Delphine 23rd quarter on these calls.

Yes.

So how logging the bloggers.

We have experienced across all business units.

Okay Delta Apparels model.

Thank you.

All these aircraft you were talking to walkable, great people body P value for all stakeholders.

You called joined the call GRC.

For more detailed discussion of our financial results, including the stronger <unk> liquidity as the quarter progression.

Delta apparel, <unk> flexible financial position and very good bottom quarter of a year.

Oh.

I'm, sorry, I'm, having a lot or check.

Please bear with me.

<unk>.

Hey, there was no playbook.

We are close to what is good used to produce caldor quarter would play out.

That you had the momentum which years football so basically it's a third quarter progress it's been extremely encouraging.

Well, the Dallas Delta apparel strategic advantages.

Our diversification of sales channels, we're all geographic footprint in the strong emotional connection our salt life Sobi brand child consumers resulted in third quarter sales change either our internal expectations.

Doug <unk>, most recent blessed by the fall off in the quarter, we're tracking nearly 90% of our bar yourselves.

Oh, well know testing can you.

It's order should show writing <unk>.

Droughts children <unk> sales channels.

It's really king incredible digital print demand from our unique EGD go model. He told me got came like disruptions and supply chain this quarter.

In the inability for consumers to shocking traditional retail stores.

That's about EG to go model has become even more parents in the marketplace. We were able to continue operations utilizing our network facilities across the country.

Our existing customers and new customers the sources and revenue during times when needed those.

The only gets don't like supplier in the world. It can also a seamless burghley integrated solution.

Wasn't up with our Jerry software and internal supply chain, you all's were equally decorated old demand.

Ship directly to the consumer.

It's a lot of all eliminates non value added cost and reduces the risk.

Third party supply chains, we see basically tremendous comparative advantage.

Our de TGT, though business delivered record non holiday performance with growth of 32% third quarter. They didn't celebrated nearly 40% gross in the market you. What's the other worn Saudi is the fact that roughly 40% all the orders we seek to the third quarter were from new customers.

We continue to see significant complicated each to fold increase our D.C.G. could go business with existing customers, while also gaining new customers and expanding our channels of distribution.

Our near term and long term new business pipeline healthy Ward you touched my watch is expected in the fourth quarter. We're also she and adoption of additional important models into brick and mortar retail channel.

He provides will be added capacity needed for de TGT goes to meet the rapidly growing demands of our digital print bottle. We are opening new integrated digital printing and distribution facility in Phoenix, Arizona, combining BTG to go digital plates business with Delta Apparels old supplier performance.

The Phoenix facility increases EGD goes footprint <unk> eight digital printing locations across the U.S.

Further expanding its one day shipping reached in multiple markets, including thing excuse on and into portions of Southern California.

Facility also gives us the ability to increase our overall capacity with additional to better serve our existing customers and onboard get customers.

Despite the challenges with defended our team has been able to stay on target with the opening up this new facility and we printed and she up the first part its today from Phoenix.

The Phoenix the field he joins our network at U.S. base distribution centers that have generally been night open and operational throughout the third quarter to serve customers across all of our businesses.

We are committing to servicing all of our customers. The same day shipping getting to the piece level retail ready packaging and E.D. I support it operate the majority of our businesses based on at once orders, we maintained an import position.

Distribution centers to service, our customer needs throughout the quarter, including orders and celebrate it did you have continued to accelerate during July.

While our non U.S. manufacturing operations were close for most of the quarter ended June we get resumed production at all about manufacturing plants in accordance with local regulations. We got implemented strict safety protocols and are operating at a reduced capacity in the near term for the safety of our employees into a line.

Production levels anticipated future business.

We look forward to ramping up production during our September quarter to support toward an anticipated demand.

As I mentioned on our second quarter call. Our Deltic catalog business initially experienced an outsized impact from the Togut knocking pandemic.

Although the third quarter is our traditionally strong selling season in the Delta catalog business. We were very pleased to see a steep we talk or later in the quarter as the business returned to positive year over year growth in June.

We are seeing notable strength in the retail licensing channel as well as good momentum in the spring Crane channel. We believe as the U.S. continues to Riocan, we will see other channels pick up including at specialty informational bodies, which traditionally have done well post crisis situations.

Market trends look positive for our catalog business. That's historically three recessionary times decorate it keeps yours against ball as a modestly Paul I still get caught in the consumers who purchase during tough times.

This coupled with more consumers dressing and activewear apparel workload should drive solid demand this business where future quarters.

