Crown Crafts Inc (CRWS) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Crown Crafts Incorporated investor conference.

At this time all participants are in a listen-only mode. Later we will have a question-and-answer session, and I'll give you instructions at that time. Should you require assistance while you're on this call, simply press 0, then star, and an operator will come on to your line to assist you. As a reminder, this conference is being recorded for a digitized replay. Please stay on the line at the conclusion of the call if you would like the replay information.

For now I'd like to turn the conference over to our host and first speaker, the President and CEO of Crown Craft, Mr. Randall Chestnut. Please go ahead, sir.

Ladies and gentlemen, good afternoon. And welcome to the Crown Crafts fourth quarter and fiscal 2002 investor conference call for our quarter and year that ended March 30, 2003.

We are pleased to report, as we did earlier today before the market opened, what we consider a very strong fourth quarter, and the conclusion of what we consider a good year. And I'd like to hit some of those highlights.

With me in the conference room today is Amy Samson, our Vice President and CFO, and Amy will be addressing the numbers in more detail in a few moments. But I'd like to hit on some of the highlights. As Tim said at the beginning of the call, we will allow for question and answers at the end.

Again, repeating, the company did have a good fourth quarter and we reported pretax income of 2.1 million for the quarter versus 209,000 last year. Sales for the quarter increased 13%, or from $23.7 million to $26.8 million, 2002 versus 2003.

Several things contributed to the increase. One, in the third quarter that ended in December, we had been affected by the West Coast port lockout, and we do feel that we had some recovery from that that came in the fourth quarter where retailers were replenishing some of that inventory.

In addition, we had several new initiatives that we have talked about that took place in the quarter that contributed to the increase in sales. One is a new program that we announced earlier this year, a bedding program, Eddie Bauer, where we shipped three groups in as a test in the quarter, and we're now pleased to report that they're rolling one of those out chain-wide.

Additionally, we had a new private label program at Babies 'R' Us which did contribute to increased sales in the quarter, and this was a program that started shipping after January 1st of this year. We had new plan-o-gram programs at Target that took effect, both in bibs and bath, and we got the positive effects of those in the quarter.

And last, but not least, our business with Wal-Mart was up appreciably due to several promotions. We had a Pillow Buddies promotion, Precious Moments, we had a Red Calliope bedding promotion, and the Pooh bedding and blankets were also up for the quarter.

We also finished the year very strongly after we had suffered through a tough economic climate and the West Coast lockout through the first three-quarters of the year, and I'd like to take the pretax numbers which were reported in the press release which we issued this morning, and make an adjustment to them for the one-time adjustments that were all issued in the press release.

For 2002, if you take the numbers beginning with the 25.1 million, and you adjust or subtract the 25 million for the extinguishment of debt, bringing that down to 100,000, and then you add back to that the amortization of goodwill of $1.1 million, and I'll touch on that again in a moment , that brings the operating pretax for 2002 to 1.2 million.

Now I'd like to flip to 2003 and get that on an apples and apples comparison. You take the reported number of 2.8. That does not contain any amortization of goodwill, due to an accounting standards change where you do not amortize that, so that's why I'm making that adjustment in 2002. But if you take the 2.8 and then you add back the reserve for the closure of the Mexican operation of $1.8 million, then that brings the 2003 results in at $4.6 million. So again, on an operating pretax 2002 was 1.2 million and 2003 was 4.6 million.

Moving on, and touching on some other areas, we've also been very successful in reducing the debt, and I'm going to make the comparisons of the debt reduction, not for the year, but from the date of the restructuring which was July 2001, which is about -- we're about 21 months into it at the end of this quarter. We've reduced the debt load by 24%, or in real dollars we've actually paid $10.8 million of debt in the time frame that I'm referring to, roughly 21 months.

Inventories are also down for the same period of time by 27%, or in real dollars $5.9 million. And that's a reflection of getting the inventories in line with where they needed to be, and we think we can hold them there, even though through the current period of the transition from Mexico to Asia we've seen a slight blip in that, but now that's starting to come back in line as well.

SG&A expense decreased from 2002 at 17.7% of net sales to 13.3% of net sales 2003.

And in conclusion of my opening remarks we're very pleased with the fourth quarter. We did struggle some through the first three-quarters of the year with the economic downturn and the port lockout, and we're pleased that we were able to come back with a strong finish in the fourth quarter which gave us a strong finish for the year.

With that, I'm going to turn it over to Amy and she's going to go through some numbers, and then I'll come back after that. Amy.

Good afternoon.

