Crown Crafts Inc (CRWS) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Crown Crafts second-quarter investor 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 now like to turn the conference over to our first speaker, Olivia Elliott, Vice President and Chief Financial Officer. Please go ahead.

Thank you, Linda. Welcome to the Crown Crafts investor conference call for the second quarter of fiscal year 2009. With me today is Randall Chestnut, President and CEO of Crown Crafts, and Amy Vidrine Samson, Vice President and Chief Accounting Officer.

Good afternoon.

Good afternoon.

A telephone replay of this call will be available after 2:30 p.m. CST today through the end of the day on November 19th. A web replay of this call will be available for 60 days. You can access it by visiting our website at www.crowncrafts.com.

Before we begin I would like to remind everyone of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made in today's conference call. I will now turn the call over to Randall.

Olivia, thanks. Good afternoon, again. Earlier today the Company reported results for Q2 FY 2009, which ended September the 28th of this year. I'd like to touch on a few highlights of those numbers. Olivia will come back and expand and then at the end we will give the people on the call a chance with any questions that you might have.

Net sales for Q2 increased from $17.1 million in the same quarter in '08 to $23.7 million in '09. Net income for Q2 increased from $541,000 last year to $1.035 million this year. EBITDA for the second quarter went from $1.1 million last year to $2.5 million this year. The sales increase of $6.6 million in the quarter was achieved by shipping $5.7 million of the Springs baby, which was the acquisition we completed in November of last year and the remaining just under $1 million was organic growth.

Olivia will actually expand and do a broader analysis on the sales by product line whenever she speaks later in the call. The second quarter was negatively impacted by $425,000 in amortization related expense associated with the acquisition of Springs baby that I alluded to earlier, which took place in November of last year.

In this past quarter we are pleased that we were able to avoid a costly proxy fight, which we did have in Q2 of '07, which cost approximately $450,000. One of the things that we've been talking about for the last few quarters is the momentum that we've gained in our NoJo brand and we continue to gain momentum in this brand and I would like to elaborate on that for a moment. In the quarter, Q2, our NoJo business increased 69% versus the same quarter last year. The increase is a result of new placements and strong selling on existing collections in our NoJo brand.

We experienced some substantial increases in the brand over previous years at our major retailers. The effort that we have placed on new and creative designs for the past few years is really paying off.

In a general statement the retail environment continues to be challenging. However, by offering products that sell in all channels of distribution, we feel that we are well positioned to weather the retail environment or the storm in the retail environment. We are pleased with the results of the quarter.

Turning to a couple of additional items I would like to touch on. I'd like to point out on the balance sheet that the Company at the end of the quarter was holding $12.1 million in cash. Earlier in the year the Company drew down $10 million of its availability with our lender in reaction to the credit crisis when it hit in the spring. In Q2, as the credit crisis continued to tightened, we drew an additional $2 million. So in essence the Company is setting with just over $12 million of cash in a third-party bank that we are having to pay a differential on from what we are paying on the loan versus what we are earning on the interest. The Company feels that it's prudent to be very conservative and take these measures in rough economic times.

We are also, in the press release that we issued this morning, we reaffirmed our 2009 revenue EBITDA and earnings per share guidance for the year. The Company expects net revenue for physical 2009, which ends March 29th of 2009, to be in the range of $90 million to $93 million. In addition, we expect EBITDA for physical '09 to be in the range of $10.2 million or 11.3% of net sales to $10.8 million or 11.6% of net sales and diluted earnings per share to be in the range of $0.41 to $0.46. With that, I'll turn it back over to Olivia. Thank you.

I'm going to give financial highlights for the quarter and year-to-date. For more detailed analysis, please refer to the Company's Form 10-Q filed with the Securities and Exchange Commission earlier this morning.

Sales of bedding, blankets and accessories increased by $7.6 million for the quarter as compared to the same period in the prior year. $5.7 million of the increase is due to the acquisition of the baby products line of Springs Global in November, 2007 and $1.9 million is organic growth. Year-to-date sales of bedding, blankets and accessories increased by $12.5 million, primarily due to $10.3 million of sales associated with the Springs acquisition and $2.2 million in organic sales growth. Bib and bath sales decreased by $1 million for the quarter and by $1.5 million year-to-date.

