Crown Crafts Inc (CRWS) 2006 Q2 法說會逐字稿

Welcome to the Crown Crafts , Inc. second quarter investor conference call. [OPERATOR INSTRUCTIONS] I would like to turn caught over to Vice President and Chief Financial Officer of Crown Crafts Inc., Ms. Amy Vidrine Samson. Please go ahead.

Thank you. Welcome to the Crown Crafts investor conference call for the second 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 3:00 Central Standard Time today through the end of the day on November 21. A Web replay of this call will be available for 60 day. You can access it by visiting our Website 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 of interest rate in 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 new designs and newly introduced product lines. Actions of competitors that may impact the Company's business. Disruptions to transportation systems or shipping lanes use 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 to not forecast results nor comment on specific financial projections related to our expected future performance. I'll now turn the call over to Randall.

Amy, thank you very much. Earlier today we released the earnings for our second quarter for FY 2006, which ended October 2 of this year. And I would like to touch on a few of the highlights. Amy will come back and give more of the details. And then at the end, we will open it for any questions that anyone may have. Net sales for the second quarter of FY '06 declined $1.7 million or 7.6%, from $23 million in the prior year to $21.3 million in the current year.

Several factors contributed to the decline. Approximately 900,000 resulted from shipments of new product placements in the prior year, which were not repeated at the same levels in the current year. An additional 900,000 was caused by erosion in price due to a change in shipping points on a program from FOB U.S. to FOB Asia, that was agreed upon by the Company and one of its customers in order to streamline the distribution process. Additionally, as we have discussed in the past, we had a decline of Pillow Buddies business in the quarter year-over-year of about $200,000. As this product category continued to weaken and has lost popularity in the marketplace. These decreases were offset by about $300,000 at one of the major customers who had increased their on-hand inventories during the quarter.

Touching on the net income. Net income for the quarter in FY '06 improved 36.4% from $844,000 in FY '05, to 1.2 million in FY '06. Resulting primarily from a better gross more begin, which was improved because of better sourcing. As the Company has made major strides in moving a major portion of its production from southern China to northern China. In addition during the quarter, we incurred $158,000 in costs for the relocation of the distribution center from Gonzales, Louisiana to Compton, California. And also the consolidation of a financial departments headquartered here in Louisiana for all the companies. These costs are substantially complete at the end the quarter.

In addition, I would like to touch on the fact we've had a number of investors that have made inquiries about the status of the Company, since we are located in Louisiana, and the effects of Katrina. and we are pleased to report that the Company is located about an hour outside of New Orleans and did not have any major impacts. I think we lost maybe one day in the office when the hurricane hit. The good side of it, the distribution center was actually closed and relocated to Gonzales the week before Katrina hit. Had that not happened, we would have incurred some downtime and some losses in shipments from the Hamco distribution center.

To wrap up before I give it to Amy. Recently - - there's been recent announcement of the U.S. and China agreeing to establish a quota on certain categories beginning January '06. And we do not expect to have but one item that is caught in that particular category. We have hooded towels, which according to the preliminary information we have will be affected by that. But currently the Company sources roughly 50% of the hooded towels from Thailand and the other 50% from China. And Thailand will not be subject to the quotas. None of the other items that the Company produces at this point, with the regulations as we understand them, will be affected by that. So with that, I will turn it over to Amy and she can go over more detail and then I will come back at the end.

Net sales for this quarter fiscal 2006 were down 1.7 million to 21.3 million from the second quarter of fiscal 2005. Randall has discussed the $1.5 million decline in the shipments of bedding, blankets and accessories. For the first six months of fiscal 2006, net sales were down 5 million to 34.9 million, from 39.9 million in the same period of the prior year. $3.6 million of the decline was attributable to decreased sales of bedding, blankets, and accessories resulting from customers reducing their on-hand inventory levels. And erosion of prices due to a change in shipping points and quota elimination. New product placements being shipped in the prior years at levels that were not repeated in the current year. And a continuing decline in Pillow Buddies sales.