Before I begin I would like to remind everyone of our Safe Harbor Statement. We would like to claim protection of forward-looking statements regarding anything we say that is not a statement of historical fact.

Forward-looking statements involve unknown risks and uncertainties that may cause future results to differ materially from what is anticipated.

These risks include, among others, general economic conditions, changing competition, the level and pricing of future orders from the company's customers, the company's dependence on [INAUDIBLE] suppliers including some located in foreign countries with unstable political situations, the company's ability to successfully implement new information technologies, the company's ability to integrate its acquisitions and new licenses and the company's ability to implement operational improvement in its acquired businesses.

I'm going to first highlight the results of the fiscal year. Net sales for fiscal '03 decreased 22.9 million or 19.4% to 94.7 million. 19.9 million of the decrease was directly attributable to the sale of the adult bedding business in July 2001.

Net sales of [INAUDIBLE] decreased 635,000 to $2.6 million, and net sales of infant and juvenile products decreased 2.2 million or 2.3% to 92.2 million. The decrease in the sales of infant and juvenile products is primarily due to lost reorders during the West Coast port lockout.

Despite the decrease in year-over-year sales, our operating results have improved, as Randall has indicated. This morning we reported pretax income of 2.8 million, 13 cents per diluted share for the year ended March 30, 2003 compared to a pretax net income of 25.1 million, or $1.27 per diluted share for fiscal '02.

As Randall indicated previously, the current year results include a $1.8 million charge related to the closure of our manufacturing facility in Mexico, and the prior year pretax income includes a one-time gain on extinguishment of debt of 25 million and goodwill amortization of 1.1.

Excluding the nonrecurring events and the change in accounting principal, our pretax net income for fiscal '03 was 4.6 million, or 21 cents per diluted share, compared to fiscal '02 of 1.2 million, or 6 cents per diluted share.

In fiscal '03 cost of sales decreased to 77.4% of net sales, compared to 78% for fiscal '02. The decrease relates primarily to changes in product mix as a result of the sale of the adult bedding division.

As Randall previously stated, SG&A decreased by 8.2 million from the prior year, over four basis points as a percent of net sales. The decrease is a result of the divestment of the adult bedding division, as well as the elimination of duplicate positions and locations as we completed our move from Atlanta to Louisiana in early fiscal '03.

During the third quarter of this year, we recorded a $1.8 million restructuring charge related to the closure of our manufacturing subsidiary in Mexico, Burgundy Inner Americana. When we made the decision to close Burgundy, we estimated the total loss, which includes both the restructuring charge and future operating losses, to be 2.2 million, which we still feel is accurate.

Interest expense for fiscal '03 decreased by 2.4 million due to lower average debt balances and reduced interest rates. With cash generated from operations we reduced total debt from 39.8 million at March 31, '02 to 33.9 million at March 30, '03. $3 million of the decrease was principal payments on the senior debt, and the remaining was a decrease in the revolver.

Income tax for fiscal '03 includes a provision for federal alternative minimum tax of 103,000, along with a provision for state income tax of 161,000, for a total tax expense of 264,000. At the end of the year, a carry forward of 15.2 remains available for utilization until 2021. For fiscal '02 an income tax benefit of 1.9 million was recorded.

Before I turn it back over to Randall I will touch on our quarterly results and a few highlights from the balance sheet.

Net sales for the quarter were $26.7 million compared to $23.7 million for the fourth quarter of '02. As Randall mentioned, the 13% increase in sales was attributable to the recovery from the lockout and the shipment of several new initiatives and programs.

Pretax net income for the quarter, for the current quarter, is 2.1 million, 10 cents per diluted share, compared to pretax net income of 209,000 or 1 cent per diluted share. We're very pleased in an improvement in pretax net income of 1.9 million on an increase in net sales of 3.1 million. The increased profitability was due to improved gross margins and savings in SG&A and reduced interest expense.

I'd like to bring your attention to a few items on the balance sheet. Accounts receivable increased 2.9 million over the prior year. However, this is due to the increase in sales on a quarter-to-quarter basis of 3.1 million.

Our reduced inventory levels continue to be in line with our business plan.

As we promised in the July reorganization, we have generated positive cash flow from operations, reduced our debt load, and controlled operating expenses and inventory levels. We'll continue to be vigilant in the management of the company.

That concludes the comments I want to make. And I will now turn it back over to Randall.

Amy, thanks very much. Kim, I'll turn it back over to you now, and we'll open it up for questions and answers, and then we'll make the closing remarks.

