Amer Sports, Inc. (NYSE:AS) Q4 2023 Earnings Call Transcript

Amer Sports, Inc. (NYSE:AS) Q4 2023 Earnings Call Transcript March 5, 2024

Amer Sports, Inc. misses on earnings expectations. Reported EPS is $-0.11 EPS, expectations were $-0.07. Amer Sports, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amer Sports Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Omar Saad, Vice President of Finance and Investor Relations. Omar, you may begin your conference.

Omar Saad: Hi, everyone. Thanks for joining Amer Sports fourth quarter and fiscal year 2023 earnings call, which is our first earnings call as a public company on the New York Stock Exchange. Earlier this morning, we announced our fourth quarter and full year 2023 results. The release can be found on our IR website, investors.amersports.com. A quick reminder to everyone that today's call will contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only, and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please see the safe harbor statement in our earnings release and SEC filings.

We will also discuss certain non-IFRS financial measures. Please refer to our earnings release for important information regarding such non-IFRS financial measures, including reconciliations to the most comparable IFRS measures. We will begin with prepared remarks from our CEO, James Zheng and CFO, Andrew Page, followed by a Q&A session until 9 A.M. Eastern. Our three segment leaders will also join for the Q&A portion of the call: CEO of Arc’teryx, Stuart Haselden; CEO of Solomon, Franco Fogliato; and CEO of Wilson, Joe Dudy. With that, I'll turn the call over to James.

James Zheng: Thanks, Omar. I'm very proud to lead Amer Sports first earnings call as a New York Stock Exchange List Company. Amer Sports may be new to the U.S. Equity markets, but we come from a long and rich heritage in sports and outdoor activities. Our brands are loved and trusted by a million worldwide. Whether used by elite competitors, [indiscernible] aspirational enthusiasts (ph), our equipment, footwear and apparel delivers the best technical quality and performance. We are excited about opportunity to drive growth across our three segments, Technical Apparel, Outdoor Performance and the Ball & the Racquet Sports. Although, 2023 was another strong year of sales growth and the margin expansion for Amer Sports, we are still in the early stage of our profitable growth in fact (ph) following our transformation to a decentralized brand direct operating model in 2020.

A smiling person in sports gear testing out a piece of new fitness equipment.

This transformation has been critical to unlock the value of our portfolio led by our high growth flagship brand, Arc'teryx. Several factors give us confidence for the future. First, we operate a unique portfolio of premium outdoor and sports brands, each position at the pinnacle of their respective market. Second, our brands have high engagement and the satisfaction with consumers around the world, but are still relatively small players in those large global outdoor and the sports markets. Third, the Premium segment of the Outdoor Sports markets remains healthy and growing, especially in Great China and Americas, where we continue to outperform peers. Fourth, our highest margin brands, regions, channels and the categories are growing the fastest and we have assembled a strong and experienced management team that's energized and motivated to drive value creation for our stakeholders.

Before I review the performance of our brand segments, I want to [indiscernible] on what I see as our path forward. First, we believe Arc'teryx is a breakout growth story with unprecedented growth and profitability for the Outdoor industry. It's truly charting new territory with its disruptive DTC models and a very strong competitive position. The growth and the profitability of this franchise will fuel our Amer Sports for years to come. Second, Solomon and Wilson and all our other brands are very strong, have longstanding authentic heritage, premium position with their respective segments and amazing products. Although, they are early in their growth infection, we are building very strong foundation for future growth for these brands across categories and the key geographies.

Third, we believe our unique expertise in Great China and our success embedding top talent in our brand teams in this important growth region, give us a clear competitive advantage across all brands in our portfolio. Before I turn it over to Andrew to discuss our company results, margins, the balance sheet and the guidance, I will provide a review of our three brand segments. First, Technical Apparel led by Arc'teryx, revenues grew 26% to $550 million in Q4, driven by 42% direct to consumer growth, including a 33% omni-comp. This was partially offset by a 5% decline in wholesale, which was expected and the primarily related to the supply chain related sales shift from Q3 into Q4 in 2022, which create a more difficult comparison. For the full year 2023, Technical Apparel grew 45%, driven by 57% DTC growth, including a 55% omni-comp.

