Performance Sports Group's (PSG) CEO Kevin Davis on Q2 2016 Results - Earnings Call Transcript

| About: Performance Sports (PSG)

Performance Sports Group Ltd. (NYSE:PSG)

Q2 2016 Earnings Conference Call

January 14, 2016 10:00 A.M. ET

Executives

Cody Slach – IR Advisor

Kevin Davis - CEO and Director

Amir Rosenthal - President, PSG Brands

Mark Vendetti – CFO

Analysts

Jay Sole - Morgan Stanley

Sabahat Khan - RBC Capital Markets

Sean McGowan - Oppenheimer & Company

David King - Roth Capital Partners

Andrew Burns - D.A. Davidson

James Hardiman - Wedbush Securities

Corey Hammill - Paradigm Capital

Martin Landry - GMP Securities

Rafe Jadrosich - Bank of America

Operator

Please standby. Good morning everyone and thank you for participating in today's conference call to discuss Performance Sports Group's Financial Results for the Fiscal Second Quarter ended November 30, 2015. Joining us today are Performance Sports Group's CEO, Mr. Kevin Davis; President of PSG Brands, Mr. Amir Rosenthal; Performance Sports Group's CFO, Mr. Mark Vendetti; and the Company's Investor Relations Advisor, Mr. Cody Slach. Following their remarks, we'll open the call for your questions.

Now, I would like to turn the call over to Mr. Slach for some introductory statements. Cody, please go ahead.

Cody Slach

Thank you, Kayla. All of the quarterly filing materials, including the press release announcing the company's second quarter results are available on the SEDAR and EDGAR databases and on the company's web site at performancesportsgroup.com. Also a web cast replay of today's call will be accessible via the company's web site until January 28, 2016.

Before we begin, I would like provide the following cautionary statement regarding forward-looking information on behalf of Performance Sports Group and all of its representatives on this call. Their remarks and answers to your questions today may constitute forward-looking information within the meaning of applicable securities laws.

Forward-looking information about future events or the company's future performance is inherently subject to risks and uncertainties that may cause actual events or results to differ materially and is based on current estimates and assumptions made by management in light of management's own experience and perception of historical trends, current conditions and expected future developments as well as other factors that management believes are appropriate and reasonable in the circumstances.

There could be no assurances that such estimates and assumptions will prove to be correct. Additional information about the material factors that could cause actual results to differ materially from any conclusions, forecasts or projections in the forward-looking information and the details regarding the material factors or assumptions that were applied in drawing such conclusions are contained in the company's public disclosure filings, including the Risk Factors section in the company's Annual Report on Form 10-K for the year ended May 31, 2015, dated August 26, 2015 and the quarterly report on Form 10-Q for the fiscal second quarter ended November 30, 2015.

Any statements regarding forward-looking information is made as of the date of this call and the company does not undertake any obligation to update such forward-looking statements except as required by applicable securities law. Now, I would like to turn the call over to the CEO of Performance Sports Group, Mr. Kevin Davis. Kevin?

Kevin Davis

Thanks, Cody and good morning everyone. Thanks for joining us today to discuss our fiscal second quarter results. There is a lot to talk about today so I’ll provide some brief comments about the recent quarter and some recent events before introducing our new CFO, Mark Vendetti who’ll take us through our full financial results and then to Amir, who will discuss the performance of our various brands.

In the second quarter our brands continued to take market share and demonstrated strong resilience in some very challenging markets. During the quarter, BAUER continued to hold the number one market share and its brand affinity remains very strong. Our OWN THE MOMENT hockey retail initiative now with two open stores one in Massachusetts and the other in Minnesota are hitting or exceeding our financial and strategic expectation. We recently conducted a thorough independent consumer study which informed us that in these local markets we are increasing brand awareness, engaging consumers, improving overall BAUER market share, and because of the great shopping experience for hockey gear we are increasing consumers likelihood of visiting local hockey retailers after shopping at OWN THE MOMENT.

Baseball sales growth was driven by EASTON's non-bat categories which were up 28% while lacrosse sales driven by strong growth in MAVERIK line of heads and protective gear were up 9% leading up to its peak selling season. We continued to execute on the initiatives put in place to improve our operations which helps offset the impact from the weakening Canadian dollar. In fact our plan to improve working capital by 30 million in fiscal 2016, is well on track as year-to-date we have already reduced inventory by $13 million.

We’ve also experienced strong results from our supply chain initiatives. And we are increasing our expectations for the benefits from that initiative in fiscal 2017 to range from between $8 million and $12 million compared to the $5 million to $7 million previously disclosed.

As I mentioned, our earnings continued to be impacted by the continued weakening of the Canadian dollar which we estimated lowered our adjusted EPS by 50% or $0.12 compared to the second quarter of fiscal 2015. Year-to-date our adjusted EPS was down 66%. Over two thirds of that decline was due to the change in currency rates, with the remaining decline primarily related to the change in launch timing of new products in baseball and hockey.

As you may have seen yesterday, we are extremely excited about our purchase of the EASTON Hockey business. The acquisition adds EASTON Hockey's heritage of innovation to our existing BAUER brand while also adding intellectual property assets that will benefit our product lines under both EASTON and BAUER Hockey. In addition, the acquisition provides us exclusive control of the EASTON brand in all sports other than archery and cycling. Both Mark and Amir will speak in more detail about this exciting transaction later in today's call.

Before I turn it over to Mark we think it’s prudent to caution investors that we have not received any proposal or communication from any person concerning a potential bid for the company or a similar transaction. And we are not otherwise aware of any information supporting recent speculation in the marketplace. In addition as called out in yesterday’s earnings release, the Board of Directors unanimously support the entire management team and the overall strategic direction of the company including our OWN THE MOMENT retail initiative for BAUER Hockey where we are pleased to announce the approval to open two new locations in fiscal 2017.

As we announced in November we appointed Mark Vendetti as CFO succeeding Amir Rosenthal who is named President of PSG Brand in May 2015. Mark brings a wealth of financial experience and expertise as well as executive leadership with his roles with some of the world's leading consumer brands and we are proud to add his skill set to our already strong executive team. It’s been great working alongside Mark for the first month and now it’s my pleasure to introduce him on this call. So I would like to turn the call over to Mark who will take us through the details of our financial results. Mark?