Bib and bath sales decreased 1.3 million for the first six months of fiscal 2006, as compared to the same period in the prior year. The decline is due to lower replenishment orders and the loss of the bath program. Gross profits as a percentage of net sales, increased for both the three and six month period of fiscal 2006. as compared to the same periods of fiscal 2005. We have begun shipping merchandise that is benefiting from the removal of quota, supplied by more cost effective suppliers. And have eliminated excess costs associated with the transition out of domestic manufacturing.

Included in the second quarter cost of sales are retention and moving costs associated with the relocation of the distribution center in Gonzales, Louisiana to Compton, California. Marketing and administrative expenses decreased slightly in both the three and six month periods of fiscal 2006, as compared to the same periods in the prior year, as a as a result of reductions in labor and commission expenses. Retention payments related to the elimination of the finance department in California are also included in the second quarter expenses. The decrease in interest expense for the three and six month periods of fiscal 2006, as compared to the prior year, are due to lower average debt balances.

We had 23.5 million in total debt at the end of the current quarter, compared to 29.6 million at the end of the same period in the prior year. The decrease in debt in the past 12 months is due to quarterly payments on the Senior Notes, followed by a payoff in full of those notes in June 2005 for a total reduction of senior debt of $7 million. Such decrease has been offset by an increase in debt related to the amortization of the discount and the annual issuance of promissory notes related to the deferred payment of interest on the senior subordinated debt. At the end of the current quarter, the balance on the revolving line of credit was 0.

Despite the $1.7 million decline in sales in the second quarter, we were able to improve our profitability through improved sourcing, operating cost control, and debt reduction. As net income for the current quarter was 1.2 million our $0.05 per diluted share, compared to 844,000 or $0.04 per diluted share for the second quarter of last year. Improved profitability on decreased sales also held true for the year to date. As net income for the first six months of the current year was 883,000 or $0.04 per diluted share, compared to net income of 741,000 or $0.03 per diluted share in the prior year. Net cash provided by operating activities was 4.3 million for the first six months of the current year and was used to reduce debt. Net cash used in investing activities was 338,000. The majority of the capital expenditures related to the conversion of our California subsidiary to a software system currently used by other locations.

We have had two changes in customer relationships that impact the balance sheet presentation but have no impact in the earnings. In the prior years, a customer allowance had been funded annually in our fourth quarter. In fiscal 2006, the customer is deducting the allowance from the invoice when payment is made, thereby decreasing the amount required to be recorded as an allowance. Accounts receivable allowances at the end of the quarter were 1.8 million, compared to 3.3 million at the end of the second quarter in the prior year. The increase in nonfactored accounts receivables from the end of the year, is due to a change in payment terms not to a change in credit risks. The FOB Asia programs, Randall referred to, are paid by letter of credit and therefore do not require factoring. I will now turn the call back over to Randall.

Amy, thank you very much. And if you will, you can come back on and make the introduction, and we will open it up to any questions that anyone may have.

Thank you. [OPERATOR INSTRUCTIONS] The question comes from the line of Michael Bernstein from DWI Holdings. Please go ahead.

Glad to see a good quarter from a P&L standpoint. I have a few questions.

Sure.

I take it that the - - most of your sourcing comes out of China.

The majority does, Michael. The second largest would be Thailand, but China is by far the largest.

Have - - given the pressure - - the U.S. pressure to - - for China to revaluate their currency, have you hedged the Chinese currency this year or are your factories tied contractually to a dollar price?

The factories are tied contractually to a dollar price. And we are not hedging that at the moment.

My experience is if there is a major revaluation, they will default on that. And that a hedge - - you might want to look at at least a partial hedge.

It is something we have looked at from time to time, Michael. But at the present time, we have not done that. And I just returned from China on Sunday after a three week trip. And at this point, it is not something we intend to look at in the immediate future. But it is something we are looking for in the not too distant future.

