Crown Crafts Inc (CRWS) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Crown Crafts, Incorporated first-quarter investor conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session; instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would know like to turn the conference over to our host, Amy Samson, Vice President and Chief Financial Officer of the Company. Please go ahead.

Thank you, Karen. Welcome to the Crown Crafts investor conference call for the first quarter of fiscal 2006. With me today is Randall Chestnut, President and CEO of Crown Crafts.

Good afternoon.

A telephone replay of this call will be available after 3:45 Central daylight Time today through the end of the day on August 23, 2005. 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 known and 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, including changes in interest rates and the overall level of consumer spending, and in the price of oil, cotton, and other raw materials used in the Company's products, changing competition, changes in the retail environment, the level and pricing of future orders from the Company's customers, the Company's dependence upon third-party suppliers, including some located in foreign countries with unstable political situations, the Company's ability to successfully implement new information technologies, customer acceptance of both designs and newly introduced product lines, actions of competitors that may impact the Company's business, disruptions to transportation systems or shipping lanes used by the Company or its suppliers, and the Company's dependence upon licenses from third parties.

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

I will now turn the call over to Randall.

Thanks, Amy. Good afternoon again.

Earlier today, we released earnings for our first quarter of our fiscal year 2006, and we reported net sales decrease of $3.2 million, decreasing from 16.9 a year earlier to 13.7 in the current quarter. I would like to touch on some of that and then talk about the earnings, and we will go into more depth.

Number one, as far as the sales decline -- the topline sales decline -- one of the Company's major customers adjusted its inventory levels downward significantly in preparation for that particular retailer's anticipated sale and also in anticipation of some new programs which were being placed with them. At the same time, another major retailer adjusted its inventory downward which put even more pressure on the Company's top line. Thirdly, as quota has been eliminated on many of our products, the topline sales have declined accordingly. Also, as we had reported earlier in a number of quarters, this quarter -- the quarter which just ended -- reflected the last quarter comparison of a bath program which the Company had and has lost through an Internet option in early 2004. Last but not least, it is our weakest quarter, has been for a number of years, and this year proved to be no exception. The first fiscal quarter of our year is our weakest quarter.

Reporting the loss, we had a net loss of $269,000, compared to $102,000 in the same quarter a year earlier. It's hard to say but the Company is pleased that we were able to control the loss to $269,000 from 102 a year earlier with a decrease in sales of 19 percentage points. The loss was achieved by controlling expenses and a slight improvement in the gross margin, which reflects lower prices from Asia that we've achieved after quota elimination. Management has negotiated post-quarter prices beginning in the fall of 2004 and subsequently many of our products have been relocated to new suppliers in the north of China. Management is continually identifying and evaluating new suppliers in different areas of China, as well as other countries, to maintain our competitive edge.

Additionally, during the quarter, the Company is pleased to be able to retire 4.5 million senior notes one year early without any prepayment penalties, bringing our debt at the end of the quarter down to just over $23 million. The senior notes, which we paid off, had a cash interest rate of 10% and had a provision for contingent interest amounting to another 3%.

At the end of the current quarter, the quarter we are in now, which is the second quarter, the Company will have completed the consolidation of its distribution centers located in Gonzales, Louisiana and Compton, California, into one facility located in Compton. In addition, the financing and accounting functions of Crown Crafts Infant Products, our bedding subsidiary, will be consolidated with Hamco and combined in Gonzales, Louisiana by the end of the quarter as well. This has been achieved by Crown Crafts Infant Products' conversion to a new software platform which is consistent with the one run by Hamco.

In finishing my remarks, it was a difficult quarter, which is reflected in the topline sales, but the Company is pleased that we were able to control costs, pay down debt and maintain a positive cash flow in a difficult quarter.

Amy, I will turn it back over to you to go through it in a little more detail.

Thank you.

As Randall stated, total net sales decrease from 16.9 million to 13.7 million in the current quarter. 2.1 million of the sales decline was experienced in the bedding, blankets and accessory categories as a major customer reduced its -n hand inventory in anticipation of the sale of their company and in preparation for new programs. In addition, another customer reduced (indiscernible) supply on hand. The elimination of quota on goods from January -- effective January 1 -- excuse me, the elimination of quota on goods from China effective January 1, 2005 has also lead to a reduction in the topline sales volume. These decreases were partially offset as a particular brand's distribution was expanded to an increased number of stores. Bib and bath sales declined 1.2 million as that category was also impacted by the same two customers previously discussed. In addition, the first quarter of the prior year was the last quarter that a bath program was shipped to a major customer.