Ladies and gentlemen, if you wish to ask a question, please press 1 on your touchtone phone. You'll hear a tone then, indicating you've been placed in queue. You can remove yourself from queue at any time by depressing the pound key. If you're using a speaker phone, for the sake of sound clarity, we do ask that you pick up your handset before you speak.

Our first question is coming from Monarch Capital. We go to the line of Anthony Marcasi. Please go ahead.

Anthony?

Yes.

Randall Chestnut. How are you?

Good, thank you. How much would you estimate of the quarter sales were as a direct result of the lockout?

It's very difficult to determine, but we're going to estimate somewhere in the neighborhood of, give or take, $1 million.

So there really was some organic growth in the quarter.

Yes, there was.

Okay. That's great. And the second question is, are you making any types of projections for the next quarter or several quarters?

We do not, and we do not, Anthony. We do not forecast.

Okay. Can you forecast in terms of year-over-year, do you anticipate this year to be better than last year?

Again, that would be a forecast, but--

Not as much.

I understand, but, you know, it's a decision we've made not to forecast at the present time.

Okay,.

And so, you know, we don't forecast.

Okay. Thank you.

Thank you.

Our next question comes from the line of Adam Gross at ATG Capital. Go ahead.

Hi, good quarter. I had a question about how to calculate the diluted shares outstanding.

I was looking at the warrants and it seems like if those represent 65% of the shares, then the total shares outstanding should be 26.8 million.

I have to call you back. I would have to call you back, and we can go over the dilution calculations, specifically.

Okay.

Because, obviously, you have a calculation for it and it supports a number different from that. I just wanted to be sure I looked back, and we go with 21, 21.4 million as the fully diluted number of shares so I would --

Adam, we are going to try to do it. It's a complex calculation. If you don't mind, let me give you Amy's direct number.

Okay.

If you could call her after the conference call, we'll help you go through the calculation offline.

That would be great.

It's 225-647-9122.

Alright. Great

And Amy Samson. If you can give her a call we'll help you with that.

Thank you.

Thank you.

If there are any further questions, now is the time to press 1.

Next we go to Dick Feldman at Monarch Capital. Please go ahead.

Getting back to the dilution, roughly how much additional capital would be brought in if -- by the exercise of the options and warrants that account for the dilution?

Amy, can you do a quick calculation of the--

Two levels of conversion.

Give us one second.

Okay.

We're not ignoring you.

We're calculating . There's a conversion ratio of A and B shares. There's a conversion ratio of B and C to the A shares that you have to go through.

If they converted from B to C and then there's a conversion to A it would be at the current, it's 11.3 cents, and then the conversion, it's 16.2 times the estimated outstanding, it's about $3.5 million.

Okay. Thank you.

Okay. Thank you.

The next question comes from the line of Deborah [INAUDIBLE] [INAUDIBLE] Services. Go ahead.

Hi. I have two questions. One of them is about the composition of where your products are sold at retail So the distribution between mass, specialty, Babies 'R' Us, et cetera. Could you alliterate?

I can, Deborah. How are you?

Good. How are you?

Fine. As we disclosed in the 10-K, we break down our three major accounts, which do constitute, Amy, give me those numbers -- which constitute a fair amount of our business, and we can sort of divide it by those lines. Babies 'R' Us in the year 2003, we list it as Toys 'R' Us but the overwhelming majority of that is Babies 'R' Us, and that constitutes 31%. And that would not be considered mass.

Right.

That's considered the more higher end of the product that we sell. And so if you say 31% is Toys 'R' Us, the overwhelming majority of that of 20, the high 20 percentile of that would be the Babies 'R' Us portion. Wal-Mart is 30, Target is 10. And, you know, if you can sort it Wal-Mart and Target mass, then that would constitute 40%. Would be in the mass arena.

What about for specialty?

The specialty business, it is a business. I can't quantify the exact number at this present time, but, you know, we have -- if you look at, -- again, you look at the numbers again, that's 30, 60, 71% with those accounts.

Right.

The specialty trade probably is somewhere in the 15 to 20% range.

Okay.

And that's a little bit of a guesstimate, but it would be close.

As far as the overall retail environment with mass taking over specialty and just all of the changes that are going on, especially with the poor Christmas last year, do you see that changing your business substantially as far as the mix, and who's going out of business, who's taking over?

I mean, I really don't see it changing appreciably, Deborah. I mean, there has been some change.

I mean, K-Mart, obviously, is not as strong as they once were, so there's been a little bit of a shift there. Our business with Wal-Mart and Target is both very good, but then on the other side of the coin, our business with Babies 'R' Us still remains very strong.