Mark Vendetti

Thanks Kevin and good morning everyone. It’s great to be the part of PSG team. Jumping right into our results for the fiscal second quarter. Revenues decreased 11% to 153 million compared to the same year ago quarter. On a constant currency basis however revenues were down 6% to $162.9 million. The 11% reported decline was primarily due to the unfavorable impact from foreign exchange, variations in product launch cycles in our hockey segment, as well as retailer consolidation in the U.S. and continued challenging market conditions for our hockey business in Russia and Eastern Europe.

Offsetting these revenue declines was a 4% sales growth from EASTON and a 9% increase in lacrosse sales. On a regional basis revenues in North America were down 9% while rest of the world was down 28% [ph]. Again this was due to the aforementioned factors in hockey. Despite these results we remain encouraged about the long-term prospects of our business globally.

Now moving on to our performance by segment, hockey revenues decreased 19% or 11% on a constant currency basis to 91.9 million compared to the year ago quarter driven by the unfavorable impact from foreign exchange, variations in hockey equipment product launch cycles, a decline in performance apparel retail related to the prior year’s launch of a complete line of 37.5 apparel, as well as consolidation among the largest retailers in the U.S. and lower sales to our Russian and European distributors. To be specific, as it relates to the U.S. consolidation, four of our top seven retailers have consolidated over the past several months.

Baseball/Softball revenues in the second quarter increased 4% to $50.9 million compared to the year-ago quarter. As Kevin mentioned this was due to a 28% sales growth in non-bat categories, partially offset by the launch of only one bat family for EASTON compared to a two-family launch last year. The growth in non-bat revenues is significant as we have designated the expansion of the EASTON brand outside of bats as a key strategic initiative.

Revenues in our other sports segment, which is made up of lacrosse and soccer, increased 5% to $10.2 million. This was due to a 9% increase in lacrosse sales, which was driven by continued strong growth in MAVERIK line of heads and protective gear, as well as growth in the helmet category.

Adjusted gross profit during the quarter increased to 19% to 50.6 million. As a percent of revenues adjusted gross profit decreased 300 basis points to 33.1% from the year-ago quarter. The decrease in reported adjusted gross profit margin was driven by unfavorable foreign currency rates which more than offset the favorable impact from hockey price increases in Canada and lower cost for new hockey product launches in all regions. On a constant currency basis adjusted gross profit decreased 2% to 60.9 million and importantly adjusted gross profit margin increased 130 basis points to 37.4% on a constant currency basis.

Gross profit in the second quarter decreased 18% to $45.7 million compared to the year-ago quarter. On a constant currency basis, gross profit decreased 1% to $55.6 million. As a percentage of revenues, gross profit decreased 260 basis points to 29.9% and on a constant currency basis, gross profit margin was up 160 basis points to 34.1%.

Overall, our margins are impacted by unfavorable foreign currency changes on both a translational and a transaction basis or product cost basis. In the second quarter, these impacts totaled 430 basis points. Although we have hedges in place for U.S. dollar inventory purchases for our hockey business that generate revenue in Canadian dollars, recall that these hedges will never be a perfect offset to the actual currency movement, especially with the extreme currency volatility we have experienced in the recent quarters. These hedges also do not protect our financial statements from the direct translation impact we experienced from a weaker Canadian dollar.

SG&A expenses in the second quarter were up slightly to $39.5 million compared to $39.1 million in the year ago quarter. On a constant currency basis SG&A expenses increased 5% to 41.3 million. As a percentage of revenues and excluding the impact of acquisitions, related cost, share based payment expense, start up cost related to the OWN THE MOMENT hockey experience retail store initiative, regulatory compliance costs associated with the company's transition to being a U.S. domestic issuer and cost related to the proxy contest in October 2015, SG&A expenses increased to 160 basis points to 21.8% compared to the year ago quarter.

The increase was primarily due to a bad debt expense which resulted from writing off the receivable of an internet baseball retailer during the quarter. Adjusted EPS was negatively impacted by $0.04 per share for this write off which was driven by a poorly executed ERP installation by our customer. The expense is a rare credit event for our company and in no way undermines the credit worthiness of our customer base. Excluding this cost, Q2 adjusted EPS would have been $0.17. Since going public in 2011, annual bad debt expenses as a percentage of revenue has never been more than 35 basis points further supporting my comments on the unusual nature of this event.

R&D in the second quarter decreased 8% to 5.9 million compared to the year ago quarter. On a constant currency basis R&D expenses decreased slightly to 6.3 million. As a percentage of revenue R&D expenses increased 20 basis points to 3.9% compared to 3.7% in the year ago quarter.

Adjusted EBITDA decreased 36% to 15.3 million and on a constant currency basis adjusted EBITDA was 23.5 million down 2%. Adjusted net income in the second quarter decreased 48% to 5.9 million or $0.13 per diluted share compared to 11.3 million or $0.24 per diluted share in the year ago quarter. The impact of foreign currency reduced adjusted net income by approximately $0.12 per diluted share compared to the second quarter last year. And the aforementioned bad debt expense reduced adjusted net income by approximately $0.04 per share. On a constant currency basis adjusted net income for the prior year quarter -– excuse me on a constant currency basis adjusted net income increased from the prior year quarter to 11.8 million or $0.25 per diluted share.

In the second quarter GAAP net loss which includes the impact of unrealized losses on derivatives and FX revaluation and certain other cash and non-cash expenses that are excluded from adjusted net income was 4.5 million or a loss of $0.10 per diluted share. This compares to net income of 1 million or $0.02 per diluted share in the year ago quarter. On a constant currency basis net loss was 0.5 million or $0.01 per diluted share.

As of November 30, 2015 working capital including the impact of foreign currency was 341.1 million compared to 362.4 million on November 30, 2014. Total debt was 451.9 million compared to 422.6 million. Our leverage ratio is defined in our credit facilities stood at 6.1x compared to 3.62x one year ago. Excluding the impact of foreign currency and underscoring the impact of foreign currency on our business, the leverage ratio was 4.35. On a sequential basis our reported leverage ratio ticked up from 5.73x in fiscal Q1.

