Crown Crafts Inc (CRWS) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Crown Crafts Inc. first-quarter investor conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Amy Vidrine Samson, Vice President and Chief Financial Officer of Crown Crafts Inc.. Please go ahead.

Thank you, Linda. Welcome to the Crown Crafts investor conference call for the first quarter of fiscal 2005. With me today is Randall Chestnut, President and CEO of Crown Crafts.

Good afternoon.

A telephone replay of this call will be available at 4:30 Central Daylight Time today through the end of business on August 18, 2004. A Web replay of this call will be available for 60 days. You can access it by visiting our Web site at www.crowncrafts.com.

Before we 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 those suggested by the forward-looking statements. 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 third-party suppliers including some located in foreign countries with unstable political situations, the Company's ability to successfully implement new information technologies, and the Company's dependence on licenses from third parties.

In addition, I would like to remind everyone that our company policy is to not forecast results nor comment on specific financial projections relating to our expected future performance.

I will now turn the call over to Randall.

Again, good afternoon, and welcome to the Crown Crafts first-quarter investor conference call. Earlier today before the market opened we released earnings for our first quarter, which ended June 27th of this year. I would like to touch on a few of the highlights in that press release and the financials contained in that, and then Amy will come back and address a few more specifics. At the end of the call, we will have a chance for questions and responses.

The sales for the first quarter of 2005 were $16.9 million as opposed to 18.5 for the previous year, same quarter or a decrease of 1.6 million, and we were down 8.4 percent. I will address that later in my comments.

The net loss for the quarter in 2005 was 102,000 as opposed to a net loss of 114,000 in the previous year, and Amy will operate on that a little later.

One item contained in the press release or in the financials accompanying the press release, inventories are up and they are up from $14.9 million to -- excuse me, $14.4 million to $19.2 million. There's a couple of reasons for this, and I want to elaborate on those. One is the Company is building inventory in preparation for its fall selling season.

In addition, the Company in the quarter took an initiative to transition from a base that we had been using for manufacturing for quite some time. We manufactured -- we would secure raw materials fabric, have it printed and then subcontract that to subcontractors located throughout Southern California.

During the quarter that just ended at the end of May, we discontinued operations in one of the largest subcontractors that we were using in Southern California and began the transition of all of this production from domestic subcontracting to factories throughout Asia. In preparation for that, we did increase inventories to cover that transition periods. The total transition will be completed over the next few months, and one of the big reasons for doing this as we move forward into 2005 as quota is being eliminated, the Company feels that it is in its best interest to move that production from U.S. subcontractors to Asian manufacturers and by completely packaged products that would be produced in Asia, and we started that process during the quarter.

Going back to sales, sales were down for several reasons, but there were really three major reasons and I will touch on those. As classic Pooh shifted from direct to retail exclusively at Target, we began to ship product without royalty was had a deflationary effect on the topline product because we pay no royalty on that and it is paid by the retailer.

Second, a major customer reduced its buying pattern to enable it to reduce its on hand inventory, and that is despite the fact that it has actually had increased sales at the retail level. They chose to take several weeks out of the pipeline, out of the inventory, and that did affect us in the quarter.

The third element that reduced sales was another major customer reduced their purchases in preparation for new placements for the fall season. So those three elements contributed to the decrease of the topline revenue.

Debt for the quarter was reduced by a total of $1.8 million from 31.4 million, down to $29.6 million. And last but not least, the margins did decline during the period from 22.5 last year to 20.5 year-over-year as we experienced a major shift in product mix and lower margins on some of the new direct to retail programs that we were shipping in in the quarter.

With that, that concludes my opening comments. Amy, I will turn it back over to you and you can walk through the financials in more detail.

Thank you, Randall. Net sales for the first quarter fiscal 2005 decreased by 1.6 million to 16.9 million from 18.5 million reported for the first quarter of fiscal 2004. Net sales of throws accounted for $56,000 of the decrease as the market for high-end luxury items continues to be very tight. Net sales of infant and juvenile products decreased by 1.5 million due to the factors that Randall has previously mentioned. In the prior year, a diverse mix of classic Pooh products were shipped to premium specialty stores. Currently the product line's distribution is limited to one mass merchant.