It is surprisingly inexpensive. Churchill is never mentioned. How is Churchill's business?

Michael, it is softer. There is no question about it. It is down. It has been impacted by the economy. And we have revamped some of the distribution, some of the sales efforts. We have opened one additional retail store, which just actually opened over this past weekend. And so it has been impacted by the economy. And it is affected.

Is it still viable?

It's still viable, yes. No question about it, it is still viable.

When do you start or have you started shipping Nautica?

Nautica started shipping in the quarter that just ended, and we ship - - we shipped somewhere in the neighborhood of $1 million in the quarter.

And how many customers do you have buying Nautica?

Michael, the largest is Babies R Us. And I don't have the exact count beyond that because then it would go to, what would be what we considered in our trade, the juvenile specialty stores.

But have you sold it to the big box retailers, Bed Bath & Beyond and Linens 'n Things?

Not the infant ,no.

I am talking about - - I thought you had the license for juvenile.

We have the license for juvenile. And we have not shipped any to Bed Bath & Beyond or Linens 'n Things at this point. We have a commitment from one of them to start a test, but that will not start until next year. Next calendar year.

In other words a couple of months from now.

Don't have exact timing on it, Michael, because we have to have a follow-up meeting with Bed Bath & Beyond to determine exactly when that distribution would start.

And the move that you've just made consolidating warehousing and finance. Do you have an estimate on your annual savings in connection with that move?

We do, but externally, I don't think we have ever published that, Michael. So we have not publicly said what that savings would be. It's substantial.

How many people were involved in the financial area who are no longer with you?

It's - - there are probably in the neighborhood on the West Coast of seven. But then we added a few back here. I think we have added three or four back. So, the net effect is four to five.

And how about, how many people in warehousing?

I don't know the exact number but it was somewhere in the neighborhood of 15 to 20.

That should be substantial then. Not that I am going to run out of questions, but does anyone else have any?

There are further questions in queue at this time, yes.

I will wait for further questions. Thank you.

All right, we will go on to the line of Randy [Lott], a private investor. Please go ahead.

I have a few questions for you. The $300,000 you said that offset the decreases in business, was that in Pillow Buddies? Or that was in another area?

It was in another area.

What area?

It was - - that particular one would be in the bedding area.

With any specific account?

We don't list those accounts, Randy.

Okay. From my background in the business, I had found that a lot of the specialty stores have gone to more being furniture stores. And the loss in the bedding sales from those wasn't really picked up by the Internet accounts I was aware of. Where has the bedding sales gone?

Well, obviously, Randy, you have been in the business for a long time, as an independent rep. The majority of it has gone to Babies R Us, Burlington, Target and Wal-Mart, which happen to be the four largest retailers for the category in the U.S. So, as juvenile specialty has weakened, it has gone to the big box retailers and the discounters.

Is there any plan to try to get it back into these specialty stores?

We do, Randy. We just introduced a new brand, a new license, and there was a press release on it, called Kelly Rightsell. And we introduced it at the ABC Show in September. And that is specifically 100% designed for the specialty market.

Where there a lot of commitments, orders written for it at the Show?

We did have commitments. I don't have it quantified that the point.

Is it going to be separate patterns made for the specialty than for the larger accounts?

It will be 100% separate and that brand will only be in specialty.

Only specialty. And any time of shipment for the Rightsell?

It will be. Our fourth quarter - - our fourth fiscal quarter and first quarter of next fiscal year.

Okay. And then also, you had the new license agreement with PALI. Is there a dollar commitment from them on that, or how is that structured?

What do you mean a dollar commitment, Randy?

Have they made any commitment per the size of what they are going to do with you?

No. It's a license, Randy and it would be the reverse. We sign a license, but there is no guarantee continue on it. If that's what you are asking. They are not selling it per se. It's a license for us.