To be clear while our leverage ratio has climbed due to the impact of FX on our EBITDA, we do not have a maximum leverage covenant. The only material impact on the leverage ratio on our debt is a 50 basis point step up in interest expense we been paying since our leverage crossed 4.25 which is modeled into our 2016 guidance as well as a fixed coverage ratio that we comfortably need. We expect our leverage to decline overtime as a result of our focus on improving profitability through our previously announced supply chain initiative and our planned $30 million reduction in fiscal 2016 networking capital.

Speaking of both of these initiatives, on our working capital plan we have previously targeted improvement in net cash flow from working capital of 30 million in fiscal 2016 mainly driven by inventory improvements. As Kevin mentioned we have already made significant progress on this initiative as measured by the year-to-date $13 million decline in inventory. We expect proceeds generated from the plan will reduce debt, reduce leverage, and add shareholder value at a time when foreign exchange is negatively impacting earnings.

Our previously announced supply chain initiative which is expected to improve pretax profitability by $30 million annually by fiscal 2020 is also well on track. In fiscal 2016 we continue to expect approximately 3 million in savings net of investments and onetime costs. However, as Kevin shared we expect at least a 60% upside in fiscal 2017 from our previously disclosed range of 5 million to 7 million and now expect savings to range between 8 million to 12 million. Under current market conditions we expect savings in fiscal 2018 and beyond to exceed our original expectations of savings of 5 million to 7 million in fiscal 2018 and 2019 and approximately 9 million of savings in fiscal 2020.

Now moving to our outlook for fiscal 2016, with the continued weakening of the Canadian dollar since our last stated guidance, which has depreciated approximately 9% versus the U.S. dollar since we gave fiscal 2016 guidance at an assumed rate of approximately $1.30, we are revising our fiscal 2016 expectation. We now expect adjusted net income for fiscal 2016 to range between $0.66 and $0.69 per share.

To a lesser extent this revision also includes incremental expenses from our recently acquired Q30 technology. Partially offsetting these incremental expenses is a benefit we have received from our supply chain plan and other operational efficiencies. As it relates to our fiscal 2016 outlook, we also expect our third quarter range will be between $0.09 and $0.10 per share and our fourth quarter range will be between $0.31 and $0.33 per share.

Given the magnitude of the impact of foreign currency on reported results, these disclosures are being provided as an exception to our policy of not providing earning guidance. And we currently do not expect to provide regular earning guidance from here forward. The revised guidance also does not include the impact of the EASTON transaction.

Turning our attention briefly to fiscal 2017, current foreign exchange rates would represent another significant year-over-year decline in the Canadian dollar. In fact if rates hold through Q1 of fiscal 2017, a quarter that represents more than 35% of our hockey revenues we will be dealing with approximate 15% year-over-year weakening of the Canadian dollar, a sizable belt to the anniversary. Now I would like to turn the call over to Amir to speak about our exciting new acquisition that we announced yesterday and provide some color around various brands.

Amir Rosenthal

Thank you, Mark. The EASTON acquisition that we disclosed yesterday includes all relevant patents, inventories, sales orders, accounts receivable, and fixed assets and the assumption of certain liabilities related to the acquired assets to operate EASTON Hockey pursuant to a transitional services agreement until the integration is completed. Within the first 12 months of closing we expect the transaction to operate approximately breakeven EBITDA and will generate positive cash flow.

We also expect to report an accounting gain on bargain purchase as we expect the fair value of assets and liabilities acquired to be greater than the purchase price. Magnitude of this gain will be evaluated and recorded in the third quarter of fiscal 2016. This is an important strategic acquisition for us. We have acquired valuable intellectual property and we are focused on growing the newly acquired business.

I would like to provide a little bit more detail on each of our segments beginning with our largest business hockey. Q2 marks our holiday selling season and as Mark mentioned currency neutral revenues were impacted by variations in the ice hockey equipment product launch cycles, a tough comparison in performance apparel due to the prior year launch of 37.5 apparel and lower sales due to the challenges faced by our Russian and Eastern European distributors.

We also experienced lower booking and repeat orders due to the aforementioned retail consolidation in the U.S. However, it is worth noting that a similar consolidation phenomenon occurred in Canada in the 2012, 2013 period and we experienced an uptick in our sales once the consolidation was behind us in that market. Some categories that grew nicely in the quarter include our team apparel which was up 18% constant currency and hockey uniforms which grew 13% constant currency. Our street hockey line also continues to perform well after launching in Q1 of fiscal 2015 and the line compliments our other growth initiatives as street hockey provides an easy way for kids to get involved in this sport and could lead to more ice hockey participation over the long-term.

Speaking of incremental growth opportunities in hockey, in November we opened our second Own The Moment store in Bloomington, Minnesota. Like our Burlington, Massachusetts location, this 25,000 square foot brand and product experience is a premium showcase trying to excite and engage hockey consumers of all ages and abilities. As Kevin mentioned in his opening remarks our retail initiative remains well on track and has performed right in line or is exceeding our expectations.

As mentioned, at the most recent Board of Directors meeting, the Board approved the build out of two additional retail locations just for 2017. We continue to anticipate opening a total of 8 to 10 OWN THE MOMENT stores over the next several years. We are currently taking booking orders for our fiscal fourth quarter 2016, and first quarter of 2017, which constitute our back to hockey season. It also marks the return of a two family product launch SUPREME and NEXUS.

The retail consolidation discussed earlier as well as continued economic weakness in Russia and Eastern Europe leads us to conclude that the global hockey market is down roughly 5% on a year-over-year basis. Nevertheless our expectation is that we will continue to take market share. With the expectation of a small amount of goal product that ships in Q3, our fourth quarter marks the introduction of some great new hockey products that are worth mentioning. They include the SUPREME 1S skate which continues to advance the dynamic stride approach that we take into that particularly skate line to really increase the players range of motion on the ice. And it does so by having an adjustable tongue and tendon guard to fit the needs of the individual player creating more of a personalized custom field without fully customizing the skates.

