Jeans Maker Kontoor Brands Wants Employees to Focus on Generating Cash

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Kontoor Brands has cut its net debt by about $316 million since its 2019 spinoff from VF Corp.

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Kontoor last year set a leverage 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. That metric stood at 1.6 as of Dec. 31. Using Ebitda instead, the ratio was 1.9 as of Dec. 31, according to S&P Global Market Intelligence, a data provider.

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Chief Financial Officer Rustin Welton attributes the improvement in Kontoor’s debt levels to a continuing effort by the company’s finance team to encourage all employees to improve what is known as the cash conversion cycle, turning over inventory or collecting payments as quickly as possible to free up funds that can be used to pay down debt.

“Cash has been, and always will be, frankly, a key focal point for us,” Mr. Welton said.

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This is the third part of a new series focused on how CFOs reduced debt and other costs. Edited excerpts follow.

Businesshala: Why did Kontoor have elevated debt levels following its separation from VF?

Mr. Welton: That’s fairly typical for companies as part of a spinoff. Certainly, we came out with a little over a billion dollars of [total] debt that was associated to us as part of the spinoff. One of our first priorities was around deleveraging the balance sheet and paying down that debt, just to increase capital flexibility and our ability to operate.

Businesshala: How did you bring down your debt?

Mr. Welton: The organization has been focused on cash. Each year we look at it and say, ‘OK, how do we continue to improve? Where are opportunities around these metrics to generate cash?’ We do that because it creates what we call capital allocation optionality—meaning it gives us the ability to pursue opportunities that enhance shareholder value, whether that’s continued debt paydown, the dividend, [share repurchases] and even strategic M&A.

Businesshala: Were cost savings part of your playbook? Or were you mainly focused on boosting sales and using the additional cash to pay down debt?

Mr. Welton: It was a couple of things, improving the business from a [profit-and-loss] perspective. We stopped selling our products where we weren’t able to generate an appropriate return. These could be specific channels of distribution, customers, categories, or product lines. We closed a couple manufacturing facilities. We shifted the business model in some countries to more of a license model.

And then we combined that with working capital improvement. We’ve driven a significant reduction in inventory since then, as an example, and have been focused on not just inventory, but receivables and payables as well.

Businesshala: What sort of metrics do you use to showcase your progress?

Mr. Welton: We focus a lot on the cash conversion cycle internally. It’s a metric that whether it’s people with financial backgrounds or nonfinancial backgrounds, they can certainly understand that inventory plus [accounts receivable] minus [accounts payable] is your cash conversion cycle. Those are the largest pieces of working capital, and those are the pieces that many people in the organization can directly affect.

We’ve tried to simplify some of the metrics. You take certain financial metrics, like return on invested capital, which we certainly look at on the finance side. But that’s a harder metric for people without a financial background to understand, ‘OK, how do I impact that?’ People understand if they touch inventory, or receivables or payables. And then we work with them on, ‘OK, what are opportunities to improve in those areas?’

Businesshala: How much debt are you targeting?

Mr. Welton: The target we’ve laid out—leverage of 1x to 2x—is where we expect to be. So it is an option, as we think about uses of cash, that we can continue to pay down debt. But again, with that target, it’s not our intention to completely pay off the debt.

Businesshala: Is that because debt is still fairly cheap, despite the increase in interest rates?

Mr. Welton: Yes. We refinanced in November [and] issued $400 million in eight-year unsecured notes at a rate of about 4.125%. And then we used those proceeds to pay off a higher-interest term loan B, and to pay down our term loan A. It was a debt-neutral transaction for us. But it extended the maturities, and really took advantage of the favorable market conditions.

Businesshala: What can other CFOs learn from your company’s debt journey?

Mr. Welton: In a lot of organizations, most of the organization focuses on the [profit & loss statement], And so they understand revenue and gross margin and operating income, metrics like that. But they think the balance sheet and the cash flows [are] more of a financial function and activity. And we’ve tried to have all of our employees understand that they have the ability to impact all of the financial metrics, not just the P&L.

Write to Kristin Broughton at [email protected]

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Credit: www.Businesshala.com /

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