Powersports Outlook COVID-19 Edition – Interview with Jim Glomstad, CEO of Sportech Inc.
What were the first indications that COVID-19 was going to have an impact on Sportech?
Given that a significant amount of our business goes directly to the production facilities of our Powersports OEM customers, we tend to stay close to their supply chain representatives. It was in January where we became aware of the challenges our OEM customers were facing with many of their China-based suppliers as a result of COVID-19.
In early March, we started to see our demand soften as our OEM customers had concerns that their dealerships may be at risk of being closed due to state-level responses to the growing pandemic. This escalated quickly through the retail channels and in early April, we were notified that most of our customers were shutting down their North American manufacturing plants for an undetermined period of time.
Once you realized that the virus was not going to be contained to Asia and was likely to spread to the U.S., how did the management team proceed?
At Sportech, our culture has always been one to run towards a problem, so our leadership team became fully engaged in partnering with all our stakeholders to formulate the best response. We focused on identifying what were the most important items that needed immediate attention and landed on three: keeping our employees safe, taking care of our customers, and protecting the viability of the company.
We had several conversations with Monomoy leadership around building contingency plans and steps we would need to take to preserve liquidity in the scenario of a significant impact to the markets and our business. Based on our primary contingency plan, we started executing an enhanced safety approach to our plants and simultaneously managed and reduced expenses wherever possible.
How have you seen Covid affect your supply chain?
The supply chain impact has been an interesting one. We do not source a considerable amount of product outside of North America, but there are a few critical components that we buy in high volume from a supply partner in Europe. This became a high-level concern as clarity into their ability to stay open and manufacture parts for some of our complex door systems was unclear, which resulted in a need for increased management time and attention.
Another notable challenge has been the dramatic impact on the supply of extruded clear plastic sheet stock. Sportech is the number one consumer of flat polycarbonate sheet in North America, and we convert this commodity into shatterproof windshields for off-road recreational vehicles. As the retail world has begun to reopen, and every gas station, bank, grocery store and the like are trying to keep people safe, most of the global supply of the sheets are now going to applications that didn’t exist six months ago. We have ironed out a steady stream of supply going forward, but it was a notable disruption to both us and to our customers.
What was the low point for sales over the last three months? What does the sales picture look like over the next few months?
In April, orders for our accessory and factory products fell more than 50% from prior YTD performance due to customer factory and retail closures. We closed our production facilities for two weeks during this time in compliance with Minnesota state orders and as a response to the disappearance of demand. Bookings also grounded to a halt during the month of April where we experienced the first negative bookings month in the 26-year history of the company. In May, however, the industry started to turn back on and we experienced unprecedented bookings and a growing backlog. The outlook for the next few months, and for the balance of 2020, is strong and our current demand is on par with our original forecast for the year.
How have you seen outdoor and off-road enthusiast demand and behavior trend during the crisis?
Despite everything that is going on, there has been a silver lining. Like other outdoor focused industries such as boating and recreational vehicles (RVs), Powersports is experiencing new consumers entering the market as an escape from the challenges and pressures of quarantining and being required to be in their homes for extended periods of time. It’s outside, easy to maintain social distancing, and a ton of fun. Once people get introduced to the space, they tend to stick around. We certainly hope that remains the case.
What is the operating status of your facilities? How much of the workforce have you brought back?
After our two-week shutdown in April, we were able to get back online and ramp our facility rather rapidly. As demand started to return from our customers, we had the confidence to get our labor force safely back in place while operating the plants under our new Covid protocols. We remained stalwart in our fiscal management and continue in our commitment of being conservative around our cost structure. At this time, our entire team is back and we operate both onsite and remotely where possible.
What does the demand picture look like going forward and how are you modeling that? When do you think demand in your business will return to pre-Covid levels?
We continue to collaborate with our customers to get their outlook on the market. Consumer demand quickly outpaced industry supply in the back half of Q2 and inventory in the channel is the lowest it has been in a decade. With much of the outputs from our plants and those of our customers already pre-sold at retail, we expect continued strong demand over the next twelve months, which would put us back at pre-Covid levels. Beyond that, we will see what our customers are forecasting. Short of any major curveballs, we are hopeful and planning for continued annual industry growth in the 5% to 10% range.
What opportunities do you see coming out of the crisis?
While we have not yet seen any fundamental changes in the industry, the crisis has given us the chance to review our cost structure and determine how we can be more efficient. Through labor efficiency projects, price concessions from material suppliers, and overhead cost reductions, Sportech should emerge a stronger business than it was prior to Covid.
How will the business operate differently going forward?
Being new to the Monomoy family, we had just gotten underway with several value creation initiatives, which have been quite impactful to the business and have generated significant shareholder value. These projects, along with other cost cutting measures that we executed during the April trough, have helped us expand EBITDA and improve our free cash flow in the short term. We expect them to be sustainable for the long haul.
On the cultural and customer front, we believe we have pivoted well to working remotely. Although we want our folks safely back in the office at some point, remote work and the tools we have developed as a result will likely remain in the way we collaborate with each other going forward.
What were some lessons or insights you gathered over the past few months that will stay with you going forward?
A key lesson that we have taken away from the response to the pandemic is the importance of open, honest and frequent communication with our employees. We felt it was important to directly share what we were thinking and doing through multiple forms of communication. Whether it was virtual townhalls, recorded messages about the state of the company, or emails that we wanted to have in writing for our employees to reference, we aired on the side of over-communication. With all of the uncertainty coming at our employees at a time like this, people are okay with you not having all the answers if you are willing to stand in front of them (virtually) and say, “We don’t know, but we are committed to finding out.”
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