The response thus far from players who have tried the product has been very strong. The other noteworthy launch is our elite GOAL product line. For many years, we have been a leader in GOAL skates, GOAL masks, and GOAL sticks. GOAL protective is a category where we have not had a leadership position, and our new product which we developed in 2014 with Henrik Lundqvist as part of project ODIN features a significant reduction in waste as well as unique materials that make it truly different than any other GOAL pad in the marketplace.

The product has already been tested and proven at the highest levels of play including the Olympic Gold medal game and the Stanley Cup Finals. There are also new under protective products that incorporate lighter weight materials that make them particularly attractive while also continuing to provide a high level of protection. And as always we’ll have a new stick launch in April. Our stick launch this month which brings a new line of SUPREME sticks back to the market is also generating a lot of excitement with our consumers.

Returning to EASTON Hockey, this is an exciting transaction because it brings to us another business with a history of innovation. EASTON Hockey was the pioneer of the aluminum and composite stick in hockey and EASTON has long been considered a strong brand in the sport. We believe by focusing on their track record of success in the stick category and by utilizing the resources of a broader and more financially stable organization, we can support and further grow the EASTON brand in this important category and other key equipment categories. We have owned the EASTON brands since our April 2014 acquisition of the EASTON Baseball/Softball business and have been licensing the use of the EASTON brands in hockey, cycling, and archery. We will continue to license the brand for use in cycling and archery.

Moving on to our baseball business, we grew constant currency sales by 4% driven by the non-bat categories at EASTON which we identified as an important growth opportunity for the brand. In fact every non-bat category grew in the quarter with the most notable growth from CASCADE [ph] protective helmets, apparels, bags, and accessories. We continue to expect the non-bat category to grow at a faster rate than bats in fiscal 2016.

As expected our bat business was down year-over-year due to copying a two family bat launch last season versus just one this season. Comps were also constrained due to last years earlier loading of new products at retail which shifted demand from Q3 and Q4 into Q2 and Q3.

COMBAT sales declined by 10% due to the early launch of MAXUM bats this year compared to the traditional launch of bats in the second fiscal quarter. On a year-to-date basis COMBAT sales grew by 20% in constant currency. We have spoken earlier about USA Baseball's new bat standard for youth baseball which will take effect in January 2018 and covers players 14 years and under. As a reminder all youth baseballs governed by USA Baseball with the exception of USSSA Baseball must use bats which comply with this new standard. Bats meeting the new standard will be available at retail in September 2017. As was the case with high school and collegiate bat standards, the USA youth bat standard has been adopted to make aluminum and composite bats deliver ball exit speed that is similar to wood bats.

Historically when similar standards for college and high school bats took effect, bat manufacturers including EASTON experienced a decrease in bat sales leading up to the new standard being implemented. However, during the season in which the standard went into effect EASTON experienced an increase in bat sales above the previous decline resulting in increased market share for their new line of bats. For the upcoming standard change we continue to expect no impact to our 2016 business. In fiscal 2017 we expect a decrease in our bat revenues and a corresponding increase in fiscal 2018. We will continue to provide updates on the expected impact of this change in standards each quarter.

Within our other sports segment lacrosse grew 9% on a constant currency basis driven by continued strong growth in the MAVERIK line of heads and protective gear as well as growth in the helmet category. As previous discussed, the women's lacrosse performance standard for new head gear has been formally approved. The American Society for Testing and Materials or ASTM officially published the standard this summer and we expect it to be adopted by U.S. lacrosse. We will aggressively pursue this incremental growth opportunity for our CASCADE brand in the coming months. Our goal is to bring to market a head protection product for women that is well regarded and is as high performing as our line of CASCADE men's helmets.

In our soccer business, INARIA uniform sales decreased 5% in constant currency for the second fiscal quarter. However, are up 12% on a year-to-date basis due to further developing the brand in the U.S. and Canadian markets and forging new retail relationships with companies like Soccer.com. We are also leveraging the PSG apparel engine to bring innovative technology like 37.5 to our soccer apparel line and have added an important sports marketing asset Sebastian Giovinco, the recipient of this year's most valuable player in the MLS.

Now I would like to turn the call back over to Kevin to discuss our latest technology acquisition and wrap up the prepared comments.

Kevin Davis

Thanks Amir. As many of you know during our second quarter we acquired the exclusive global license to sports related patent and technology assets from Q30 Sports Science for $7 million with future payments of up to 18 million of certain product development and sales milestones are achieved. Q30 was formed to commercialize proprietary technology that was developed by leading physicians and thought leaders in the field of neuroscience. The technology and supporting science have shown a reduction in indicators of mild traumatic brain injury or mTBI in both animal and human studies. This technology is the first in its field to attempt to reduce mTBI from inside the cranium using the body's physiology rather than through traditional external protective equipment such as helmet.

The researchers have developed a simple device that athletes can comfortably wear which mildly increases blood volume in the cranium to reduce what is known as the Slosh effect where the brain moving within the skull during an impact. In two separate peer review research studies conducted on small animals which were published in the medical journals Neurosurgery and the Journal of Neurosurgery, researchers found an 83% reduction in the number of torn fibers in a standard concussion model when the device was utilized.

Additionally we have discussed two other studies done with hockey and football players that were not published yet have shown very favorable results for athletes using this important new technology. There is more research that needs to be conducted and we are working with all the relevant bodies including FDA and Health Canada to ensure we are following appropriate and requisite steps to bring this important technology to market. Subject to completion of all of the required testing, we would hope to begin offering this product to athletes in our FY17 or early FY18.

So in closing as we look through the remainder of 2016, we reiterate our expectation that on the currency neutral basis our brands will continue to outpace the growth of the markets we served resulting in market share gains and increased profitability. We are also very pleased with the continued success of our supply chain team and the meaningful increase in the savings we are forecasting for FY17 of 8 million to 12 million. Due to the success of this teams efforts in offsetting the significant impact of currency on our reported results. We remain optimistic about the future and despite currency headwinds we expect to continue the execution of our growth strategy.

Now I would like to open up the lines for questions from our analyst community. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question will come from Jay Sole with Morgan Stanley.