Secondly, bib and bath sales were negatively impacted as a major customer reduced their on-hand inventory levels during our first quarter, despite experiencing increased sales at the store level. And finally, bedding sales experienced a decline as another major customer reduced their buying in anticipation of setting new programs in the future.

These disappointments were somewhat mitigated as many of the Company's products, both ongoing items and recently shipped programs, continued to experience strong sales at the store level. Growth margins decreased 2 percent from 22.5 in the first quarter of the prior year to 20.5 percent in the current quarter. The decrease in margins correlates to some of the factors previously mentioned.

In the current quarter, a greater volume of lower margin merchandise was shipped compared to shipments of high margin blankets, NoJo and classic Pooh brand in the prior year. The margins were also negatively impacted as excess merchandise was liquidated at reduced prices due to programs ended earlier than anticipated.

Marketing and administrative expenses decreased by 539,000 or 17 percent in the first quarter of fiscal year 2005 compared to the same quarter in the prior year. SG&A was 15.5 percent of net sales for the current quarter compared to 17.1 percent for the corresponding quarter of the prior year.

In the first quarter of the prior year, legal fees associated with the reincorporation of the Company in Delaware and expenses related to the closure of Burgundy Interamericana were incurred. These costs or similar costs were not repeated in the current quarter. Interest expense continues to be reduced as the Company maintains the pattern of reducing debt. Interest expense for the first quarter of fiscal year 2005 decreased by 89,000 compared to the first quarter of fiscal year 2004. Long-term debt was 26.6 million at June 27, 2004 compared to 29.5 million at June 29, 2003.

721,000 was drawn under the revolving credit facility at the end of the quarter and the prior fiscal year. There was no revolving credit balance outstanding at the end of the current quarter. In fact, the Company had 2.1 million of cash on-hand.

Income tax expense for the current quarter was 24,000 compared to income tax expense of 80,000 for the same quarter in the prior year. As in the past, federal tax expense in both quarters is reduced by the NOL carryforward. The Company has a net operating loss carryforward of 14.6 million, which began to expire in 2021.

In the first quarter of the current year, cash of 4.2 million was generated from operations compared to 1.2 million in the first quarter of fiscal year 2004. The increase in cash provided by operating activities is primarily due to greater collections of Accounts Receivable. $2 million of the cash generated from operations was used to reduce debt, and the remaining cash generated was held at the end of the quarter.

In summary, the net loss for the quarter was 102,000 or 1 cent per diluted share compared to a net loss of 114,000 or 1 cent per diluted share for the first quarter of fiscal year 2004. Through savings and operating expenses, the Company was able to hold its losses constant despite the reduction in sales and gross margin.

That concludes my comments. I will now turn it back over to Randall.

Amy, thank you. As we advised earlier, Linda, if you will come back on and make the introduction, we will open it up for questions.

(OPERATOR INSTRUCTIONS). Ralph Marash (ph), First Manhattan Company.

Good afternoon. A couple of questions. On the inventory, could you just explain that again because I guess it is the finished goods inventory that is inflated?

I will. The way the Company has produced its products in the past, not all products, the majority of its bedding products for a number of years had been produced at subcontractors in Southern California, cut-sew contractors. The Company would buy raw materials, have those raw materials converted to printed fabric, and then we would have the fabric cut, sewn and assembled at the subcontractors in Southern California. As we get ready for the 2005 quota elimination, the Company felt and does feel and we do feel it is best to source the package completely offshore.

In the past, it was really to our advantage to do subcontracting in many cases because we could produce the sheets domestically which had the highest quota on it and bring in other components and assemble those in the contractors in Southern California. But as quota is eliminated, it's better to do it offshore. So as we had to ramp up the production in Asia, we also had contractors still running in Southern California, so we had overlap of production to some degree.

Okay.

Did that give you a clearer explanation?

