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Edited Transcript of IDG.TO earnings conference call or presentation 7-Nov-19 2:00pm GMT

Q2 2020 Indigo Books and Music Inc Earnings Call

TORONTO Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Indigo Books and Music Inc earnings conference call or presentation Thursday, November 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heather M. Reisman

Indigo Books & Music Inc. - Founder, Chairman & CEO

* R. Craig Loudon

Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain

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Conference Call Participants

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* David John McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Indigo Books & Music Q2 Analyst Conference Call. (Operator Instructions) This call is being recorded on Thursday, November 7, 2019. And I would like to turn the conference over to your host, Mr. Craig Loudon, Chief Financial Officer. Please go ahead.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [2]

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Good morning, and thank you for joining us to review Indigo's second quarter fiscal 2020 results. My name is Craig Loudon, and I'm the Chief Financial Officer. Joining us from Indigo today is the Chief Executive Officer, Heather Reisman.

Regarding the materials for this conference call, we issued the press release yesterday. It can be found at indigo.ca and on SEDAR. The conference call will be recorded and archived in the Investor Relations section of the Indigo website. A playback of the call will also be available by telephone until 11:59 p.m. Eastern Time on November 14, 2019.

This conference call may contain forward-looking statements, and to the extent that it does, we refer you to our cautionary statement regarding forward-looking statements in the press release and the MD&A related to this quarter.

I would now like to turn the call over to Heather Reisman.

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Heather M. Reisman, Indigo Books & Music Inc. - Founder, Chairman & CEO [3]

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Good morning, everybody, and thank you for joining us. In the context of a highly competitive and dynamic retail landscape, we are keenly focused on our customers on lowering our cost infrastructure and on protecting cash and capital. During the quarter, we repatriated our entire proprietary design studio to Toronto under the leadership of Nathan Williams. And we are excited about Nathan's creative direction, the evolution of which will be seen in products landing in stores this coming spring and summer.

We also launched our paid membership program, plum Plus, and early indication is that this program will be very well received by Indigo customers. We are also strategically moving to be far less promotional, an action that will take some top line away but will increasingly deliver bottom line results.

I would now like to hand it over to Craig to speak to the financial results in detail.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [4]

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The results we are discussing are for the 13 weeks ended September 28, 2019. Comparative figures have been provided for the 13 weeks ended September 29, 2018. As a reminder, we began reporting under IFRS 16, the new leasing standard, in the first quarter. Our financials on a reported basis and discussed today include the adoption of IFRS 16. However, we have also provided certain metrics for fiscal 2020, excluding the impacts of the new standards to assist with your analysis.

Revenue was $203.4 million for the quarter, which was $12.9 million less than the second quarter last year. The top line decline was a result of strong competitive pressures and the company's planned efforts to reduce promotions to improve profitability. Top line results were impacted by softer consumer spending in the nonessential market space and the mature general merchandise assortment in recent months, which contributed to the downward trend experienced in the second quarter.

We are making improvements to the assortment to meaningfully change course and have begun to see some positive momentum through the back-to-school season. The strategic reduction of promotional campaigns resulted in higher full price sell-throughs and a margin rate improvement of 1.3% for the period.

Total comparable sales, including online, decreased 8%. Comparable retail store sales for the quarter decreased by 7.4% in superstores and 5.7% in small-format stores, primarily as a result of the company's planned efforts to reduce promotions.

The online channel comparable sales decreased by 12.2% for the quarter. The impact of reducing promotional activity was more significant in the online channel as e-commerce consumer behavior is more driven by price sensitivity. The merchandising strategy has also been refined to remove low-price, low-margin items, which historically drove traffic and sales at the expense of profitability once the channel's fulfillment expenses were considered. While online and print sales were impacted by the elimination of the every book ships for free campaign that ran in the second quarter of fiscal 2019, overall, these efforts have led to contribution improvements in the online channel.

Overall, operating, selling and administration costs decreased by $19.9 million compared to last year. Excluding the IFRS 16 impact, these expenses decreased $3 million primarily due to the reduction in sales volumes and increased productivity across the company's distribution centers. This was partially offset by a meaningful increase in the company's cost base from net new superstores opened in fiscal 2019 as part of the company's retail transformation and timing differences associated with expenses.

For the quarter, adjusted EBITDA increased by $17.3 million. Excluding the IFRS 16 impact, adjusted EBITDA increased by $0.4 million. Higher adjusted EBITDA was driven by the margin and operating cost improvements achieved, which outpaced the impact of tempered sales.

Net loss for the second quarter was $20.5 million compared to a net loss of $19.1 million last year. The impact of adopting IFRS 16 for the quarter was an earnings improvement of $0.3 million. This increase in the net loss position is result of the broader competitive environment and higher amortization in the current period as a result of the company's executed capital investment program in fiscal 2019.