Jay Sole

Good morning.

Kevin Davis

Good morning Jay.

Jay Sole

Kevin I wanted to ask you about the 28% increase in non-bat baseball category sales, can you give us a little bit more detail about what was the driver there, was it new products and technology and those products was a better merchandising, was it leveraging some of the relationships you have with key retailers, can you give us a little bit more color there?

Kevin Davis

Yeah, I will have Amir answer that one.

Amir Rosenthal

Good morning Jay. It is product driven. We obviously have discussed our strategic plan to grow that business across the entire spectrum of products and the categories that I mentioned earlier are the ones that are leading the way and clearly there is innovation involved in the process as well but of the three drivers that you mentioned it is product innovation and much less so retail markets.

Jay Sole

Okay and then can I ask one on gross profit. The increase in gross margin ex-currency was nice and when you called out hockey price increases looking ahead into kind of the rest of the year as we get into 4Q what potential do you see to kind of take another price increase given that the Canadian dollar has moved more since two months ago?

Mark Vendetti

It is something that we are continuing to evaluate and we’ve made no decisions yet. Typically when we do a price increase it is with more advance notice than a couple of months which is the timeframe we are talking about between now and Q4. So it is something that we are continuing to evaluate and as we have said before you have got to balance the increase of the Canadian -- decrease of the Canadian dollar versus the U.S. dollar but also elasticity at the consumer level, competitive dynamics, and we continue to evaluate all of those to determine what the right price should be and what the timing should be for any price increases.

Jay Sole

Got it and then maybe ask one more about EASTON Hockey, can you tell us how the products will fit into the rest of the portfolio, are these complimentary to what BAUER is doing, where they will stand kind of side by side or is there an opportunity maybe offer something at different price point, how do you see the products fitting into to what you do in other BAUER stuff?

Kevin Davis

Our focus is going to be on sticks, protective hand gloves, EASTON for its past history has had other categories as well. We view the lineup of those three categories and particularly sticks as very complimentary to the BAUER offering. It is not intended to overlap with the products that BAUER has or to the non-distinguishable if you will from BAUER product. Those are the categories that we are going to be focusing on going forward and we think there is some very compelling story telling about why that product is different than what exists in the marketplace right now.

Jay Sole

Okay, great, thanks so much.

Kevin Davis

You are welcome.

Operator

We’ll take our next question from Sabahat Khan with RBC Capital Markets.

Sabahat Khan

Thanks and just continuing on EASTON, can you maybe comment on where the products for EASTON are manufactured, if there is any opportunity to consolidate that and where the geographic exposure of the sale is based in [ph]?

Amir Rosenthal

The geographic exposure for the sales is very similar to BAUER's. The hockey market is primarily for EASTON and for us North America and then obviously Eastern Europe and Europe generally. They have a much smaller presence in Russia than we do so that’s a much smaller market for them. But generally speaking the geographies are very similar. I am sorry what was the first part of your question, I answered the second part first.

Sabahat Khan

There are many factoring facilities in East Asia as well for those guys?

Amir Rosenthal

Thank you for the reminder. The manufacturing is primarily in Asia although they do a small amount of stick manufacturing which is high-end custom NHL level product at a facility in Mexico. The rest of the sticks are manufactured in Asia so you could think about their stick manufacturing facility as similar to our skate manufacturing capability in Quebec which is attained at the same level of player, custom high-end NHL level player.

Sabahat Khan

Alright thanks and just following up on prior questions, so you said there is a few complimentary categories so what does strategy long-term to be operating kind of a two brand strategy rather than eventually consolidating or what are your thoughts there?

Amir Rosenthal

The plan is to operate the EASTON brand independently of the BAUER brands from a brand perspective. Obviously there is going to be central management of product development and sales and marketing. But the EASTON brand is the third strongest brand in the hockey business and for the categories that we have described we see a very significant opportunity to continue and grow that business and to incorporate their technology not only into EASTON branded product or across the entire hockey portfolio.

Kevin Davis

And I will add to that as part of the -- that retail consumers and retailers like to see various offerings. And as Amir said as the third largest brand in the sport and a number of players at the highest level that are using their products there is clearly demand for that. And because we are the owner of the EASTON brand it is great to have that brand back into our stable and to be able to execute initiatives for that to meet the need of the consumers. So we are super excited about it.

Sabahat Khan

Thanks and one last one if I could. Based on the earnings guidance you have kind of outlined, is there anything you can share on when you or where you expect leverage to be maybe over the next 12 months or when you think it will be in a range that you are comfortable with?

Amir Rosenthal

It is Amir, Sabahat. I -- well first of all I just wanted to be careful about the use of the word comfortable. We certainly are not comfortable with leverage where it is right now. But we are also very confident in our ability to manage the debt and discharge ratios under our agreements so that is point one. Point two, we think we have seen the peak of leverage at this point and the reason that we say that is because the working capital initiatives that we have been talking about and that Mark referred to earlier has been traction in the first half of the year and as we mentioned inventory are being down by 13 million given that we have reaffirmed our guidance to achieve the $30 million working capital initiative by the end of this fiscal. We see the debt trending down in the right direction so for those reasons we think we have seen the peak and we will continue to see an improved leverage situation not only through the rest of fiscal 2016 but into fiscal 2017 and beyond.

Sabahat Khan

Alright, thank you.

Operator

We will take our next question from Sean McGowan with Oppenheimer & Company.

Sean McGowan

Hi guys, I have a couple of questions too, can I just ask you to clarify on the cost savings, are you now saying that, that total amount would exceed 30 million or is it all just going to come sooner?

Kevin Davis

It is not a movement forward of the savings, it will exceed 30 million.

Sean McGowan

Okay, that seemed like where the math was going just wanted to be clear. And another question on EASTON, I think if you recall we talked in the past about this, there was a feeling on your part that it wasn’t worth going after that, I know why I asked I am sure we are not comfortable I think if something is changing in the motivation of the seller or did you get more excited about the brand or what changed there?

