Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Second-quarter results exceeded expectations across all key metrics.
- Gross margin increased for the fourth consecutive quarter, driven by strong productivity.
- Normalized EBITDA improved by 10% year-over-year.
- EPS was significantly higher than anticipated due to better operational performance and tax benefits.
- The company reduced its cash conversion cycle and net debt by about $400 million.
Negative Points
- The outdoor and recreation segment continues to be the weakest and requires a turnaround.
- Core sales were still down 4.2%, indicating ongoing challenges in the market.
- Net interest expense increased due to higher interest rates.
- Operating cash flow for the first six months of 2024 was down compared to the same period in 2023.
- The macroeconomic environment remains challenging, particularly for consumer discretionary goods.
Q & A Highlights
Q: Can you provide some perspective on the gross margin performance in the quarter and expectations for the rest of the year?
A: Mark Erceg, CFO: We are pleased with the gross margin expansion, driven by productivity improvements, pricing actions, and favorable mix. We expect continued gross margin improvement in the back half of the year, although at a lower rate due to tougher comparisons. Our long-term target remains around 37% to 38% gross margin.
Q: What gives you confidence in the back half of the year, particularly for seasonal categories like back-to-school and holidays?
A: Christopher Peterson, CEO: We expect better core sales trends due to increased innovation, new distribution gains, and stronger international business. We feel good about our back-to-school setup, with strong operational results and promotional setups.
Q: How are you managing inflation and transportation costs, and what is the impact on margins?
A: Christopher Peterson, CEO: We anticipated low single-digit inflation and have managed well, particularly with ocean freight. We have contracted 100% of our containers, avoiding significant cost increases. We expect continued gross margin improvement due to productivity and favorable mix.
Q: What is the outlook for the outdoor and recreation segment, given its recent struggles?
A: Christopher Peterson, CEO: We believe the trend has bottomed in Q2 and expect sequential improvement starting in Q3. We have restaffed the leadership team and expanded the focus of the Coleman brand to include more outdoor activities, which should drive better performance.
Q: What is your view on the current consumer health and its impact on future growth?
A: Christopher Peterson, CEO: Consumers remain under pressure due to inflation, but we are optimistic about 2025 as the COVID bump is behind us. We expect categories like kitchen appliances and food storage to benefit as consumers eat more at home. Our innovation pipeline is strong, which should drive growth.
Q: How are retailer inventories and promotional activities impacting your business?
A: Christopher Peterson, CEO: Retail inventories are in good shape, and we are not seeing significant changes. Promotional activity is consistent with last year, with some exceptions in categories like outdoor and rec. Private label penetration remains stable.
Q: Can you elaborate on the impact of sourcing from China and your efforts to reduce dependence?
A: Christopher Peterson, CEO: We have reduced our dependence on China sourcing from 35-40% to about 15%, with plans to reduce it further to less than 10% by next year. This includes a significant portion of baby products, which are currently exempt from tariffs.
Q: How are you addressing the competitive environment and driving better results?
A: Christopher Peterson, CEO: Our integrated strategy, including innovation, new business development, and international growth, is driving better results. We are focused on executing with excellence and believe we are on the right path to outperform the category consistently.
Q: What are your assumptions for pricing versus volume in the second half of the year?
A: Christopher Peterson, CEO: We expect the pricing benefit to be lower in the second half as we lap last year's price increase. The focus will be more on volume growth. Argentina's impact is small, representing less than 1% of sales, and we are managing it effectively.
Q: How are you managing the impact of potential tariff changes on your business?
A: Christopher Peterson, CEO: We have significantly reduced our exposure to China-based manufacturing and are agile in responding to potential tariff changes. We have also increased US and Mexico manufacturing capabilities, which positions us well against competitors who rely more on China sourcing.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