As a reminder, in January we launched our new distributor model for body, our customers with a broader range of broad categories surprising actually rescue recognized brands and products, including told seller exclusives original Penguin Callaway and Jack Nicklaus lines adult Blair.

Rounding out our assortment apollo's outerwear flannels bags and accessories, we'd have successfully added delta produce face masks in coverage, which I quickly Bill Thomas take what were smaller larger businesses a lot.

We continue to believe Arnie full service vertical distributor model leveraging a one stop shop offering represents a meaningful long term additional revenue screen.

To further leverage the one stop all front, we have now I'm worse or Delta catalog and soaking sales teams to better position. So people grows we were seeing very strongly and for the iconic soak each year to year short.

Well, the surgeon followers and influences on social media.

In addition, Sophie's web sales jumped 80% in the third quarter June results that were nearly double last year.

In our Flunkies business, we are a supplier.

Chain partner of choice open full service supply chain management and technology, along with our manufacturing platform, which is compliant flexible into politics and retail ready services. It can provide and importantly, close to the United States market that nationwide distribution coverage over the past two years, we have said.

Sex fully diversified our flunkies customer base, including shipping several new direct to retail programs are fun TV business was impacted by our El Salvador plant being close but the majority of the quarter.

Although we are able to serve a several other orders from our Mexican facilities, which were operational for several weeks during the quarter, We've said that our diversified customer base in the Pontis business as well as our new direct to retail programs will provide a balanced growth strategy for this business over time.

Well the pandemic, our salt life route ecommerce performance with nothing short of amazing.

For Salt life consumer significantly celebrated their engagement to our online channel Robin third quarter web sales growth of about 140%.

In late April we began to reopen that brand doors with all can salt life doors open, including our recently launched at Harpercollins store Destin, Florida, we could not be more pleased with the results. We are they have so far far exceeded our expectations.

Same store sales were up 5% since reopening our stores. In addition, our newly opened stores. This year generated approximately 50% of additional sales dogs this quarter compared to the prior year.

With the re opening up our branded stores as well as wholesale partner stores later in the quarter, our salt life through June sales turned positive year over year sales growth of 7%.

Strong and ball based Jane results have continued into July.

To summarize well because my team and then it impacted most aspects of our business reacted quickly and names frequently asked the pandemic unfold it while staying operationally focused on delivering for current and new customer base.

Core different whereas ahead of our expectations the solid momentum across all of our business segments. Given those top of does that we're back on a path to returning to profitable growth.

I'll now turn to just specially nobody did have to review our financial results in more detail death.

Bob.

Our third quarter performance was in line with a preliminary results we issued in two weeks ago.

Overall, the company incurred 23.1 million nonrecurring expenses during the June quarter associated with the impact from the covert Nike pandemic eat meat input costs, primarily related to the curtailment of our manufacturing operation incremental costs to right size production Sydney.

Forecasted demand and increased accounts receivables inventory reserves related to the heightened risk in the market as the U.S. continues its recovery.

These costs of which approximately 11 million all non cash charges, primarily impacted the Delta group segments.

As a reminder, we also took 1.9 million of expenses related to the curtailment of manufacturing operations and our March corridor.

<unk> mandated closures began mid March.

Well, we believe the most significant costs associated with our manufacturing operations are behind US now we do anticipate approximately 3 million of additional impact in our fourth quarter related to accept call at manufacturing output is ramps back up after their proteomics.

Our third quarter fiscal funny funny net sales were 71.8 million or about 60% of the prior year June quarter sale.

Our monthly sales pro Formas quite easily accelerated through the third quarter since April sale at 33% of the prior year levels could you fail at nearly 90% of prior year levels.

During the third quarter direct to consumer E commerce sales more than doubled compared to the prior year wed love to sales growth of approximately 140% on the felt like site and great 80%, obviously, you can see oversight.

As Bob mentioned, we were happy to see our catalog in Salt Lake businesses returned to growth in June and most excited about that 30% increase in sales and he's going to go for the entire quarter, culminating in nearly 40% growth engine.

On a reported basis gross margins were 4.2% compared to gross margins of 20.8% in the prior year third quarter.

Adjusted gross margins in our current quarter, 21.6% and encouraged me to 80 basis points compared to the prior year with the improvement attributable to taking either agency caucus improvement within the Delta Group segment integrated vertical manufacturing platform and it didn't seem to margin expansion eating.

Okay.

Okay senses declined 15.2% to 15.2 million compared to 17.9 million in the prior year third quarter as we took quick and decisive actions, where we could get cut costs given the current environment.