Yes. Thank you. When do you take ownership of the inventory then?

When we take ownership of the inventory in Asia now, we take ownership of really when it leaves the port in Asia.

Basically when it is put on the boat. For most of the arrangements, that is when it takes place. For a frame of reference, just speaking to that shift in raw materials last June, June of 2003, we had 3 million in raw materials compared to June of 2004 of 1 million, and total inventory into June '03 was 18.8 and it is now 19.2.

So just for a frame of reference within -- for our business at the end of March to the end of June are heading into different traditional patterns of selling, so June to June dollars are more comparable, but within it, the mix has changed due to the transition in business Randall is referring to.

Again just for reference, under the old California subcontractor when was the inventory yours?

We took ownership at a much different point. We took ownership of the fabric at the time we bought what is called gray goods, which is the raw fabrics. And then we own that through the process of the printing and the converting and the finishing and then we own that as it went through the subcontractors. The subcontractors provided labor only. We owned all the inventory. So it does change the dynamics too as well.

I was going to say, so once it gets sorted out, actually your reported inventory position has actually improved?

It will. There is no question.

Okay.

Because we eliminate the front-end of the raw materials. We buy completely packaged products offshore that we take ownership when it goes on the boat.

A couple of more questions. It is nice to see the cash position. Are there any special plans for that?

Ralph, at this point, no, none that we can elaborate on. But we have not been using the revolver, and we have held the cash position. But no there is no plans that we can announce at this point.

This is a speculative question, but conceivably would you make an extra debt payment? Is that possible?

Ralph, at this particular point, the answer to that is no. But I am not going to preclude that or say that that is not possible for the future, but right now, no.

Our current debt structure does not allow it currently as it stands today.

So you basically can only make scheduled principal paydowns?

Right. We have a once a year through this excess cash flow calculation that you can pay that additional million on, and that is the only thing that can be made. So it's only 500,000 a quarter for the debt agreement with the maximum additional of 1 million a year. So we cannot reduce it greater than 3 million at any basically on an annual basis per the current agreement.

Since reincorporation three years ago, we have met the qualification for the excess cash flow payment every year, and we have made that excess cash flow payment every year.

Right and today's Q says that you are planning to do it this year as well.

That is correct.

That is correct.

Okay. The new program that one of your major customers is getting ready for, I assume this was all in the works in plan? So was it sort of a surprise that they cut back a little bit on purchases, or was that what you expected?

I think, Ralph, there's maybe two things mixed together there. Okay? One of our customers adjusted on-hand inventory down, so therefore they reduced their purchases as they made a decision to bring their on-hand inventories down to a lower-level, and that affected our shippings. The other customer did do an end of season reduction in preparation for the new goods going in. That was not a total surprise, no.

It was just a little earlier than anticipated. It was a traditional cycle, but it was earlier than had been forecasted or planned, and we had, of course, bought the plan.

Those two customer that you mentioned were both separate customers?

They were separate customers.

(OPERATOR INSTRUCTIONS). Max Beskor (ph), Winfield Capital.

What is a good number to use for an inventory going forward? I understand that this will leave you in a better inventory position once everything washes through, but what would be a good number for that going forward? What are your expectations?

I mean, Max --

For the current level of business?

A few million less than what we ended the quarter.

So someplace between 14 and 19?

Somewhere in between there, yes. We ended the quarter higher than we should. No question about it. We had the overlap to some degree of exiting the West Coast operations. But, Max, with our business and when we released the earnings this morning, we said our first quarter is our weakest quarter and it has been for several years. But as we prepare for the better quarters, you're always going to get at the end of the first quarter an inflated inventory. You have to to prepare for the shipping in our second quarter.

I certainly understood the comments on that, both your comments on the call and what was in the release.

It will reduce it. It will because as we filter through and sort through to Ralph's point earlier in the conversation and we don't have the investment in raw materials upfront, you will see the benefit of that.

I guess I was looking for from a modeling point of view --

It is tough because every quarter is different.

