Brands Kontoor Inc.,
which owns denim brands such as Lee and Wrangler, has reduced its net debt by more than a third over the past three years, in part by turning transactions into cash more quickly.
Greensboro, North Carolina-based Kontoor had $606 million in net debt at the end of last year, up from $922 million when it spun off from the VF-based apparel and footwear company. in Denver. Corp.
in May 2019.
Last year, Kontoor set a debt target – defined as net debt divided by the last 12 months of adjusted earnings before interest, taxes, depreciation and amortization – of between 1 and 2 times. This measure was 1.6 as of December 31. Using Ebitda instead, the ratio was 1.9 as of December 31, according to S&P Global Market Intelligence, a data provider.
Chief Financial Officer Rustin Welton attributes Kontoor’s improved debt levels to an ongoing effort by the company’s finance team to encourage all employees to improve what is known as the cash conversion cycle. , renew inventory or collect payments as quickly as possible to free up funds. which can be used to pay off the debt.
“Money has been, and always will be, frankly, a key focal point for us,” Welton said.
This is part three of a new series focusing on how CFOs reduced debt and other costs. Edited excerpts follow.
WSJ: Why did Kontoor have high debt levels following its separation from VF?
Mr. Welton: That’s pretty typical for companies in a spin-off. Granted, we walked away with just over a billion dollars worth of [total] debt associated with us as part of the spin-off. One of our first priorities was to deleverage the balance sheet and repay that debt, simply to increase capital flexibility and our ability to operate.
WSJ: How did you reduce your debt?
Mr. Welton: The organization focused on the money. Every year we look at it and say, ‘OK, how do we keep improving? Where are the opportunities around these metrics to generate cash? We do this because it creates what we call the capital allocation option, which means it gives us the ability to pursue opportunities that enhance shareholder value, whether continued repayment of debt, dividend, [share repurchases] and even strategic mergers and acquisitions.
WSJ: Was cost savings part of your playbook? Or were you primarily focused on increasing sales and using the extra cash to pay down debt?
Mr. Welton: It was a couple of things, improving the business of a [profit-and-loss] perspective. We stopped selling our products where we were unable to generate an appropriate return. These can be distribution channels, customers, categories or specific product lines. We closed a few manufacturing plants. We have changed the business model in some countries to a licensing model.
And then we combined that with improved working capital. We have driven a significant inventory reduction since then, for example, and have focused not only on inventory, but also on receivables and payables.
WSJ: What kind of metrics do you use to show your progress?
Mr. Welton: We focus a lot on the cash conversion cycle internally. This is a measure that whether they are people with financial or non-financial backgrounds, they can definitely understand this inventory more [accounts receivable] less [accounts payable] is your cash conversion cycle. These are the most important elements of working capital, and they are the elements that many people in the organization can directly affect.
We have tried to simplify certain measures. You take certain financial measures, such as return on investment, which we certainly look at on the financial side. But it’s a harder metric to understand for people without financial experience, “OK, how can I influence this?” People understand whether they are touching inventory, receivables or payables. And then we work with them on ‘OK, what are the opportunities for improvement in these areas?’
WSJ: How much debt are you aiming for?
Mr. Welton: The target we have set – 1x to 2x leverage – is what we plan to be. So that’s an option, as we think about using cash, that we can continue to pay down debt. But again, with this objective, we do not intend to completely pay down the debt.
WSJ: Is it because debt is still fairly cheap, despite rising interest rates?
Mr. Welton: Yeah. We refinanced in November [and] issued $400 million in eight-year unsecured notes at a rate of approximately 4.125%. And then we used that proceeds to pay off a higher interest term loan B and to pay off our term loan A. It was a debt-free transaction for us. But he extended the maturities, and really took advantage of the favorable market conditions.
WSJ: What can other CFOs learn from your company’s debt journey?
Mr. Welton: In many organizations, most of the organization is focused on the [profit & loss statement]. And so they include revenue, gross margin, and operating income, metrics like that. But they think the balance sheet and cash flow [are] rather a financial function and activity. And we’ve tried to impress upon all of our employees that they have the ability to impact all financial metrics, not just P&L.
Write to Kristin Broughton at [email protected]
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