Kevin Davis

We didn’t get more excited about the brand. It is a great opportunity and one we are really excited to have. I think there are a lot of dynamics that led to it and we are very pleased to be in the place that we are in. Certainly nothing changed on our part. When you look at the portfolio of assets, not the least of which is a very important brand but their intellectual property, the team that they have there, there is just a lot of great things about that business and we couldn’t be more excited.

Sean McGowan

Okay and when you say that you expect in the next 12 months it will be after closing it will be EBITDA breakeven that kind of suggest maybe dilutive on an adjusted EPS basis is that case, can you bracket that?

Kevin Davis

If you exclude the gain that we are talking about or bargain purchase I think the expectation is it will be slightly dilutive.

Sean McGowan

Slightly, okay and finally all the talk about currency and its impact on profits and all that, can you give us some kind of sense or proper guidance on the outlook for absolute reported sales over the course of the next couple of quarters?

Kevin Davis

We haven’t historically given that level of guidance. We gave earnings guidance for the next two quarters. Mark alluded to what the first quarter -- the impact the weakening of the Canadian dollar have had over the during this fiscal year and how that is going to be a headwind force in the first quarter. But historically we haven't given the revenue guidance.

Sean McGowan

Okay, thank you very much.

Kevin Davis

Thanks Sean.

Operator

We’ll go next to Dave King with Roth Capital Partners.

David King

Thanks, good morning guys. I guess first off in terms of following up in the line of questioning around EASTON hopefully not beating a dead horse, in terms of just thinking about the balance sheet and the impacts there, obviously you are going to have the BPO gain and boost the equity from that, I guess can you just talk a little bit about other impacts to the balance sheet and how we should be thinking about that in any way, assets, liabilities what have you and then also how big was EASTON or is EASTON Hockey now today in terms of revenue?

Kevin Davis

We have not disclosed the size of the EASTON business on an LTM basis. They were privately held as you know. We can tell you that the business is down from a revenue standpoint meaningfully from where it last reported as a public company when it was part of EASTON -- sports. As far as the balance sheet is concerned the assets that we are acquiring inventory and receivables plus some fixed assets, a very limited amount of fixed assets, on one hand in terms of tangible assets you've also got the intangible assets of the intellectual property.

The reason that we are bullish about the cash flow being positive for that business over the next 12 months is that we expect to be able to monetize those assets relatively quickly and to be able to do so for more cash than we are laying out for them. The liabilities are pretty modest. It’s a certain trade payables and also contracts related to athletes and league support that you would expect in the marketing area for the brand. It is not overall impactful to the total balance sheet and because we are expecting to generate cash from the transaction for monetizing the assets that we are acquiring it really should not have a meaningful impact to the balance sheet over the next 12 months.

David King

That helped immensely. Then switching gears a bit, in terms of the fiscal 2016 guidance, did you guys say what exchange rate that assumes and I think if we look at the Canadian dollar its 1.44 today and just in terms of the $0.04 reduction from prior guidance, how much of that is from FOREX, it sounds like the supply chain benefits are largely offset by increases from Q30 but I just want to make sure I am understanding it all correctly?

Mark Vendetti

I think you got it. The Canadian exchange rate continues to -- the Canadian dollar continues to weaken sort of as we speak so I would say it would be 1.40, low 1.40 so we did that calculation on. Certainly not 1.44. So, we prepare these things couple of days. But I would say low 1.40 is the range and I think your other comment is accurate that we have some other -- that the cost savings are going quite well and we are making the investments that we have previously talked about. And I am not going to comment as to whether they are offsetting or not.

David King

Okay and then lastly for me in terms of R&D spending obviously that’s been coming down a little bit recently, historically I think you have sort of targeted 4% sales as sort of the number, is that still the way we should be thinking about that, is there anything that is shifting maybe in part due to leverage levels, how should we be thinking about R&D as a percentage of sales on a go forward basis?

Kevin Davis

You should be thinking that we will continue to invest in R&D as we historically had. Also consider that a large part of our investment in R&D is in Canadian dollars and so we get some benefit of translation on that line when we are reporting in U.S. dollars.

David King

Okay, thanks for that, good luck.

Kevin Davis

Thank you.

Operator

We will go next to Andrew Burns with D.A. Davidson.

Andrew Burns

Thanks, good morning. Appreciate the quarterly earnings guidance, that's very helpful. Just had a question in terms of the progression here, it is two part. When you think about third quarter earnings being down year-over-year I would assume that the primary driver there is FX in your hockey business, didn’t know from a margin perspective if there is baseball headwinds that we should be thinking about that also factor into that and then I will follow-up?

Mark Vendetti

A couple of points Andrew, one is as we said before the bat business is lower on a year-over-year basis and we have our strongest margins in the baseball in the EASTON business from that. So, that was an expected outcome in this year. And the second point to make is that our Q3 is a low revenue quarter for our hockey business and is not a particularly strong period for new launch products. So you have got that impact as well. And there is a little bit of -- given the smaller revenues in Q3, the shift is spending from one quarter to the next could impact profitability for the business as well. Not at the gross margin level of course but just overall profitability. The gross margin impact would be driven more by the bat impact that I talked about and the fact that there is really not any meaningful new launch product in the third quarter historically for the hockey business.

Andrew Burns

Thanks, that is helpful and then in terms of the fourth quarter EPS representing a material portion of the full year earnings, how far along are you in the order in terms of the order book and just trying to get a sense obviously you have some forward contracts in place that are helping to at least partially offset the FX, I am trying to get a sense of the visibility to that earnings power in the fourth quarter at this point in the year?

Amir Rosenthal

We have decent view into that. Historically we take our orders in our hockey business in advance of that and we have decent visibility I would say, no different than previous years.

Andrew Burns

Great, thanks and then one last question for you just in terms of your focus in terms of use of cash of over the last 12 months, it has clearly been investing for growth whether it is Own The Moment, Q30 or recently with hockey just wondering if there is debt level or anything that would be a trigger point to where your use of cash has shift primary focus return to debt pay down, thanks?

