Crown Crafts Inc (CRWS) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Crown Crafts, Incorporated investor conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. (Operator Instructions). As a reminder, the conference is being recorded. And I would now like to turn the conference over to our host, Vice President and Chief Financial Officer, Olivia Elliott. Please go ahead.

Thank you. Welcome to the Crown Crafts investor call for the third quarter of fiscal year 2010. With me today is Randall Chestnut, President and CEO of Crown Crafts.

Good afternoon.

A telephone replay of this call will be available after 2:30 PM Central Standard Time today through the end of the day on February 17th. 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, thank you. Good afternoon again. Earlier today the Company reported results for our third quarter of FY 2010, which ended December the 27th of 2009. And I'll touch on a few of the comments related to the quarter. Net sales for the quarter were $20.6 million as opposed to $19.3 million in the previous year same quarter, or an increase of $1.3 million or 6.7%. Net income for the quarter before the impairment charge of $9 million for the write-off of goodwill incurred in the third quarter last year was $1.113 million this year as opposed to $822,000, again, net of the $9 million, or an increase of $291,000 or 35.4%. EBITDA for the quarter was $2.3 million this year as opposed to $2.1 million last year, or an increase of $200,000 or 9.5%. $1.1 million of the sales increase in the third quarter was from the acquisition of Neat Solutions, which occurred in July of 2009. The balance of the business was relatively flat. However, in this retail environment, we're pleased with those numbers.

The Neat Solutions integration has progressed very well. During the course of this quarter we closed the office in North Carolina. All the functions were integrated into Crown Crafts. The distribution center was also incorporated with our existing distribution facility in Compton, California. In addition, sourcing for the majority of the business has been and is being moved from the US manufacturing to Asia. The gross profit percentage increased from 19.7 in Q3 of '09 to 22.5 in Q3 of 2010. Part of the increase was aided by the decreased amortization costs related to the purchase of Springs Baby Product division, Springs Global Baby Products division, which occurred in Q3 of FY 2008 and those amortization costs expired. Several years ago, and we've reported this the last few times, several years ago we began an extensive effort to rebuild and recapture sales in our premier brand, Nojo.

In the third quarter shipments of the Nojo product increased 30% over the same quarter last year, and shipments increased 17% year-to-date for the nine months of this year versus the same nine months of the previous year. We're extremely pleased with that progress. During the quarter we returned $12 million to CIT, our lender. As most of you are aware, because of the financial difficulties of CIT, we had fully -- we'd remained fully drawn on the revolver for over 18 months. After CIT emerged from bankruptcy late in the third quarter, our third quarter, we returned these funds and finished the quarter with a debt of $5.6 million. And I would like to note that $3.7 million of that is the legacy debt, which is interest-free, with only $1.9 million being on the revolver with CIT at the time. We're pleased with the strength of our balance sheet.

We're also pleased to announce this quarter that the Company's board of directors has declared a cash dividend on the Company's common stock of $0.02 per share to all shareholders of record at that close of business on March the 12th, 2010, and payable April the 2nd, 2010. Over the years the Company has employed several strategists to provide value to our shareholders, including the repayment of debt, targeted acquisition, and share repurchases. This cash dividend will provide immediate value for our shareholders and demonstrate the continued confidence in the Company's earnings capability and the strength of our balance sheet. Even in a challenging economic environment, we're excited about being in position to do this and to further enhance the success of the Company and share part of the value of the prosperity with its owners. To conclude, I will say we're pleased with the quarter. We were pleased with the results. I will turn it over to Olivia, so she can make additional comments. Thank you.

I'm only going to give financial highlights for the quarter and year today. For more detailed analysis, please refer to the Company's Form 10-Q filed with the Securities and Exchange Commission this morning. Sales of bedding, blankets, and accessories decreased during the quarter. Sales decreased by $5.9 million due to discontinued programs and lower replenishment orders, which decrease was offset by $5.4 million in shipments of new bedding and blanket programs. Bib, bath and mess protection sales increased during the quarter. $1.1 million of the increase was due to the acquisition of Neat Solutions in July, 2009 and $0.7 million was due to an increase in sales of core products. Sales of bedding, blankets, and accessories decreased year-to-date by $20.3 million due to discontinued programs and lower replenishment orders, offset by an increase of $14.2 million in shipments of new bedding and blanket programs.