Arc'teryx continues to experience very strong brand momentum across all regions, channels, consumer segments and the product categories. And in both stores and online, the DTC channel experienced strong traffic and the commercial trends. The brand achieved key milestones in its DTC evolution in 2023, including premium flagship openings in Osaka, Beijing, Toronto, and the most recently, our 20,000 square foot store in Shanghai, that's taken the brand's retail presentation to new highs. Arc'teryx is also doubling down on innovation, including a significant new footwear launch with the first fully in-house designed and developed footwear for the mountain athlete. (ph) Arc'teryx continues to drive deep relationships in mountain communities through global academies and host more than 25 Australian participants at Whistler, San Anton, Chamonix, Squamish and the Yangtze Academies across 2023.

Regionally, Technical Apparel grows 30% in both Great China and America. Technical Apparel grew more than 40% in APAC, where we are evolving that operating model to accelerate DTC expansion. Importantly, in Q4, Arc'teryx also posted outsized growth in key opportunity areas, including [indiscernible], footwear and hard goods and accessories. Turning to Outdoor Performance. Revenue grew 2% in Q4 to $523 million driven by strong top and the bottom line performance in our Winter Sports Equipment franchise, partially offset by an expected deceleration in Salomon footwear in the wholesale channel. DTC experienced strong growth, while wholesale declined due to the challenging comparison versus Q4 2022 mentioned above. Regionally, Great China and APAC experienced healthy increases, partially offset by declines in the America and the EMEA.

Although, wholesalers in the Americas and the EMEA remain cautious with preorders as they focus on maintaining lean (ph) inventories and rely more on refreshment orders. Solomon continues to enjoy strong demand at retail. The brand performed well in both own retail and the partner stores, including DTC up a very strong double-digit with all regions and the format showing solid gains. There continued to be signs that Solomon footwear is generating strong brand heat in [indiscernible] communities. Our new sports style line (ph) was ranked as the number one clothes brand on StockX last year. Although, worth noting is a strong Winter Sports Equipment performance in Q4, particularly in APAC, Great China and the EMEA aided by favorable weather conditions, strong result bookings and timely inventory deliveries.

For the full year 2023, Outdoor performance grow 18%, growing in all regions driven by the 146% growth in Great China, and the 44% growth in APAC. By channel, DTC led growth at plus 42%. Key brand highlights from 2023, include number one, Solomon becoming an official partner for 2026 Milano Cortina Olympic Games, including supplying 25,000 volunteers and [indiscernible] with Salomon Apparel, Footwear and Accessories. Second, the launch of Salomon's first low running super shoe, the PHANTASM 2, which sold out in 30 days. And the third, the successful of Solomon athlete, Courtney Dauwalter, the best trail runner on the planet and the first human even to win the Western States 100, the Hardrock 100 and the UTMB in a single season. And the 2024 start with a splash when Solomon launches, Welcome Back to Earth brand campaign during the Super Bowl.

In Winter Sports Equipment, Atomic reinforced its global leadership in Alpine Skis and achieved number two position in the global Ski Boot market. Our star athlete, Mikaela Shiffrin had an exceptional year, breaking the 24 year old record for most World Cup victories of all time and now has 93 wins. Moving to Ball & the Racket, where revenues declined 3% to $242 million in Q4. Ball & the Racked had promising growth in EMEA and the Great China. This growth wasn't enough to offset declines in its largest channel, U.S. wholesale. From a category perspective, the growth in sportswear, golf and the balls wasn't enough to offset weakness in baseball and the racket. The U.S. sports equipment market was significantly hampered in 2023 due to elevate inventories across the industry that are split over from 2022.