So we're not seeing a tremendous shift. Anything we're seeing is very minor points.

Deborah, I think over the last five to seven years the company made that shift as we went from one of the smallest subsidiaries, used to have a customer base of 3,000 customers, but had less than 7 million in sales. The customer base is now 300 customers, but the sales are much -- substantially higher.

So that shift from specialty stores to discount and mass distribution has been made in the past five to seven years in the businesses.

Okay. Only one last question and that is, right now you're mainly in a soft goods, you are in the soft goods business, especially in infants. Do you have any plans at all to add lines or make any acquisitions?

Deborah, at the present time, I mean, we don't have anything on the horizon for acquisitions.

As far as adding product categories we're constantly doing that, and it's our intent, since we are in the infant business, to outfit the nursery, and we've expanded last year into wooden accessories that decorate the nursery and coordinate with the bedding groups. We've also expanded into diaper bags. So, you know, we're constantly looking at new products that we can get into that are basically in the infant category.

Okay. Thank you very much.

Thank you.

And next we go to the line of Charles Levy at Smith Barney. Go ahead.

Hey, Charles.

Hi, guys.

How are you doing?

Good, thank you. Good quarter. Great. Without forecasting, could you give us a sense of the -- what's in the heads of the retailers that you do do business with, in terms of their optimism, et cetera?

I mean, can you predict the economy?

Absolutely.

And I'm not being cute. But it's a mixed bag. I mean, I think the retailers are, you know, feeling okay. But they're playing it very conservative. They're watching their inventory levels, and if something sells it stays, if it doesn't sell it's out. So I think every retailer is playing it very close to the vest until they see where the economy's going to go. And it's been a tough year with the economy.

Are there any of the new products that are proving to be, in particularly, good sellers?

I mean, is there a home -- one out of the ball park? I wouldn't say there's one out of the ball park, but we've got several new initiatives, Charles, that's been very good.

We mentioned the Eddie Bauer. We're pleased that one of those groups is now being rolled out chain-wide to Babies 'R' Us.

We had the wood decor which I did mention earlier, did contribute because it came into full force. And when I say wooden decor, it's just really nursery decor. It's hard items. It's not the soft textile products but the hard accessories that go with the textiles. Really made its first full quarter in the quarter that ended in March, and that did contribute to the sales, as well.

So there's a lot of different initiatives that we've been doing that are starting to, you know, come into their own.

And Charles, as we put in new goods and the plan -o-gram level, historically, we see increase point of sale at the store. So even if it's not a new item like a wood decor, but just a new bedding, a replacement of the prior year bedding program, or a new bib that's put out, generally you get a bump in sales, and we have seen that which is a pleasant surprise at the store level. So it's a good sign for the products that are in the stores today.

Okay. Thanks. Keep up the good work.

Thanks, Charles.

If there are any further questions, please press 1 at this time.

We go to the line of Al Kline at Brenner Securities.

Yeah. Great quarter. I didn't think you'd get up that high.

Can you give us some idea as to whether you could make a deal with the warrant holders and remove some of those warrants before they get exercised? Has there been any talk with them?

Al, at this point there has not been, no. And there's been no deals and there's been no talks of any deals with the lenders.

Okay. I thank you.

I'm not trying to give you a short answer.

No, I understand. I understand. Sometimes they like to get these things off their books, and will deal with you.

It's very difficult to speak for lenders.

Okay.

Thank you very much.

Thank you.

And there's no one else. Oh, just as I said that.

Our next question comes from the line of Michael Bernstein at Design Works Incorporated. Go ahead, sir.

Hi. Congratulations on that great quarter.

Hey, Michael.

Hi. How are you?

I'm fine, and you?

Good. I have a number of questions. I'd like to break them up into categories.

First with regard to brands. The Eddie Bauer, was that rollout done in the fourth quarter?

Yes. The first shipments of the Eddie Bower took place entirely in the fourth quarter.

And if it were very successful, do you see that adding appreciably to your business with Babies 'R' Us?

Michael, as I say, as I said earlier, we really don't make forecasts, and, you know, it's -- with the rollout we made with the three bedding sets, one's been placed chain-wide, and with the number of stores they have, I mean, it could be a fair amount of business. But, you know, we don't forecast.

Is that more than just a bedding ensemble? Does it have other pieces to it or is it just the bedding ensemble?

Just a bedding ensemble. It does have some bed and baths items, as well. But mainly right now just a bedding ensemble.

Do you have an exclusive with Eddie Bauer and Babies 'R' Us?

We do.

And how long does that go?