Bib, bath, and mess protection sales increased year-to-date due to $2.2 million in sales associated with the Neat Solutions acquisition and $1.1 million in sales of core products. Gross profit increased in amount and as a percentage of net sales for both the three and nine months periods of fiscal year 2010 as compared to the same periods of fiscal year 2009. The Company has incurred lower cost associated with its acquisition of the baby products line of Springs Global in November 2007, including lower amortization cost of $138,000 for both the quarter and year-to-date periods, as well as the absence in the current year-to-date period of $243,000 in charges incurred in the prior year related to transitioning away from the warehousing and shared services agreement. The Company has also experienced lower product development and foreign office costs, which were offset by higher testing costs.

Marketing and administrative expenses for the third -- for the three and nine-month periods of fiscal year 2010 increased in amount as compared to the prior year. In the three and nine-month periods of the current year the Company incurred $201,000 and $632,000 respectively of costs related to the Neat Solutions acquisition and related integration. The Company has also incurred increased advertising costs and factoring fees. These increases were offset by the absence in the nine-month period of the current year of $195,000 of costs that were incurred in the same period of the prior year that were associated with the governance and standstill agreement entered into on July 1, 2008 with Winfield Capital and its affiliates. I will now turn the call back over to Randall.

Olivia, thank you very much. And Bonnie, if you will come back, then we'll open it up for any questions that anyone on the line may have.

(Operator Instructions). We have a question from Arnold Brief with Goldsmith and Harris, please go ahead.

Oh, didn't know I would be first in line.

Hey, Arnold.

Good morning. Good afternoon, I should say. With the increase in Nojo continuing in a very positive manner, I haven't worked out the numbers, but if you take out the acquisition in Nojo, the rest of your product line would seemingly be losing some market share. Is that going to stabilize or is Nojo replacing some of that product? Is Nojo taking market share from someone else? I don't think market share from yourself, I now what's going on with your core lineup apart from Nojo.

Arnold, we didn't lose market share and I beg to differ with you there.

I raise that as a question, not as a statement.

No, okay. What we did lose is we had a major retailer that their business was significantly down during the quarter and without the placement loss, just the point of sale was down. And it was all related to the economic situation.

Their drawdown of inventory.

Part of it was draw down of inventory. But it is hard -- no, actually the point of sale was down, too. They were both down. Inventory was down and point of sale.

Thank you.

Very good, thank you.

we have no further questions in queue at this time.

All right. We'll give it one moment, if you will, Bonnie.

Thank you.

And if we don't have any more we'll conclude.

And we have he a question from [Michael Bernstein with DWI Holdings]. Please go ahead.

Hi, Randall, how are you today?

Fine, Michael. How are you?

Okay. I've noticed infant product at Costco with the Disney brand. Is that you or are they sourcing that in some other way?

Part of it is ours, Michael. It depends on when you saw it and part of it was not. It was another supplier that has shipped product into Costco. So it depends on what you saw and when you saw it.

Okay. Is that a decent size business for you.

The one that is currently in the store now or either on the way, and I'm not even sure it's on the floor yet, was fair sized, but it's not huge business, but it's fair size.

Okay. And Target, who had been sourcing all of their Winnie the Pooh product through you, but they have the right to source it anyplace to my understanding, are they still sourcing it all through you?

No. As a matter of fact, it was sourced through another party for a short period of time, but as we speak it has been discontinued and they no longer carry the classic Pooh brand.

So what has happened to classic Pooh?

As of this point it's still, it's back with Disney and nothing has happened to this point.

Is that something you're interested in getting back?

We're always looking for new opportunities, but as of this point, it's still with the Walt Disney Company.

Okay. But wasn't that at one time a huge part of your bedding business?

At one time, it was. At one time it was a huge portion of it. And Disney chose to go on what they call direct to retail, which is what you're alluding to, and they gave it to Target. And it stayed for, I'm not even sure of the duration, five years, I think. But Target is now discontinued that.

Do you think that could be a major opportunity if you could get it back or is the brand tired?

Again, we don't speculate. The brand's got some age on it. But, I mean, it's still a very desirable brand, but it's got some age to it. But as of this point, it's not for us to speculate. The brand belongs to the Walt Disney Corporation.

How large now, without that, is your Disney business?