In Q4, we made the strategic decision to take the promotional actions necessary for Ball & the Racket to begin 2024 with wholesale inventory levels. Wilson continues to be a market share leaders in its core business of Tennis, Baseball and the golf, and we remain confident in the brand's long term outlook. Some of our recent key highlights over the past year include launching the first ever 3D printed basketball, which debuted at the 2023 NBA All-Star [indiscernible] contest and expanding the brand's retail footprint with new version stores in Santa Monica, Minneapolis, Mall of America, Garden State Plaza, the Galleries in Houston, as well as additional stores in China and Korea. Wilsons' strength in tennis continues as 32% of the competitors at the recent Australian Open compete using our Western Racquet, making us the number one racquet at the tournament.

For the full year 2023, Ball & Racquet grow 7%, led by double-digit gains in DTC, Great China and APAC. With that, I will turn it over to Andrew to discuss our company results and the outlook.

Andrew Page: Thanks, James. Amer Sports continues to enjoy the financial benefits of our transformation to a brand direct operating model. Our strong and authentic brands resonate with consumers and position us well to navigate the challenging macro crossed currents in 2023. With revenue growth above 20% for the full year and continued gross and operating margin expansion, we continue to win with our consumers. Our full year and Q4 results all came in at or above the high end of the ranges we preannounce in our flash results in January. Q4 results decelerated from Q3, which we expected due to supply chain bottlenecks in the second half of 2022, which caused a meaningful shift of sales from Q3 into Q4 creating much harder comparisons.

Looking at the second half in total, our underlying sales and margin trends remained healthy. We also experienced a capital structure transformation following our IPO last month. We retired approximately $4 billion worth of shareholder loans and we refinanced the remaining $1.8 billion of third-party loans to more favorable terms and extended maturity to 2031. Digging in deeper, starting with our top line. For the fourth quarter, revenue rose 10% to $1.3 billion. For the full year 2023, group revenue grew 23%. DTC continued to grow at a very strong double-digit rate led by Arc'teryx while wholesale revenues for the group fell 4% with all three segments experiencing declines due to the comparison issues mentioned above. DTC expanded 37% in Q4 led by Technical Apparel in the Americas and Greater China.

In wholesale, high inventory levels at retail in the Americas and EMEA were a drag on shipments in the Ball and Racket, Outdoor Performance segments. In Q4, regional growth was led by a 45% increase in Greater China, where all three brand segments experienced solid growth, followed by 22% growth in APAC, albeit off a small base. The Americas grew mid-single digits led by DTC strength, partially offset by declines in our wholesale channel. Turning to profitability. Adjusted gross profit margin rose 170 basis points to 52.2% in Q4 versus Q4 2022, primarily driven by our highest gross margin business, Arc'teryx, growing at a faster rate than our other franchises. This was partially offset by heavily promotional environment in Ball & Racket, lower logistics costs, improved sourcing performance, and channel and regional mix also drove gross margin expansion.

In Q4, strong gross profit gains were offset by SG&A deleverage. Adjusted SG&A as a percentage of revenue increased 410 basis points on slower sales growth and represented 42.6% of revenues in the quarter. This drove the 220 basis points decline in our Q4 adjusted operating profit percentage to 10.4%. The key areas of expense growth included variable selling expenses, additional headcount, variable marketing expenses, higher rent costs driven by store openings and strategic investments in IT. Our Q4 adjusted net income declined to a loss of $41 million compared with $46 million of income in Q4 2022, driven primarily by increased interest expense on higher variable interest compared to 2022. Adjusted diluted EPS fell to an $0.11 loss in the fourth quarter as compared to $0.12 of income in the Q4 of 2022.