I think there's a three year contract, and our deal with Babies 'R' Us is really year to year.

Okay. With regard to Ocean Pacific, how is that received?

We showed it at JPMA and the response has been good. We've had one retailer pick one of the patterns, we showed three. And one of the fairly sizable retailers has picked one.

Does that mass, you're allowed to sell it to mass?

No, it's the upscale distribution.

Oh, it's upscale distribution?

It's upscale. It's Babies 'R' Us, Burlington, Specialty stores, et cetera.

Okay. You said you had a significant roll-out to Target. Is the product at Target selling?

Yes, it is. It's selling very well. We had some plan-o-gram programs in bibs and bath, and the bath plan-o-gram has been one of the most successful that we've had with them, or that they've had. So the response to the bath plan-o-gram has been very good.

It was mentioned about warrants and doing something with the banks. You did some type of restructuring with the banks on the warrants, did you not? There was something done with the banks and something. I couldn't understand exactly what you did. My question is, what did you do with the banks which was a change in where the agreements were in July '01?

Really nothing changed in the warrants with the banks. The banks still hold the warrants.

Wasn't there some type of new deal with the banks concerning the warrants? Or some new deal with the banks? I just thought I read that. I might have been dreaming it.

There was, Michael. No, you weren't dreaming it, and there is a reserve shares agreement with the lenders that is a public document that you can read that, you know, basically, is an agreement with them where they would free up shares, if need be, to handle certain functions.

Okay.

And that's a public document.

I just didn't bother reading it, so I didn't know what it was.

Is there any substantial institutional interest in the stock today? I mean, are there people out there looking to buy it?

Michael, we think so. I mean, we've had conversations with a number of institutional investors and we think there has been some interest. Is it major? I can't quantify it. I mean, -- but we do think there has been some interest, and there's been some activity of recent.

From your summary balance sheet, I couldn't tell. What was at year end your short-term debt and long-term debt?

Hey, Michael. This is Amy.

Hi,.

I'll let Amy answer that.

Short term debt is $3 million and the long term debt is 31.

When you say 3 million, is that the short term portion of long term debt?

Right.

Okay. How much is the revolver?

The revolver at year end was 1.8 compared to 5.5.

So the revolver is classified as long term?

Right. Based on the term of the revolver, that is correct.

Okay.

The 3 million that's in short term is anticipated principal reductions on the long term debt for the next 12-month period.

Did most of -- Yeah, everything that I'm hearing sounds rather positive. Is there anything that's negative that you see that's going on in the business now that could adversely impact the business?

Michael, we've made, you know, in trying to keep with the rules and regulations of the Securities Exchange Commission we try to make full disclosure, as for every place we possibly can.

The economy is not good. Retailers are tough. But, you know, I mean, I'm not sure what you're referring to, and if you've got a specific question, I'll be happy to try to answer it. But, you know, --

By negative I meant, for example, if you have 30% of your business, or 31%, with two retailers, and you knew that, or had a reason to believe, that two of your products were going away, that could impact your business. I mean, is there anything on the horizon that you know about?

Michael, again, you know, is there anything that is -- is there something we should disclose today, if that's what you're asking me?

I'm not asking if it's a disclosable matter. You're talking about those things that -- I guess everyone's trying to get you to do some type of projection.

And we don't.

Which you don't want to do. So, I'm just saying, in general, you've painted a fairly positive picture, notwithstanding you're not projecting anything, and I'm asking you if --

Michael, we didn't paint a positive picture. We reported the earnings. I mean, we reported the earnings and everything we reported is in the press release of the 10-K. And we're not trying to forecast the future, and I've said that twice on the phone call now.

But, you know, and we're not trying to paint a pretty picture. We'rejust trying to report the earnings as they were, and that's the earnings for the year that ended in March.

Okay.

Thank you very much.

There is no one else in queue at this time, sir.

Kim, give it another 30 seconds or so, and then we'll wrap up -- if anyone else has anything.

You do have a final opportunity to press 1 if you have a question.

Okay. We are not having anyone else queue up, sir.

Okay. Very good.

We, Amy and I really would like to say thank you very much for your participation in the call. And if you have questions in the future, don't hesitate to call either one of us, and we'll be happy to discuss it with you as much as we possibly can.

We, as a company, have taken the approach that we do not make forecasts, and therefore, we're not in the position to do that, and do not want to do that. And we hope you understand that.

But with that, we are -- we would like to say thank you very much. We are pleased with the year that ended, and we feel very strongly about that, and we do appreciate everyone's support. And have a good day. Thank you very much.

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