We don't segregate those numbers by license, but we do say that the license business last year was, hold one second, and we'll tell you how much Disney was of the total business, but that's not just Pooh, that's many, many, many licenses and a lot of it is in toddler beds, which includes cars and the movies.

Right.

33% is Disney and a total of 51% which includes Disney is license.

Okay. And that's probably now concentrated more in your non-infant category?

No, infant is still big. Infant is still big. But with the acquisition of Springs Juvenile, the Springs toddler bedding business, the toddler beds became a much larger percentage and that is basically all licensed revenue and always has been.

Right. So, distorts that number, but the infant is still significant. Are you picking up any, I don't mean to monopolize this, but are you picking up any market share at Babies"R"Us, Toys"R"Us.

We think we are. Obviously, the premier brand that we're alluding to, Nojo, lives at the higher end of the market and Babies"R"Us, Toys"R"Us is classified as that higher end of the market. So we think we -- we've done very well with that brand and the refocus and the retooling of that brand.

Okay. One of the questions, I don't know if you addressed it, that I asked you, but might, for other people, might need some clarification, when you read the dividend and what was authorized, unless you realize that the $500,000 is key to your loan agreement ending, it looks kind of weird. I don't know if you made that point to others.

Michael, I don't think there's a point to make. As I made it to you, we filed -- what Michael is alluding to and let me refer to give it to everybody on the call. He sent me an e-mail earlier today and said that the loan agreement only provided we could issue $500,000 in dividends and would we to have go back and get approval if we ever elected to issue dividends again. Well, the loan agreement with CIT expires July the 11th of this year. So obviously, a lender's not going to grant authorization to pay dividends beyond the life of the loan agreement. So that's what Michael is alluding to. But the loan agreement expires July 11th. so there was no need to get one beyond July.

Oh, no, I understand that, but when you read it and you don't realize it expires, you could read it in the wrong context. So I appreciate your clarification.

Okay, thank you very much. Bonnie?

We have a question from Arnold Brief with Goldsmith and Harris, please go ahead.

The industry basically is, I think, characterized by a reasonable degree of stability in terms of final demand. Obviously there's fluctuations with retail inventories. But I think in this latest period, there was some trading down in terms of price points. There was some trading down probably in terms of buying less accessories. And I don't have current numbers, but the number of births were actually down, I think 128,000 through April of '09, which would have a significant impact, a few percentage points, at least, on final demand. Could you sort of give us some feel for how you think these things affected your business and the industry and whether or not you see any changes coming in the birth rate, in consumer spending, trading up again, purchase of accessories, et cetera and so forth?

Arnold, I will try to shed some light on it. We have seen some changes and you are right, the birth rate -- given a number there of the decrease insofar as '09. I haven't seen that, but it wouldn't surprise me, because with the economy the way it is and the unemployment rate, or the jobless rate being double-digit, it does have an effect on the birth rate and it has been a slowdown, and with that, to answer, and that does effect, when you're off a point or two in the birth rate, we cater to the birth and particularly the first birth is where the money is spent and we cater to that. So it does have a significant effect on it, no question about it. Is there some trading down? Yes, we're seeing some of that. Is there some shortening? We're seeing some of that.

Instead of a person buying -- in previous lives we had said, okay, the person typically will run through 12 baby bibs in the first year and they'll run through eight blankets, I think were the numbers. We're seeing that down a little bit, because we're seeing the consumers being more conservative, buying less, and maybe laundering the product more. So, yes, that all that in total has affected the industry to some degree. And how is it going affect in the future? A lot of that is going to depend on when the economy stabilizes and when the birth rate changes and when the unemployment rate improves.

You don't see any changes on the up side at this point?

We're obviously -- in the total market, I haven't seen a tremendous increase, no.

One other question, as long as I don't think the line is long in terms of questionnaires, this is an industry, I think, that is on the verge of consolidating. There's an awful lot of small manufacturers. I don't think you have access to equity capital with the stock at this price. I'm sure the dividend increase announcement was an attempt to resolve that issue to some extent. I'm not quite sure of your borrowing power at this point. I know you have some because you don't have much debt. But do you see yourself as a consolidator at this point, being able to raise capital to participate in that, what I think is going to be a trend?