Let's move to another question. Some of the older lines that you guys have seem to be getting a little tired in the marketplace, and I just wondered if you would have any comments about what you're doing with respect to product developments and new lines and some other things that you might be doing to grow sales?

One of the things that we have for license for Baby Einstein for the bed and bath area we have shipped that to one major retailer now. A second retailer has committed to it, and it will ship -- it will be on the shelf in our fourth quarter -- excuse me, our third quarter. We will ship that in late third or early fourth. So two of our three major retailers have signed up for that program, and that has been a very good program. It is an educational property that is controlled by Disney, and it really is very very cute.

We are not announcing today, but we will introduce at the ABC Show in September a new brand that is coming out that we are pretty excited about. Then we've got some other things on the burner, and I don't mean the back burner. I mean the front burner that we are working on for the future.

Thank you very much.

Charles Levy, Smith Barney.

I am sure this is easily explainable, but could you just tell me -- I see the reduction in the assets due from factor from 16 change to 8 7. What was that all about?

Yes, there are two basic components. The first -- well, maybe I will say three. The first is the fourth quarter was substantially greater shipping. So just your topline is substantially different.

The second is just the timing of when our year-end ended. We had a tremendous amount of collections in the first week of this quarter. So in a sense, I do not want to say it was inflated, but it was a factor of timing based on when shipments went out in February and March. A lot of collections came in in that very first week of this calendar year.

Then the other thing that is, there is a timing in when significant agreement is funded with a major customer, and it was funded in late February/March and we built an accrual for that for the remainder basically over the next 11 to 12 months. So the accrual related to that at the end of March would say you have one to two months of accrual in it where it will continue to build and have five months by the end of June. So it's actually a blend of different factors.

Okay. Randall, could you give us an idea in general of what the stores feel like and the conditions considering we're getting mixed report some retail these days?

I mean Wal-Mart is still doing very well and anticipates the category to continue being very strong and we have seen no slowing there.

Target, with the new introduction of the classic Pooh program, the sales number there, the sell-through numbers are very good. So those numbers are looking very good for the future.

Babies "R" Us is still very solid. We saw the speculation earlier today that Toys "R" Us may spin them off into a freestanding subsidiary, and that will not affect us in a negative way because the overwhelming majority of our business is with the Babies "R" Us chain, and that is really where our product is featured. Their business continues to be strong.

So I mean our three major retailers in the category, we still are getting good signals from, Charles.

Yes, that was my next question about the Toys "R" Us spinoff, but you have taken care of that.

There is some good news in that, but Rick Markee would be the CEO and I consider that very good news.

Okay. Thank you much.

(OPERATOR INSTRUCTIONS).

Okay, Linda. Do you have anyone else coming in?

Charles Levy, Smith Barney.

Randall, can you say anything about any progress in the situation with the banks and the warrants and cleaning up that situation?

Charles, we cannot address that situation. It is not something that we are in a position to discuss at this point. I mean I appreciate your interest, but you have got to appreciate that I don't have an answer.

So we should assume things are status quo?

For the time being, Charles, you have to assume things are status quo.

Thank you.

There are no further questions at this time, Mr. Chestnut. Please continue.

Okay, Linda. We will wrap up. As we said in the press release, our first quarter is always our weakest quarter, and this year was no exception. It was weak again. Our mission in the Company is to control cost, and we feel very strongly that we have done that. Our mission is to be sure we source as well as we possibly can, and with the changes that we alluded to earlier on the phone call, we feel the we have gotten ourselves in the position to do that for the future.

But as always, we want to say thank you for your interest and your participation. If you have follow-up calls, don't hesitate to call Amy or myself and we will be happy to try to help you. Thank you very much. Linda, you can wrap up.

Ladies and gentlemen, this conference will be available for replay after 4:30 PM Central time today through midnight on Wednesday, August 18 of 2004. You may access the AT&T Teleconference replay system at anytime by dialing 1-800-475-6701 and entering the access code 741059. (Repeats numbers.)

That does conclude our conference for today. We thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.