Lower variable selling costs associated with the lower sales volumes also contributed to the decline in that's you know exactly.

We took a 1.2 million dollar expense during the current quarter associated with a contingent earn out liability from the 2017 digital acquisition driven from the growth achieved an expected to continue in the geeky to go business.

Operating loss was 21.6 million compared to operating profit at 8.3 million in the prior year third quarter.

Adjusting for the 23.1 million of nonrecurring expenses associated with the impacts and so with Nike operating income was wondering a half million compared to adjusted operating income of 7 million in the prior year.

Net loss for the quarter was 17.8 million, what she's always and 58 cents per share with an adjusted loss per share of a penny.

It's encouraging that we were able to cheat about breakeven profitability with a 40% decline in sale.

Well, if I back the 1.2 million in fair value adjustment on the contingent earn out we would have been at about 12 cents earnings per share.

With a continued momentum were seeing in sales and assuming no new shops in the system. We believe are we are well positioned for a profitable fourth quarter.

Now turning to the balance sheet and the impact on cash flows in our liquidity.

As we previously communicated those sales in liquidity improved each month quarter progressed, enabling us to end the period and a much stronger position than originally anticipated. We generated 32.2 million of operating cash flows and 31.6 million a free cash flow during the June quarter anyway.

Restart cash on hand, and availability under our credit facility again by nearly 50% compared to the March levels, ending the quarter with total liquidity of about 46 million.

Our total net debt, including capital lease financing and net of cash on hand as of June was 127.5 million, which is down approximately 7 million from September 2019, and down 21, and a half million from a year ago.

Total inventory had yield decreased over 11% to 158 million compared with 177.8 billion a year ago.

We service customer demand during the quarter with her arms and inventory position in the U.S., but.

Our manufacturing facility now open here producing products to continue servicing our customers.

Looking ahead as Bob mentioned, we had seen sequential monthly improvement in trend as the U.S. begins to reopen and our seem to continue in July.

We are cautiously optimistic that we will continue to see improvements through our fourth quarter I'm, turning the business and profitability this quarter.

But anything this period of time has shown that it is that our business and our team a resilient and I'm very proud of our ability to weather the unprecedented period in history. Let me now turn the call back over to Bob before we open up for questions.

Thanks, Dan for our nation in our industry environment has been a child you want to navigate we'd have control we can in the business start to really managing cost while capitalizing on the strength of our fully integrated and diversified business model as well as our emotionally connected salt life and Sophie brands to gain.

Market share and expand our reach.

Throughout the third quarter, we strengthened our financial position, while smartly invest through to support our high growth businesses. We're now putting the final touches on our business plan for fiscal 2021.

Looking forward to starting a new year in just a few weeks there remains considerable uncertainty on the effects of 'cause. It 19 on the U.S. economy in general and our business specifically over the next several quarters.

We believe that celebrating the man for DPG, though is here to stay with partners across many channels of distribution quickly adopting the technology, we have to offer.

We have additional equipment on order you know looking forward to the growth of our new facility in Phoenix, which further expands the advantage we enjoyed in the marketplace.

We anticipate adding further capacity as we progressed through the year.

Likewise, we are encouraged with the dramatic acceleration in demand on the salt life and so he consumer web site.

This is one of our most profitable channels of distribution and we'll continue to focus on the go to these businesses grew stronger engagement with our consumers.

We're very encouraged with the demand we are seeing for under decorated basic activewear business evidence about the sales growth we achieved in the June theory.

This growth has continued through July and we believe our expanded product offerings and new distribution channels will continue to drop our business.

While our fund teach private label business was significantly impacted by the extended shutdown, we experienced in our facilities in El Salvador.

We're now operating our plants in our customers are anxious for us to rebuild our production for their programs.

Additionally fund Tees has been able to win additional programs to be processed in our Mexican and domestic facilities.

We've said, we overall competitive landscape to change as well as new customer requirements could negatively impact weaker suppliers, we believe our higher service level combined with our vertical distributor model will serve us well in this disruptive environment.

We're looking for two or do you to school year with great interest of patients and bleakness future negative impacts to the U.S. economy, and offshore manufacturing facilities or minimal we will soon return to be improving sales and earnings growth. We were enjoying just a few quarters ago.

I want to again thing our board of directors and employees, who are truly been amazing for their patients hard work and support throughout this difficult feared.

Operator, we'd now be happy to open up the call for questions.

Yes, I think you know.