Arnold, we do, no question about it. And we've done three acquisitions now over the last three-and-a-half years and we do see ourself being in a position for that and we alluded to that in the press release that by paying the dividend, we don't see that affecting strategic opportunities going forward at all. We do have a lot of borrowing power. Our debt is very low and we generate a lot of cash and we've used that to retire debt. If you are going to be in this environment, in this tough retail environment, and in this economic situation, I like our balance sheet. So yes, we think we're in that position.

Would you consider, as a part of your strategic planning, to move out of the soft goods area into hard goods or gear, however you want to label it, or do you want to concentrate in the soft goods area?

Again, that's speculation. It would depend on the Company, the opportunity, the product. There's some that in the hard head side that right now, with the safety products and the recalls, I'm not sure I want to be there. But it doesn't preclude us in looking at other parts of it. I mean, the Neat Solutions was a departure from what we're doing. It's non textile. So we're not opposed to venturing outside the box.

Could I go back to that first question I asked? With Nojo sales being up 17% for nine months, it's obviously taking market share and I don't know how the whole total industry is doing. I don't know that the numbers are current enough, but you can make a case that on your total sales are probably at least even with the market, maybe up relative to market. But if you take Nojo out of your sales and the acquisition out of your sales, your other bedding and accessory line -- lines, I should say, are down rather substantially and I'm just wondering how do you view, excluding Nojo, how do you view the strength of the rest of that core bedding accessory line? I think you give Nojo percentage of sales. Could you update that number for us?

Well, Arnold, we don't disclose that number.

I thought it was in your 10-Q.

The Nojo sales, it's not.

No, okay, I'm sorry.

And, Arnold, I thought I answered the other question. We have (multiple speakers).

Well, you answered in terms of the total in Nojo, but it seems to me that the rest of your line has to be down very substantially.

I answered that, too. And we had one major retailer that their business was off substantially. And it was off in inventory adjustments and it was off in point of sale.

Could you tell us, is that BRU?

No. It was another major retailer.

Okay. All right.

Thank you.

And we have a question from Nelson Obus with Wynnefield Capital, please go ahead.

My question was answered.

Okay, Nelson. Nothing else? Okay.

We have Michael Bernstein with DWI Holdings, please go ahead.

Randall, what percentage of your product is now sourced out of China?

A substantial portion is. I mean, we still source a little out of Thailand and we source some out of India and a few other countries. But a guesstimate is that it would be in the mid to upper 90% range.

I'm seeing that China right now across most categories that are cotton or poly cotton based are raising prices rather substantially. Are you facing price increases if you go back to, let's say, October until now and if so, are you able to offset those price increases by increasing your top-line prices?

To answer your question, we are seeing price increases and in some cases with some retailers it's difficult to pass it on, but in some cases we are passing it on. But we are seeing both. We are seeing the increases due to cotton, the increase in cotton prices out of Asia, and -- but in -- we are trying to pass it along as much as we possibly can.

There has been some softening in cotton prices in the last week or so, which is the first time in a long time. Are you able to get firm price commitments from your suppliers, for example, through 2010 through July? I mean, how tight is -- when you're buying from someone are you ordered to order? Do you have six months protection? Do you have a year's protection?

Our business is much like most everybody's, because style has changed, designs changed, and it's order to order. So every order is negotiated on a set price. It's -- because you don't buy product and it continues for a long period of time. It's difficult in a lot of cases to get that kind of protection for that long a period of time.

So you would be very sensitive to currency adjustment, even though no one anticipates that's really going to happen.

We are very sensitive to that, and -- but we react to that when it occurs by either adjusting our cost or raising prices or in some cases, finding new vendors and finding new countries.

Thank you.

Thank you.

And no more questions.

Okay. Then, Bonnie, if there's no more questions, we'll wrap it up. And Olivia, thank you for your help. And thanks all the investors that were on the line for your questions and participation. And to remind everyone, this -- we are on a March year ending, so our next quarterly conference call will be our year-end conference call, which will be sometime in early to midsummer. So we thank you very much for your interest in the Company and if you have questions in the meantime, don't hesitate to give us a call. Thank you.

Ladies and gentlemen, the call will be available for replay today after 2:30 PM until midnight on February 17th. You may access the AT&T Executive Playback service at any time by dialing 1-800-475-6701 and entering the access code 144152. Again that number 1-800-475-6701 and access code 144152. That does conclude the conference for today. Thank you for participating and using AT&T Executive TeleConference. You may now disconnect.