Gross profit decreased as a percentage of net sales for both the three and six-month periods of fiscal year 2009 as compared to the same period of fiscal year 2008. This decrease in percentage is due primarily to amortization cost in the current year associated with the acquisition of the baby products line of Springs Global, additional costs in the current year related to the establishment of a foreign representative office in China, increased product testing costs, increased product development costs, and increased product costs from Asia. These increases were partially offset by a $215,000 charge related to vinyl bibs in the second quarter of the prior year.

Marketing and administrative expenses have decreased as a percentage of net sales for the three and six-month periods of the current year. Although the Company incurred increased amortization and salary expense associated with the Springs acquisition, the prior year included costs associated with the Company's proxy contest of almost $0.5 million, which were only partially offset year-to-date by the costs associated with the Governance and Standstill Agreement with Wynnefield Capital.

Aside from these factors, the remaining decrease in marketing and administrative expenses as a percentage of net sales is due to the Company's ability to increase net sales without a significant increase in fixed cost. The increase in interest expense for the three and six-month periods of the current year is due to a higher revolving line of credit balance and a new term loan executed in conjunction with the acquisition of the baby products line of Springs Global. In addition, as Randall mentioned, the revolving line of credit balance was higher due to excess funds drawn down and invested in reaction to the current credit situation. I will now return the call back over to Randall.

Olivia, thank you. Linda, if you will come back up, we will open it up to any questions that anyone on the line may have.

(Operator Instructions) Our first question will come from the line of [Chris Dukeou] from [Attican Capital]. Please go ahead.

Good afternoon, guys.

Hi Chris. How are you?

Doing all right.

Good.

Got a question on, I guess, what you are seeing right now with your customers. Are you guys seeing them cutting back on inventory levels at all?

Chris, we have seen that in some of the customers. We have seen where they are having inventory problems themselves and they are tightening up a little. But overall, and that's why I alluded to the fact I think we are well balanced. We are seeing just a little of it with some of the retailers, but the majority of our retailers are still taking goods and not fighting inventory issues at this point. In this environment, that could change any day.

For whatever amount of the inventorying they have done, do you feel that they have kind of gotten themselves to decent levels?

I can't answer that, Chris, with the ones that have tightened up some. I don't know whether they have gotten their inventories back in check or not. I really don't know. I don't think they have in total.

What about -- what are you seeing in terms of mix? I know you said that Nojo is doing very well, which is good to see, but in terms of, I guess, whether you are selling more of the kind of lower end goods versus the upper end goods or maybe consumers cutting down the number of pieces in a set that they buy, what kind of things are you seeing there?

Chris, what we are seeing more than anything else is possibly a consumer that's going to a higher end retailer and looking but then finally shopping and making the purchase at a retailer that would be more value oriented, one.

Two, we are actually seeing at point of sale in some of the same retailers not a weakening of the bedding sales and we think that's because it's a pre-planned purchase and the consumer is basically buying for the first birth and they have nine months to prepare for it. But we are seeing some weakening of some of the disposable items, like bibs, where they are maybe using them longer and not spending the money there. But again the first purchase for the bedding for that first birth we are not seeing softening there at this point. And again, I want to make sure everyone understands that could change.

Sure. Okay. And as far as bib and bath, do you think that that is accounting for the bulk of the sales decline there?

That is a big portion of it, yes.

So that's something that you would expect eventually to reverse?

We hope so.

It depends on if we're in the great depression, I guess.

We hope so. We do hope so.

Okay, great.

Okay, thanks Chris, take care.

Our next question will come from the line of Charles Levy from Smith Barney. Please go ahead.

Hi guys.

Hi, Charles. How are you?

Okay. Keep up the good work.

Good. Thank you.

I see on page 11 of the 10-Q you tell us how many shares you have bought through July 1st. Could you give us any share repurchase count that you completed in the quarter just completed?

That is the quarter that's just completed, Charles.

Well, I thought it was the year.

Yes. Well, it is because we actually did not buy any in that particular quarter, Charles. So the share repurchase program actually expired on July 1st and so in the quarter that we just reported on, there were no shares repurchased at that time particular time.

Is there any repurchase plan in effect now?