Mark Vendetti

I think our -- I don’t think, our process is no different than it has always been. That our business generates free cash flow and we focus that investment first on the growth of the business and secondly to pay down debt and we are very cognizant of our leverage. We understand the importance of delevering our supply chain initiative to reduce 30 million from working capital in this fiscal year is well on track. And we are using that free cash to do both of those things, to pay down our debt and to continue to invest in growth. So, again we are very cognizant of the leverage, we understand the importance of delevering, and we also understand the importance that this is lead, we are a long-term growth business and we have to keep investing in that for the best overall returns for shareholders over the long-term.

Andrew Burns

Thank you and good luck.

Kevin Davis

Thank you Andrew.

Operator

We will take our next question from James Hardiman with Wedbush Securities.

James Hardiman

Hi, good morning. Thanks for taking my call. I think you mentioned in the prepared remarks that you estimated the global hockey market to be down 5% on a year-over-year basis, I guess first question, I am assuming that is constant currency number but assuming that it is, can you maybe walk us through some of the different geographic regions if not quantitatively, qualitatively talk about the different dynamics in the U.S., Canada, and Europe it seems like there is some very different factors at play in all three of those different markets maybe walk us through that? Then I guess how do you see that global hockey market trending as we move forward, do you think that flattens out over the remainder of the year or is there more trouble ahead?

Amir Rosenthal

First of all for the hockey -- global hockey market North America represents somewhere between 60% and 70% of the total business that will differ by company, by brand. And the U.S. would represent slightly more than half of the North American business in that. I think it would be typically true across the entire market and as I said before generally true for each of the brands. I think you have to split Europe into while you could ordinarily look at Europe as one market given the market dynamics in that area right now, I think it is important when you are up to two which is Russia and Eastern Europe on one hand and the rest of Europe on the other.

For our business the impacts that we have discussed earlier which is the consolidation of retail in the US and the weakness, general economic weakness in Russia and Eastern Europe are what a) creating the drag for us in hockey revenues and b) impacting the size of the market. So those are the big picture dynamics by market that would suggest that the Canadian market right now is performing stronger than the U.S. market. And it would suggest that the non-Eastern Europe, non-Russian market is performing stronger than the Russian and Eastern Europe market.

As far as when the overall market returns to health it is hard to say. What we suggested in the comments earlier is that we have seen a consolidation phenomenon like this before when the Canadian market went through it a couple of years ago like any market that consolidates there is usually a trend that is a small downturn followed by an upturn and that’s what we expect to happen in the U.S. because we know that participation rates are continuing to grow. It is generally speaking the same modest increases that we’ve seen in the hockey market overall for the past several years and obviously the Russian market and the Eastern European market is a little bit more of a wild card. It's driven by oil pricing and the impact of the devaluation of Russian Rubel so it is harder for us to speculate from when that market turns around. But I think the general hockey market is healthy, people continue to play, and participation continues to grow at roughly the same rates that it has historically over the long term.

James Hardiman

Got it very helpful and then Reebok looks like they are looking at potentially shop this CCM business was that ever a business that you would look at and does your acquisition of EASTON really take that option off the table if it ever were on the table from a regulatory perspective?

Kevin Davis

We don’t comment on things like that so I’ll just leave it like that.

James Hardiman

I guess would you be able to comment on the idea that if you own the top -- owning the top three brands in hockey would be something that the regulators probably wouldn’t approve of or is there anything you can comment on that front?

Kevin Davis

You know I can't speculate to what regulators would do or not do but I think your premise is appropriate.

James Hardiman

Okay fair enough and then last question from me, if memory serves you talked on the last call about maybe giving us some color with respect to your entrance into the Japanese baseball market, is there any update there?

Amir Rosenthal

Yes, the update is that we have over the past quarter continued to make strides in terms of getting the product ready for launch in that market. There is a similar process there as there is in the U.S. There are standards of the bats and other product need to be complied with and we’ve made very good progress over the last quarter and we hope to be able to share some more detail about our exact timing for launching product in that market very soon.

James Hardiman

Got it, thanks guys.

Amir Rosenthal

Thank you.

Operator

We will take our next question from Corey Hammill with Paradigm Capital.

Corey Hammill

Good morning guys. I had a question on the competitive environment. Yesterday CCM put out really summary of revenue results for the past year and they said they saw 8% growth in hockey and then they commented that it is up 18% over two years, you guys appear to be gaining market share when you give us the annual numbers, so two questions, one, if they are going faster in the market and you are going faster in the market should we assume that EASTON has been sort of the loser in all of this you and CCM taking share from EASTON? And then second, can you just talk about where you are seeing CCM being successful given some of the growth rates that they are putting out in some of your key categories like skates, they are doing very well on sticks, just any color around how they are achieving that growth will be great, thanks?

Mark Vendetti

Corey the first question you asked we would say that the answer is yes, that both BAUER and CCM have taken share from EASTON and not only EASTON but some of the smaller brands in this space over the past couple of years. The second question, unfortunately we don’t have anybody from their business on the phone to answer that question in more detail than we can but what we can tell you is that they are in the market in every category that we are and their selling over the past 12 months has been exactly as you described and they have transitioned from using both the CCM and the Reebok brands to almost exclusively using the CCM brand. And other than that, we don’t have any further detail about their business other than what has been disclosed in their press release that you mentioned.

Corey Hammill

Do you know when they report, grabbing your numbers for CCM brand if there has ever been a trend of moving some of the product out of the Reebok brand into the CCM brand is it possible that the number, the plus 8% is just some of that. There is now more CCM product and less Reebok product available, so that could be almost inflating the number if you know what I mean?

Mark Vendetti

I don’t think that is true because I think they combined the CCM and Reebok product in their release. Again, I can't say that definitively but I assume that to be the case. I think there was a reference to them having tripled in the same press release having tripled the CCM sales over the past some period of time and I think that number, my assumption is that, that number reflects the brand switchover from Reebok to CCM. I think if it included CCM only then their hockey business would be close to as large as ours and we don’t believe that to be the case. So, the tripling of the CCM hockey product I think does include the fact that they transition from the two brands to one but I think the 8% growth is CCM, is the total business.

Corey Hammill

Okay, perfect. That is great, thank you.

Mark Vendetti

Yeah, just one other point on that Corey, the growth -- their business includes the licensed NHL replica Jersey business and I don’t believe in their latest release that they split out the growth of the licensed apparel from hard goods. So I can't say how much of the 8% growth is hard goods and how much of it is licensed apparel.