I want my Cascade question basic all my pressing star one on your telephone keypad and areas and ask your phone. Please make sure. Your mute function has time to layer smelter retiree quite nice.

Again that S star one that he would like to ask a question.

Well take our first question from Dana Telsey, My Telsey Advisory group.

Good afternoon, everyone and nice to see the progress in our businesses improve even going into July.

As you think under the Hood in terms of looking at the big components of gross margin in F. DNA. What do you see is the main drivers of improvement going forward and how much of the S. Yoo neighborhood cost reductions they permanent and what do you see is the ability in terms of pricing to drive gross margin. Thank you.

[noise] well they need that's going to vary a lot obviously across our different business units.

Thats a good bit of our gross margin improvement that we see coming sequentially over the next several quarters, obviously reloading our plants and absorbing the cost is a big tail or the demand for our digital printing is you know at or beyond our capacity right now so obviously we.

Get some synergies with that.

That being a higher gross margin business for say helps and really our highest gross margin business or at least direct to consumer products that are sold to our ecommerce site. So we can then you can start having the outside outsize growth that we've had there you know it does help our overall gross margins.

As all companies and different industries. When you go through something like this you learn new things and what's really necessary and what's not necessary. We've obviously had a lot less travel a lot less travel expense until I think you'll obviously.

To that continue that way for all quarters, where perhaps years to calm as we all get used to R&D work environment. So.

That combined with higher production going through our facilities over time, whether their distribution facilities or manufacturing facilities allows us to further leverage our fixed cost and a you know we're seeing that.

As we speak and Ah you know, we would expect that to continue as there's not further shocks to the system.

They have you got anything to add on the call side or any those points.

No I think I think you Ah you covered that well boxing.

Dentist next up on these new customers what are you seeing him and new customer growth. What are you seeing from existing customers seems like the opportunities in new customer growth our extensive.

Yeah.

Yeah.

I'll, let them talk about that on the DPG to goes out and then maybe I'll talk about the other parts of the business. So she's intimately familiar with.

You are the question on that and you know we we've been thing for a long time that.

Good old business is growing YOD with the adoption rate art.

Thing I would say that were the Jose situation the disruptions in the marketplace, the new wave that more and more consumers are shopping and obviously the brick and mortar retailers have to find ways to service that business that it has just really increase to the acceleration rates.

Oh people looking at a digital model and we experience about as we mentioned with all of the new customers that we actually onboarded during the quarter on that provided a lot of that sell through as well as send a pipeline expecting I've seen bringing on new customers here in the September quarter.

In the quarter sitcom, though I think that variance Scott pelley, new customers that will be coming onto the digital print model N mean channels on the distribution that we have been talking about whether that is the traditional retailers odd that decides to go through eight odd to me as a model whether that is more into them.

Sure no product areas on core jobs, even with our existing customers as more and more shopping is happening online. So we're quite excited.

About the growth opportunity in the business and as Bob had talked about earlier that all of our ways that provides a capacity to serve us that doesn't it doesn't like switch on you know we're dealing hands are right in the middle log and excited about all of those opportunities.

And just to add to that in some other aspects of our business.

You know our ecommerce business has been growing strongly you know retailer see that so we're also seeing more interest from retailers for different product across a larger geographic region. You know that would certainly be true or the salt life.

And then we were able to keep most of our distributions running throughout with pandemic, although the first phase of it and where we maybe would not have are far mirror one running we were able to service customers through other so I think we provided a really high level of service to our customers throughout this period of time.

And we're seeing you know that gain new business for is quite frankly.

We believe with our customer base, they're all looking for higher levels of service.

Quicker reaction time quicker shipments being able to react to their needs and we do that but they come to the piece by shipping the same day and by providing other services such as E. D. A obviously, we have a screen printing, both domestically and offshore and our domestic screen printing really.

Up to Saudi periods of time when offshore screen printing was down one of these countries were close so I think all in all we did a nice job a servicing customers over the last quarter and we're seeing them come back to the table with larger and more frequent order so it isn't already.

Thank you.

Once again the guest star one if you might ask a question.

Well now take a question from Jamie Wilen with Wilen management.

I was just if you want you to choose to go to start.

So yeah, I'm sooner Qs are gonna be adding capacity in several of your other Suntrust Fisher.

That correct me, if you have opportunity in our other facilities to put more equipment and increase those out but how we actually started thinking about in the quarter are ready to service the business that we had and we'll continue to do that so it really will be the Phoenix addition, and expansion at the other.

Just a little better location.

