Billabong’s Annual Meeting: The Future’s Still Coming

Billabong held its annual meeting on November 22.  Back in August, I reported on Billabong’s results for the year ended June 30.  Here’s the link to that article.  The headline numbers then (all numbers in Australian dollars) were revenue from continuing operations of $1.10 billion and a net loss after tax of $23.7 million.  I started that article with these points which seem just as relevant now as they did then.

There are four things I want you to recognize:

1. This is a tough turnaround. They are doing the right things, they are making progress and we’re starting to see results. But it is complex and all-encompassing and, I hypothesize based on my own turnaround experience, taking longer than CEO Neil Fiske thought it would take when he took the job.  Someday, I hope to have the chance to ask him about that.
2. The economy and business environment sucks pretty much worldwide. Industry CEO’s are putting it perhaps a bit more eloquently than I just did, but they are all saying the same thing. And they are right.
3. All the actions Billabong is taking are mostly the same things other industry brands are doing. Billabong has an advantage in being a relatively large company. However, they are still selling product which it is hard to argue is fundamentally “better” or “different” than that of their competitors.
4. Product differentiation for Billabong and most industry companies is based on branding. In today’s environment, thoughtful and cautious distribution is a critical component of branding. As I’ve written to the point where you’re probably tired of hearing it, that implies a focus on the bottom, rather than the top, line.  That’s fine for a private company, but harder for a public one.

Those are the high points and apparently, they haven’t changed based on what Chairman Ian Pollard and CEO Neil Fiske said at the meeting.  However, there were some nuggets of information that came out of those presentations.

Chairman Ian Pollard informed the audience they are “…reviewing a number of our smaller brands, including Tigerlily, VonZipper and Excel, with a view to possible sales that will pay down debt and continue to simplify our portfolio.  Shareholders can be assured that unless we get full value for these high-quality brands we will hold them and look to grow them.”

Regular readers aren’t surprised to see this, as I’ve been predicting sales of more brands for quite a while.  I take Ian’s statement that they won’t sell unless they get “full value” as a negotiating position for discussions which I imagine are already underway.  Keeping and trying to grow these brands would be contrary to the big three strategy Neil’s been pursuing since he came in and to their financial capabilities.  Remember, the plan has been to finance marketing programs (focused on the big three) through expense reductions and operating efficiencies.

Should they sell those three brands they would be left with Billabong, RVCA, Element, Honolua Surf, Kustom, and Palmer Surf.  Note that Ian’s language doesn’t exclude selling any brands other than the big three.

Ian goes on to note that Billabong continues “…to consider the refinancing of our debt.”  But to do that, he continues, “…we need to see improvements in our profit and cashflow.”  Selling brands and reducing debt would be a move in that direction.

Before turning over the meeting to Neil, Ian tells us, “…we have had a soft start to the first half of this fiscal year but with encouraging signs coming from the US and the emerging benefits of our project agenda, and assuming a reasonably stable trading and currency environment we expect full year EBITDA before significant items and assuming no divestments to be in the range of AU$60 to $65 million.”

As we’ll discuss when reviewing Neil’s comments, certain of their projects are starting to get traction with positive financial results.  But with the caveats Ian notes, it’s hard to have any perspective on the quality of the forecast.  A “…stable trading and currency environment…” is profoundly to be hoped for by most companies.  I don’t know how Billabong management viewed it, but as I see it the U.S. election result has increased uncertainty in these areas.

If I looked past EBITDA, which you know I tend to prefer believing, as I do, that the bottom line is the best indicator of a company’s results, there’s additional uncertainty as they point out.  If I were a betting man, I’d expect the sale of at least one brand, but I’ve got no idea how such sales would impact the bottom line.  Nor do I know what the net impact of the so called “significant items” will be.  In footnote five in 2016’s annual report, we see that significant items increased profit before tax by $7.6 million in 2016 and by $11.0 million in 2015.

That report also tell us that EBITDAI for the 2016 fiscal year was $49.8 million.  The number from the annual meeting doesn’t seem to include I- impairment charges.  But looking at that footnote five again, it appears that impairment charges were only a negative $97,000.

So an EBITDA of $62.5 million, to take the midpoint of the projection, would be an increase of 25.5% over the 2016 fiscal year result.

CEO Neil Fiske spent most of his time bringing shareholders up to date on the company transformation the management team developed and started implementing shortly after he became CEO.  The bottom line is that it’s taking longer than he hoped (maybe not longer than he really expected?) but it’s producing results.

He described Billabong as going “…from a complex, regional, fragmented business three years ago to a much simplified, brand-led, truly global company.”  That is a great summary description and just oozes opportunities to improve the bottom line.  He reminds us that they achieved a $19.5 million cost reduction in 2016, with more to come, though not as quickly as was originally hoped.  “Combined, the Pipeline and Sourcing projects will deliver benefits at maturity in FY19 of $35m with the sourcing benefits contributing meaningfully in the second half of FY17. I would note that a substantial majority of the $35m will emerge in FY18 and FY19.”

I’m not going to go back and rehash all the numbers I analyzed when the annual report came out.  That’s why I linked to my analysis at the start of this article.  But one thing is still kind of grinding on me.  They talk about growth in “wholesale equivalent sales.”  For example, Neil tells us that RVCA was up 44% in Australia during the last complete year on this basis.

It has to do with how they account for sales of their brands through their owned retail.  I’ve never seen it explained in a report or conference call, I talked to one Australian analyst who couldn’t explain it and my email inquiry to Billabong Investor Relations went unanswered.

I don’t know if this important or not, but I’m now full on curious if only because I can’t find out.  I did a little searching and found the following from Nike’s conference call from September, 2015.  I added the emphasis.

“Finally, participants may discuss non-GAAP financial measures, including references to wholesale equivalent sales.  References to wholesale equivalent sales are only intended to provide context as to the overall current market footprint of the brands owned by NIKE, Inc. and should not be relied upon as a financial measure of actual results.”

If anybody can explain the accounting for this, and how it differs from GAAP I’d love to hear from them.

The bottom line for Billabong? They are making progress but it’s taking longer than they hoped/expected and the market is tough.  I really wish I saw a balance sheet quarterly instead of only twice a year.