Corey Hammill

Okay, so you believe that 8% number includes both.

Mark Vendetti

Yes, we do.

Corey Hammill

Got it, that is great. Thank you.

Kevin Davis

Thank you.

Operator

We will take our next question from Mart Landry with GMP Securities.

Martin Landry

Good morning. Just would like to get some color on the inventory level of hockey equipment and sticks and the shot [ph] channel specifically in the U.S. and if I understand your comments about consolidation, it looks like it may have reaped a little bit of excess inventory right now, I would like to hear your views on that?

Kevin Davis

Sure. Whenever there is a consolidation as its happening as Mark mentioned in his comments four of our top seven hockey retail customers in the United States have consolidated. If you will what used to be the top seven is now the top five and whenever that happens you’ve got some inefficiencies from two separate businesses carrying inventory that are now one business and it takes some time for those inefficiencies to work through. So I don’t know that I call the inventory levels excessive as much as their not as efficient as you would expect once this consolidation occurred. So that’s our view of the driver. And as we focused on during this call is impacting the U.S. market and not the Canadian or the European market. That would not Canadian or European market.

Martin Landry

Okay and then can you share with us any of that in terms of the actual numbers and whether like on a year-over-year basis how much of the inventory and the channel is up?

Mark Vendetti

I wish we could because that would be extremely valuable information for us to have as well but the hockey industry is relatively small compared to the total sporting goods industry and the sort of pay by scan information that is typically readily available in many other industries. It is not typically available here so what we do is we rely on discussions with our customers to try and get a sense of inventory levels in the marketplace. But I couldn’t share with you on this call a) because it is not something we’ve shared publically before but even more important we have incomplete information because of the size of the marketplace, the number of retailers who we sell to, and a very small percentage of those retailers who actually have the sophisticated point of sales data that can be shared with us.

Martin Landry

Okay, fair enough and just lastly on your order book for the back to hockey season you are starting to get these orders, just curious how the outlook looks for the back to hockey season. I mean you are going to launch two family of products usually when that happens your order book goes up double digits, would that be a fair assessment or that be a little too aggressive?

Kevin Davis

Well its January now and given that we typically we get about five months lead time we only have visibility through the end of the fiscal year and the back to hockey season goes all the way through September. So it is premature for us to give you a sense for what we think the total booking orders look like for that period of time. But what we have normally done is wait for the entire order season to be complete before we provided anymore detail there. But given that what we talked about before with the hockey market being down on a global basis and given the headwinds that we’re currently seeing in the Eastern Europe and Russian market and the consolidation impact in the U.S. market I think double-digits growth with the unreasonable assumption for the back to hockey season orders.

Martin Landry

Okay, thank you very much.

Operator

We’ll take our next question from Rafe Jadrosich with Bank of America.

Rafe Jadrosich

Hi, good morning. Thanks for taking my question and Mark congratulations on the new role.

Mark Vendetti

Thank you very much.

Rafe Jadrosich

I just wanted to follow up on the hockey market first, just typically in a situation where there is maybe a little bit too much inventory in the channel or where there is consolidation how do the retailers usually work through that, do they use promos and then what are you just hearing from retailers probably in terms of sell through rates?

Mark Vendetti

Well sell through for our grants we are hearing a positive things generally speaking across the entire spectrum of products that we offer. I think that’s a statement about the quality of our products, the strength of our brand, and the demand creation that we do at every level in the sport. As far as the way that the retailers work through the product, it is a combination of price and other promotional activity that you would expect. And any number of initiatives to try and drive some of that product through the marketplace. So, I don’t -- nothing unusual or that you wouldn’t expect in a situation like this. So, that is I think what you will see.

Rafe Jadrosich

And then just on the EASTON acquisition, can you talk about how that sort of fits within the category management system that you guys have used to gain market share, will they be completely separate design, will they be based in New Hampshire, can you just give a little bit of color there?

Mark Vendetti

So for the first 12 months or so during the integration period and the transition services agreement, the operations will remain where they are. EASTON Hockey has some operations in California, some in Montreal and at that Mexico stick manufacturing facility that I mentioned earlier. So no change there for the short-term. We are assessing how to integrate the business over the long-term and the efforts that we will use in that sport will be similar to what we do for BAUER. We have a presence with EASTON and a very strong presence with NHL players. Got 140 players in the NHL using EASTON sticks and that is a very meaningful number of players in the highest level of the game.

The other channels that they use for demand creation are digital in grassroots and those are ones that we have used very successfully with the BAUER brand. And we will be working very closely between the two groups to consolidate and coordinate that activity and we know we have great assets with the brand and the intellectual property. And I think you have seen with BAUER we do a reasonably good job of driving demand for the product and telling great stories about it and we would expect to do the same here.

Rafe Jadrosich

And then a final question, just on the success of the supply chain initiative, what sort of give you the confidence to raise the long-term outlook, where have you seen upside to your original expectations, thank you?

Mark Vendetti

Great question. We have confidence in the numbers. There is a lot to the supply chain initiative and whether it is consolidating distribution centres as we have recently announced, the work that we are doing with our long-term partners, manufacturing partners in Asia has truly been remarkable. They are very receptive to our initiatives about lean manufacturing principles. They are looking forward to rolling that out on a broader basis. We are hitting on the initiatives in a very meaningful way and as we learn more we are able to disclose a little bit more. But we are seeing really some nice work there. I will also say that part of that in addition to all the great work that is being done, the continued strengthening of the U.S. dollar relative to Asian currencies and lower input costs as oil decreases also play into that. But the operational aspects of this are the real long-term benefit to the company as our efficiencies improve.

Rafe Jadrosich

Great, thank you.

Operator

At this time this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Davis for closing remarks.

Kevin Davis

Thanks everybody for joining. I know we went a little bit over, not unusual for us to have a lot to talk about on these calls so I appreciate people's patience in having us get through all the questions. And we certainly look forward to speaking with investors and analysts when we report our third quarter results in April. Thanks everybody.

Operator

That concludes today's conference. We thank you for your participation.

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