We are extremely pleased to see the results of our improved sourcing as gross profit improved 1.2% as a percentage of net sales quarter-over-quarter. Cost of sales has decreased as we have begun shipping merchandise that cost less, due to the removal of quota and the impact of more diversified, more aggressive sourcing.

Though marketing and administrative expenses increased slightly from 15.5% to 18.1% of net sales, the actual expense in dollars decreased slightly. The decrease is due to reductions in labor and commission expenses. The increase in marketing and administrative expenses as a percentage of net sales is a direct result of the sales decline, as the majority of the SG&A expenses are fixed.

The decrease in interest expense from 946,000 in the first quarter the prior year to 802,000 in the current quarter is due to the lower average debt balance. Total debt was 29.6 million at June 27, 2004 versus 23.1 million at July 3, 2005. The decrease in debt reflects quarterly payments through March, 2005 followed by the early payoff in full of the senior notes in the current quarter for a total reduction of senior debt of 7.5 million over the preceding 12-month period.

For financial statement purposes, the payments are offset by an increase in debt related to the amortization of the discount and the annual issuance of promissory notes related to the payment of interest on the subordinated debt.

Though margin improvement was made and operating expenses and interest costs were reduced, these savings could not overcome the impact of the sales shortfall. The net loss for the first quarter of the fiscal year 2006 was 269,000, or $0.03 per diluted share, compared to a net loss for the first quarter of the prior fiscal year of 102,000 or $0.01 per diluted share.

Okay, Amy, thank you very much.

Karen, if you will come back on and make the introduction, we will open it up to any questions that anyone may have.

(OPERATOR INSTRUCTIONS). Max Beecher with Winfield Capital.

Nice job maintaining the margin improvement in the face of some of this stuff.

I have a couple of specific questions. You mentioned a retailer that was up for sale and reducing inventories accordingly. Do you know who the buyer is? I'm not asking for a name; I'm just asking if you know who that is.

No, Max, it is Toys R Us, which that sale has now concluded. (multiple speakers) -- concluded last month but it was -- and of course it was bought by a group led by KKR, Vornado and -- (multiple speakers).

Do you expect that the inventory levels there will go back up to what they were as they get themselves squared away?

I mean, Max, you know we don't predict the future but you know, indications are yes.

That's all; I'm not asking for -- I don't want to put too sharp a point on this.

Also, when we talked about the reduction in marketing and administrative sales, I noticed, in the Q, you spoke about labor and commissions. My specific questions is I assume you put commissions as part of marketing expense.

The answer is yes.

Okay, because one wonders if any of the other reductions were in marketing expense, or if you are maintaining your marketing spending and making new reductions in non-marketing expenses, ex-commissions.

Our tradeshow expense was down some, Max. Our major tradeshow this year relocated from a venue that it had held a number of years in Dallas, Texas, which was a fixed showroom venue, to a pipe-and-drape if you will, which is a flexible showroom venue in Orlando this year, thereby reducing our exhibition cost for that particular show, which is our major share during the year.

Without reducing your exhibition effort?

Yes, yes. It was something that was by all the suppliers, which was welcome.

You found that you were able to get the same level of traffic and the same level of interest and participation in the new venue as the old one for less money. Is that a -- (multiple speakers)?

Actually, the participation, Max, was up and we think the interest level was up, and we think the retailers and the suppliers really liked the new format much better. The old format had sort of worn itself out.

Okay. Last question for the minute -- you'd mentioned that this was the last quarter you were shipping a program to a major customer. Is there the opportunity to replace that with other programs? What about the overall -- make a comment, if you would, on the overall number of programs in your segments that are being offered out. How many at-bats are you getting? More, less or the same? I guess that that was two questions, sorry.

That's okay. The program we alluded to is program that was a bad program that was, to be specific, was a target. That was an Internet auction that the Company did on and did lose in early -- actually, in January of 2004. It continued shipping for the quarter that we just ended of last year. That's why we were saying -- (multiple speakers) -- comparisons from a year ago. So, that program was a program from 18 months ago that the Company was not successful in replacing.