Capital investment in the second quarter of fiscal 2020 was $3.8 million compared to $25.6 million for the same period last year. The decrease is congruent with the completion of the company's capital investment program in fiscal 2019, as mentioned, to implement changes across Indigo's retail outlets, digital platforms and supply chain facilities. Additionally, the company will meet its capital expenditure target of $20 million for this year, a significant reduction from prior years.

The company launched a cost-cutting initiative at the beginning of this year, targeting $20 million to $25 million in cost savings. Speaking to the first half of fiscal 2020 and excluding the impact of IFRS 16 for the 26 weeks ended September 28, 2019, our concentrated efforts have resulted in a reduction of operating, selling, administrative and other expenses of $9 million compared to prior year's cost base. While this reduction has been partly offset by costs associated with the net new stores and some onetime expenses associated with the move of the company's New York office to Toronto, it's reflective of the company's commitment to future profitability.

At this point, we would like to open the call for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from David McFadgen at Cormark Securities.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [2]

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Just a couple of questions. So Heather, we're into the all-important quarter, Q3. I'm just wondering how you're feeling about your merchandising product line. Is it reinvigorated much? Or is there still a lot more work to do?

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [3]

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David, it's Craig Loudon. Heather, unfortunately, had to step out of the room, but I will take your questions. We're feeling good about holiday. I think as we've mentioned before, though, Nathan has arrived to lead our product development efforts, and the bulk of the output from that activity will not hit until spring/summer of next year. However, he did put his mark to the best extent he could on holiday. So we're feeling good about holiday and that it's a natural time for traffic and people to head to Indigo. So certainly, we're feeling good about this time period.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [4]

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Yes. So obviously you've seen some same-store sales declines so far this year. I mean I'm not trying to get you to comment any guidance or anything. But do you think you could actually result in a flat same-store sales in Q3? Or is that just...

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [5]

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Again, I don't think -- we don't provide that kind of forward guidance. But I think if -- based on what we've said on the prior call and have said in a lot of the release material, we do believe last year we were far too promotional. We also had a lot of marked down goods, particularly in Q3. If you remember, we had the store development program that ran late and a lot of product then that couldn't sell in the stores and later had to be cleared. So I would expect that we will not keep up with that pace of sales. However, you will see strength in the margin rate and the margin line.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [6]

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Okay.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [7]

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And that's intentional just so that you understand. I mean that is our strategy. We believe we were, I shouldn't say, chasing sales, but in the end, because of the amount of product and the disruptions with the store renovations, we would not want to keep up with that pace given how it happened.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [8]

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Right. Okay. So far this year, you guys have burned through a fair bit of cash more than I would have expected. I was just wondering, do you think that's going to -- I mean obviously Q3, you have a big cash inflow. But when you're looking out to the end of Q4, I mean how are you feeling about your -- the cash balance going forward?

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [9]

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We feel we'll end with a good cash balance. So I'm not -- when you say we've gone through cash, I mean our CapEx has been very low as we reported on the documentation. I think what you're seeing is just a natural progression of the seasonality. This is always our lowest time period of cash in the year, and we'll see it come back up in Q3. And I think at year-end, we should have a reasonable cash balance. Again, I'm not going to throw a number out there. And we also think we've got room to come down and inventory to, particularly in the off-season, to improve that cash position. But I think people will be pleased where that will end.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [10]

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Okay. Let's say things go a little worse than expected or let's say things were a lot worse than expected and you chew through a fair bit of cash, do you have bank lines in place right now that you could draw on if you needed to?

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [11]

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We do. Not at the moment, but we have other contingencies in place if needed. Obviously we do have a majority shareholder and do have other ways to raise cash if needed. But we don't anticipate that will be required whatsoever in the next year.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [12]

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Okay. And then I noticed that you saw at the -- after Q2 that you've sold your equity stake in Calendar Club. I think it was only for $1.8 million. I thought that was incredibly low. I was just wondering how you came to that valuation.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [13]

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Well, I think the -- we'll talk about that at a subsequent event, so we'll talk about that more in the next quarter. But I think if you look at what it generated last year versus, generally, we were financing that business, I don't see how you would come up with a larger valuation than that. Last year, I think our share of earnings was something like $800,000. Yet the financing often was millions of dollars of cash. So the risk versus reward and frankly, the amount of time it was taking for us -- I think that's a great little business, don't get me wrong, for our partners to continue on with it, but also just the amount of time it took from our management team in this retail environment, it just was not worth focusing on. Better to focus on our core business.

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Operator [14]

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(Operator Instructions) And at this time, Mr. Loudon, it appears that we have no other questions registered, sir. Please proceed.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [15]

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Thank you. Thank you for your time and attention today. We appreciate you calling in and look forward to reconnecting on a quarterly basis. Our third quarter results will be announced on or around February 6, 2020. Thank you again for your support, and have a good day.

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Operator [16]

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Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.