Charles, we haven't announced any more repurchase plans, but the investor should not assume that the Company is not repurchasing some. We can buy some block trades, okay, but we don't announce those until the end of the quarter. But there could be some as -- that the Company has made.

So the authorization that you had is still in effect?

We have an authorization, not the same one we had. If you recall Charles, that was $6 million up to one year. That expired in July. We do have another authorization that's at a lesser degree that is still in effect as we speak, yes. But it's smaller, okay, as one would expect in these tighter markets.

We don't need as much money now because the prices --

That's true, sorry.

I have to run to another meeting but keep up the good work, guys.

Thanks, Charles. Take care. Have a good day.

-- follow-up question from the line of Chris Dukeou from Attican Capital Please go ahead.

Hello. I'm back.

Okay.

A question on cost of goods. I know there have been a lot of moving parts there with currency, the Chinese labor environment and all the new testing and raw materials, et cetera, et cetera. But are you guys seeing anything here more recently at your supplier base that might be effects of the credit crisis?

Well, I mean, Chris, we are seeing -- if you follow the exchange rate, the exchange rate was taking a nose dive for the first part of the year on a fairly consistent basis, but that's been since early August or about the time that the Olympics started in China. It has stabilized in the 6.81 to 6.85 range and it stayed there since that particular time, so that's encouraging. It's not a freefall any more, one.

Two, the Chinese government had taken away some percentage points of value-added tax that they allowed for the Chinese manufacturer to -- when they export the goods, they could reclaim the VAT and get money back for the value added tax only on the materials component.

The Chinese government had eliminated some of that. But this year, in August of this year, the Chinese government basically gave 2 percentage points of that VAT back to the manufacturers on most of the products, okay. And then again in November, they actually did another. In some product categories it is 1% and in some it's 2% that they gave back to the manufacturers. So we are starting to see a little bit of a reversal because of -- I mean it's pretty obvious that China is needing the work and a lot of factories have been closing in China, so we are seeing some stability there.

So are any of your suppliers -- we read horror stories in the Wall Street Journal about factory owners just walking away from their factories.

Knock on wood we have not had that at this point, no. We have not.

Have you guys taken any steps to further diversify your supplier?

We do, Chris. We are constantly looking at that. That's not just a day to day thing. We are constantly looking at it. We just have two people that were in China, just returned, one last week, one the week before, and our manager of the Shanghai office is actually in the US now meeting with us and will go back in two weeks. So we are constantly looking at new places.

The foreign office expense that was in the quarter, is that a onetime thing just for setting the thing up or is that -- ?

No. You are going to have continuing expense there.

That's the continuing expense.

There may have been a little bit of startup expenses in that money, but not a huge deal, Chris. Most of it is ongoing expense. It's office and salary related.

Okay. With regards to the SG&A, it's pretty impressive that you guys were able to keep that flat on a dollar basis. Do you see that that level and I guess it's actually a slight increase if you back out some stuff, but do you see that level as being sort of a sustainable dollar amount to support the business?

We sure hope so. We think so. We run a conservative business and we think we can hold it.

One last one here. I realize the business is not quite this simple, but just humor me for a second here. If we were to just take this first half sales number and double that and take your first half EBITDA and first half net income and double each of those, I guess to hit your guidance it looks like you would have to do a little bit better in the second half.

Mathematically it does say that and in reality it says that, yes. We have got to do a little better in the second half, Chris.

So what --

And we obviously must feel that we are going to or we wouldn't have reaffirmed the guidance.

What kinds of things would be driving that? Do you have particular large programs that are slotted to begin or -- ?

We do. We have some that are slotted to come in later in the year. We have some business -- businesses that we had -- that we've regained that are coming back later in the year and we have some onetime placements that are going to come back later in the year.

By onetime placements you mean?

Promotions.

Okay. Were there any large promotions this past quarter?

There were some, Chris, but none -- I'd have to go back and look and I can't answer that question right offhand. I know there was one blanket promotion, but anniversaried year-over-year it would be pretty much the same number.

Okay.

So it's a huge blanket promotion that typically occurs in the second, sometimes it has gone into the third, but this year, I think, it was almost all in the second.

All right. Good. Thank you very much.

You're quite welcome. Thank you. Linda?

We'll go to the line of Gary Steiner from Huber Capital Management. Please go ahead.