For the full year 2023, we generated a $0.35 adjusted diluted loss per share as compared to an $0.08 loss per share in the prior year. Excluding PPA, our fourth quarter adjusted net income would have been a loss of $31 million or an $0.08 per share loss. For the full year of 2023, adjusted net income excluding PPA would have been a loss of $92 million. Turning to the balance sheet and cash flow. As I mentioned, we improved our capital structure using the IPO proceeds to retire our EUR1.3 billion shareholder loan. We also refinanced $2 billion of debt in the form of EUR700 million term loan, a $500 million term loan and an $800 million senior secured notes. Following our IPO and debt restructuring, our net debt to adjusted EBITDA is down several turns to approximately 3 times.

We aim to bring that down below 2 times over the next few years through both EBITDA expansion and debt pay down. Based on current interest rates, our net finance costs will run-in the range of $45 million to $50 million per quarter, a meaningful improvement from 2023. Inventories finished 2023 in a healthy position, up 21% from the end of 2022, below our revenue growth of 23% for the full year. Our goal is to grow inventories at a rate that is in line or below revenue growth. Turning to the future. We are happy to share our five-year financial algorithm, which consists of low double-digit to mid-teens annual sales growth, 300 basis points of gross margin expansion and 30 basis points to 70 basis points of annual adjusted operating margin expansion.

The group level top line algorithm reflects mid to high-teens sustainable growth for technical apparel, high-single to low double-digit annual expansion for Outdoor Performance, and a mid-single digit long term growth rate for Ball & Racket. Turning to the near term guidance. We are off to a solid start in 2024 and continue to enjoy healthy mix shift benefits led by our fastest growing high margin Arc'teryx business. Given the difficult comparison from the strong growth at the beginning of 2023, we expect revenue growth for the group in the range of 6% to 8% in Q1, which will be our slowest growth quarter of the year. This incorporates greater than 30% growth in Technical Apparel, flattish revenues in Outdoor Performance and a low double-digit decline in Ball & Racket.

We expect Q1 adjusted gross profit margin to be approximately 53.5%, driven primarily by mix shift benefits and an adjusted operating profit margin of 9% to 10%. Our net finance costs for the quarter will be $100 million to $110mn and our effective tax rate will be in the range of 25% to 35%. This equates to adjusted diluted EPS in the range of $0.01 loss to $0.02 earnings per share. Keep in mind that net finance costs for the quarter includes approximately $60 million of non-recurring items associated with the early extinguishment of debt, related hedge contract exit costs and the higher interest rate on the prior debt for the first 45 days of the quarter. This non-recurring net finance cost would negatively impact Q1 EPS by $0.08 to $0.09 per share.

Going forward, we expect recurring net finance costs to be in the range of $45 million to $50 million on a quarterly basis. For the segments, we expect an adjusted operating profit of slightly above 20% for Technical Apparel, mid-single digits for Outdoor Performance and low to mid-single digits for Ball & Racket. Turning to the full year. We expect mid-teens revenue growth for the group, which incorporates greater than 20% growth in Technical Apparel, 8% to 10% growth in Outdoor Performance and low to mid-single digits growth in Ball & Racket. We expect more than 100 basis points of adjusted gross margin expansion to 53.5 to 54.0 in 2024, driven primarily by mix shift. This will be partially offset by SG&A deleverage. We expect adjusted operating margin of 10.5% to 11%.

For the segments, we expect adjusted operating margin of slightly above 20% for Technical Apparel, high-single digits for Outdoor Performance, and mid-single digits for Ball & Racket. You should assume full year net financing expenses of $240 million to $250 million or approximately $180 million to $190 million, excluding the non-recurring items that I mentioned above of $60 million in the first quarter and an effective tax rate of 25% to 35%. This equates to a range of $0.30 to $0.40 of adjusted diluted EPS based on $510.1 million fully diluted share count. We are assuming $250 million to $260 million of depreciation and amortization, which includes $100 million to $110 million of ROU depreciation. CapEx is expected to be approximately $300 million, an increase of $120 million over 2023 to support new store expansion, our SAP implementation, and distribution and logistics investments.

With that, I'll turn it back to the operator for Q&A.

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