On your follow-up question, you know, we bid on a number of programs -- G-d, literally hundreds of them. I mean, I cannot say that we are equal, above or below. I mean, there's no majors that stand out in my mind that we've lost, okay?

I guess my question was are there as many chances to succeed, not are there as many chances to lose?

Max --.

Even the consolidations that are taking place in your retail customer -- (multiple speakers).

In today's retail environment, it is probably a 50-50; there's no question about it. I mean, there's a chance to win; there's a chance to lose. You know, we are very aggressive and competitive on every single one that we have an opportunity for.

Okay. Would you allow a number for the target, how much that target contract was which was shipping on average?

I think we actually reported it a year or so ago. Amy, just under $3 million -- just under 3 annualized, Max.

3 million per annum?

Yes.

Okay. Thank you very much. If there's anyone else, let them go.

(OPERATOR INSTRUCTIONS). Charles Levy (ph) with Smith Barney.

Just trying to work backwards on the sales decrease for the quarter, you gave us that 2.1 million was the bedding with Toys R Us. Could you tell us what the quota differential was?

Max, excuse me, Charles, I apologize. Charles, I cannot quantify the quota. Because it's so convoluted, the majority of that is attributable to the fact that they basically just slowed down purchasing and bringing in inventory -- the majority of that decline.

Any ballpark?

For quota?

Yes, just for the quarter, just trying to see how we get to 3.3 million decline in sales. We got 2.1 covered already from Toys R Us.

Actually, Charles, 2.1 was for the bedding division, and the -- additional 1.2 was the bib and bath. They were actually both -- because both divisions or categories ship to similar customers, they were both impacted by the Toys R Us/Babies R Us -- (multiple speakers). I'm sorry if there was a little confusion to say that the 2.1 was only attributable. That actually impacted both divisions.

Okay, so that totals it out.

Just for reference, the Target program -- what was the differential in this last quarter from a year ago, just so we can get, again, a feel for how business is in general?

Just under $0.5 million, Charles, in the quarter that just ended.

Comparing to the quarter last year?

$0.5 million was in the quarter a year ago versus 0 this year. Yes.

Okay, so that mean things got better somewhere to offset that in effect, really.

There were some increases, like I had alluded, that some of the declines that, you know, despite the holding off on the inventory levels and the reductions, that there were some increases in certain brands and increased store counts. So, there are some positive signs but they did not offset the negatives.

Okay. On the senior notes that were retired with the 10% interest, can you give us a forward look as to what that savings is going to be on a quarterly basis?

The effective rate was 13%. We would have normally been paying them down at $0.5 million a quarter with, in general, an extra 1 million September 30 of each year. But they were due in full June 2006, about a year from now.

The offset will be borrowing on the revolver for when those occasions do come up that we would have had that cash if we had not applied it to the debt. The revolver is prime plus 1, so that will give you that and you can -- I don't think it would be unreasonable to look at history.

So that should be a nice savings quarter to quarter from this point on, at differential.

Is it the Nike program that you won last year?

No, not Nike.

Nautica maybe?

Nautica, Nautica. (multiple speakers) -- (indiscernible) you've seen them all! (LAUGHTER). When does that start? When does that maybe show some impact on the top line?

We start shipping the Nautica infant actually this week or next week. One program -- one bedding program and two follow in early September. So, it's in the quarter we are in now. The goods are in hand from Asia and ready to be shipped.

Okay, so we've got a potential plus in this quarter. Okay, I think that's all I've got for the moment.

Charles, thank you very much. Have a good day.

(OPERATOR INSTRUCTIONS). We have no further questions. Please continue.

Karen, thank you very much. To everyone on the call, thanks for your continued interest in the Company. If you have questions, follow-up questions, feel free to address those later afterwards to Amy or myself and we will be happy to try to address those for you.

That's it. Thank you. Amy, any follow-up -- this will be -- you make the announcement -- it will be available on follow-up -- (multiple speakers).

Right, it will be available through August 23 for telephone replay, and then through the Web for 60 days.

Thank you very much. Have a good day. Goodbye.

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