Hi, Randall. Just a couple of things.

Hi, Gary, how are you?

Good. Good. Could you -- what are you guys earning on the cash that you have in the bank versus what you are paying on the revolver?

Not a lot. We are earning -- we are earning I think just under 2%. Is that right Olivia?

It was actually, I think, between 1.25% and 1.5%.

It was lower than what I thought, Gary. It is between 1.25% and 1.5%. We are very conservative with the investment. It's basically it's following a treasury bond. The spread is what, about 2 points.

Yes.

The spread that we are losing, Gary, is about 2 points.

Okay. And that's on like $12 million?

On $12 million. Not like, it is $12 million.

Okay. And then just on Springs --

We have got cash. We have got cash though, Gary.

That's good. On Springs, could you just -- I guess, what would be your thought now in terms of your ability to hit sort of the guidance that you had put out or your thought as to the full-year revenue capability of that business as well as given the efficiencies of running that business in-house?

As far as the efficiencies, Gary, we feel very, very good about that and don't have any problem with that whatsoever. We still feel good about the overall guidance that we gave. The product is a little weak at two particular retailers right now, but they are not major retailers. It's weak at JC Penney and it is weak at K-Mart, but other than that it's doing well and it's hitting the numbers. That is the only two places where it's weak. Even with that said, we think we will be very, very close or on the numbers, Gary. From an operational standpoint, we'll hit the numbers.

Great. Congrats on a good quarter in a tough environment.

Thank you.

Thank you.

Okay, Linda.

We'll go to the line of [Harry Long] from [McDonald Long] Please go ahead.

Oh, hi, Mr. Chestnut; hi, Ms. Elliott, how are you doing?

Hi, Harry, how are you? Where have you been?

I've been watching your Company. It's pretty interesting. I was wondering going back to -- I missed the very, very beginning of the call, but going back to Vietnam, I remember there was some discussion about infrastructure not being quite up to par but that they might have some pretty good labor rates. Is there any update on that and how that is developing?

Harry, we still have not moved back into Vietnam or tried to move into Vietnam. The infrastructure still is not there and in our particular business you have got to have the fabric. It all starts with the fabric and China has the fabric and Vietnam just does not have the raw basic fabric that we need to go fabric forward. So at this point it still is not attractive and China is still the most attractive country in Asia to source from.

And is there any update on whether, let's say, Wal-Mart is allocating more or less space to baby blankets than the individual stores overall? Is there any thoughts on that?

No. They are doing a redo and they've only, I think, let's hope at this point redone one store, which is the number one store, I think, in Rogers, Arkansas and I walked through that store a couple of weeks ago and it appeared to be about the same amount of space, Harry, that they are devoting to it. I did not see much of an increase.

I don't know if you want to talk about this on a public conference call, so maybe I should ask another time, but looking Russ Berry, it seems like they have had some, maybe I'm wrong and have some problems, and it looks like their market cap is now very close to your own, especially compared to let's say a year ago. Are there any possibilities in the industry for, I don't know, consolidation or for strategic partnerships? It would stand to reason that their kids line division might be doing better than other parts of their business. Maybe that is something you don't want to comment on.

And honestly, in all respect, Harry, I would rather not comment on it. We have enough problems trying to run our own business much less think about someone else's. So we try to stay very focused on what we do and try to do it pretty good every day instead of trying to worry about how the other guy is doing. So I'd prefer not to comment on that.

Okay. But the only reason I brought it up was just because their market cap was real low. Okay, I won't bring it up again. Thank you so much.

I haven't noticed that. I'll look at it.

Have a good one, I appreciate your thoughts.

Thanks, Harry. You take care. Linda.

There are no further questions in queue. Please continue.

Okay, then we'll wrap up. And Olivia, this is Olivia's first call in her new position as Vice President and Chief Financial Officer and Olivia, you did a great job. Thank you very much.

Thank you.

And after all the investors on the call and for all of our employees in the Company, for all of our customers and for all of our suppliers, we say thank you very much. It is a difficult retail environment and it's an environment that we are struggling to prosper in and we are very pleased with the results we had for the quarter. But as always, we thank you for your interest, your participation and if you have any follow-up questions, don't hesitate to call. Linda, I'll let you wrap up.

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