So, it will be sold through Crown Crafts orders?

It is sold through them but we hold the license for it.

Okay - -

They are not buying the product is what I am saying.

So, it will ship from you?

Yes and we handle receivables, et cetera.

Okay. And do you think that is - - with PALI's strength that that will be a sizable part of the business addition?

We don't forecast, Randy.

Okay .

We said that at the top of the hour.

Right. Sorry about that. Also you pretty much been ahead of your debt payoff through the years. Is that something that you are seeing - - forecasting? Seeing as ongoing?

Our current loan that we have, Randy, doesn't provide any provisions for prepayment at all now. So, at - - the loan agreement, which is a public document does not allow early payment or prepayment.

And another question. Is there some - - Michael Bernstein obviously - - previously had - -I know what his relationship was. Is his relationship or [Winfield's] got any special restrictions with the Company or any special privilege? Is there anything there?

Randy, there was a document that was filed a week or so ago, which gave Winfield an observer status to the Board of Directors if that's what you are alluding to. I think that was filed the end of last week in the form of an 8-K. And it was something that after the Board gave careful consideration to, it has allowed Winfield a nonvoting observer status to the Board. Which we think will be very friendly to the shareholders. And that's contained in a public filing, any restrictions that might be affected by Winfield.

Thanks very much for your answers, Randall.

Thank you, Randy. Have a good day.

[OPERATOR INSTRUCTIONS] And we will go back to the line of Michael Bernstein from DWI Holdings. Please go ahead.

Randall, I know it is in your loan documents, I just forgot. When do your loans come due? Michael, it's - - and help me - - in June or July of '07. I get it confused.

July.

July of '07 are when the loans are due.

So in July of '06, your current long term debt will become short-term?

It will, yes. It will. It would have to be a year and day. To keep it classified as short term.

Okay. Last question. The last time we spoke, you and I spoke about your sourcing in China was fairly concentrated. Have you been able to diversify that sourcing?

Michael, it has been diversified to an extreme amount in both Hamco and CCIP, Crown Crafts Infant Products. Where our concentration used to be with a few suppliers in southern China in the quarter that just ended, that is less than 35%. And the other 65% is spread over many new suppliers in Northern China. So, it has changed drastically and that is what we were alluding to earlier.

No more questions.

Thank you.

And we have a follow-up from the line of Randy Lott. Private investor. Please go ahead.

Yes, Randall. Just a quick question or two on Pillow Buddies. That has been decreasing over time. Is there any new avenues or any way you are looking to revisit that and to reverse that?

Randy, we look at it all at the time. It has become a license business. And the license that - - it is just not accepted at retail anymore. The product category is very, very weak. The retailers aren't carrying the product category category. And the toy industry has changed considerably over the last several years. And electronics have become more important and stuffed animals and stuffed toys have become less important. So, we continue with the business but it is not a big business. And unless we can change the consumer trends, I don't see that reversing itself.

And then in the past, you have spoken about large investors that were in discussions or talking to. Anything further on that front?

Talking to large investors?

As far as any type of funds, anything other than individual investors that have shown interest to something that might bring some excitement to the stock, some attention?

Don't have anything to report, Randy.

Okay. Thanks very much, Randall.

Thank you.

There are no other questions at this time.

Okay. Give it a moment if you will to see if anyone has a question before we wrap up.

[OPERATOR INSTRUCTIONS]

We will wrap it up. We - - as always, we appreciate the investors' interest in the Company. We appreciate your questions and your following. In the meantime, if you have any questions at all in the future, in between, feel free to call either myself or Amy Samson and we will be happy to try to answer those questions for you. And so, if you will, you can wrap it up and we can conclude. Thank you.

Thank you. Ladies and gentlemen, it conference will be available for replay after 3 p.m. this afternoon running through November 21 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 801515. Again, those numbers are 1-800-475-6701 and please enter the access code of 801515. That does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.