Would you care to how should address or what type of revenues. We can do wouldn't next fiscal year and mr. six.

Well I mean, you what I would say is you know prior to that means I'm like we were talking about this business being a 20% growth business and what we are seeing is acceleration.

Matt.

Hey.

I see that continuing so I would say, it's going to be a you know from our outlook is gonna be nice strong business as more and more people in the U.S. worldwide adopted this model.

Part of an odd to me and type products.

Sure through the numbers every what we did last year this fiscal year and [noise].

Or what's your expenses first because you have an obvious amounts from there.

Well again, we.

We have required reported we were down in the first few quarters, but on this quarter, we were up 30%.

40% in the month of June and I'm, continuing at that pace as we had through the fourth quarter and so maybe you can take those numbers.

No put something north of a 20% growth rate or not and that would be what we would expect since the end this business in in the future here in years to calm.

Okay.

Margins were dismissed.

Given that were around spreading yesterday or more facilities.

Correct. So I'm, our gross margins of with the additional production through there are improving in the business that coupled along with the higher usage of the delta product.

Our operating profit remains on the double digit range and our EBITDA profitability I north of that 20% market that we see and expanding from now.

<unk> drugs are being asked a question about how much your current investors and I'm just trying to be permanently took a couple million dollars rationing.

Obviously as you can see how you can run your business a little different.

Sure Stews, the mother of invention, there how much of that decline would be coming up.

Oh, so I would say on the or do you keep in mind that some of that decline is just the variable selling a cost associated with a lower jails level. So you know that that will pick back up in dollars at the top line on unit continues to expand.

We did take action and as Bob Bob mentioned during these times you figure out how you can do things differently in your business. So there will be someone out on that I think will continue as he mentioned in travel I think advertising and things like that we'll continue to be done differently than they might have been done in the path.

So we would think that there's some opportunity on sept continue on to keep the cross out of there at the same time, we'd be run run the business I'm in a very easy manner, just as part of our culture on and so there's not not a lot of added on areas, where we can just continually on how how.

The cost out as the business our returns back I feel pretty good level.

Okay, and I am I wish it depends demonstrated a bunch of difficulties for everybody in but it does create some opportunities to bring your customer spending with your competitors.

I'm, having a difficult <unk>.

Forced to lose a counter.

Before we got a business.

<unk>.

Yeah. Thank God.

You have to be sitting on the overall actor that certainly jobs years suppliers in the private label Arena.

You know that are not as well capitalize is the public companies in this space. It yeah, I've had probably more difficulty I don't have the diversity of Oh, you know customers and our distribution channels as we do we take a even upon the big players our diversity of a customer bases are real asset that we have.

And then you know there's change encourage out there about you know service level and go to market strategies and all those things so are.

Well, we'll just have to see how all that ultimately plays out over the next several quarters, but you know given us a solid economy to work from we were.

Confident of our position than our customer base and Pal that has evolved over time that all having some new hi Tech business is really driving our growth at least consumer sites and lead you to goes.

That's true.

Turning to shut in.

Remember for what they didn't protective clothing.

In a quarter, where she's really surprising I know you know we're doing some of the Christmas for through it does that come to refocus or just a minor regard Peter.

Yeah. So we gave you all have a big focus on that you know going forward.

So you know.

Like you said they did it they did a really nice job for that Ah I don't think we're positioned to do that are some really good.

A large scale players in that industry that I'm sure, we'll gear up a lot of it's Brandon. So I think we'll stay focused on what we think we know how to do better and and stay with that.

Okay, and then one last thing.

Just replacing with.

No whenever it comes to produce promotion to quarter and no production parents coming back on stream.

What does industry person work right now.

So I would say solid right now.

You know there's people out there with different promotions going on for on decorate it cheese, but Ah.

You know what we're seeing is demand is strong and supplies relatively tight.

And you know that's normally a combination where you have sawlog prices.

Thanks, Charles Mr. Rob.

Thank you.

And how they find a reminder that is star find it feels like Cascade question, well pause for just on that.

And it appears there and now for their telephone question, let's turn the conference back over to our presenters for any additional or closing remarks.

Well. Thank you all very much for joining us today and ER will continue to.

The probably more proactive to keep their market and informed of our results. This quarter Gozone since we are all operating.

And unusual circumstances, we feel like we need to keep people in form so we'll do that and look forward to have another another conference calls and just over three months. Thank you very much.

Once again that does conclude today's conference you may be come off of your participation you may now disconnect.

And.

Oh and.

[noise] HM.

Oh.

[noise].

HM.