Crown Crafts Inc (CRWS) 2010 Q4 法說會逐字稿

Hello, and welcome to the Crown Crafts, Inc. fiscal year 2010 fourth quarter earnings results conference call. Your host for today's call is Randall Chestnut, Chairman, President, and CEO.

(Operator Instructions).

At this time, I would like to turn this conference call over to Olivia Elliott, Vice President and CFO, who will begin the call. Ma'am, please go ahead.

Thanks, Jamie. Welcome to the Crown Craft's investor conference call for the fourth quarter and full fiscal year 2010. With me today is Randall Chestnut, President, and CEO of Crown Craft.

Hi. Good afternoon.

A telephone replay of this call will be available one hour after the end of the call through 8 AM Central Daylight Time, July 6, 2010. A web replay of this call will be available for 90 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 very much. And welcome to everyone, and welcome to the fourth quarter and full-year FY 2010 investor conference call. Earlier today, we released earnings for the fourth quarter and for the full-year ending March 28, 2010. And let me touch on a few of the highlights, Olivia will give more detail. And then we'll open it up for my questions that anyone on the line may have.

Net sales for the fourth quarter of FY 2010, the current year, was $26 million, as opposed to $24.6 million in the previous year, an increase of 5.7%. Net income for the fourth quarter was $2.3 million, as opposed to $2 million, or up 15% from the prior year same quarter. Make a note, FY 2009 fourth quarter net income excludes the goodwill impairment charge of $12.6 million net of tax. EBITDA for the total year, FY 2009, was $10.5 million, which is 12.2% from net sales. The EBITDA represents the highest, in terms of dollars, that the Company has earned since 1998, and as a percent of net sales, it's the highest since 1995. Not a bad year, especially in what started as a difficult retail environment.

In addition to a strong finish in sales and earnings, we finished the year with a very strong balance sheet. Our debt at the end of the year, net of cash on hand, was $5.1 million, compared to $10 million in the prior year end. It should be noted that that $5.1 million, 4.0 of that, or just under $4 million of that is the legacy debt, which is interest-free from the previous lenders. We consider this debt level quite remarkable, considering we did an acquisition of Neat Solutions during the year, and we paid cash for that acquisition of over $4 million.

Speaking of the acquisitions, we completed two in the past 12 months. One in the last fiscal year, Neat Solutions, and the second was just a couple of months ago, a month or so ago. The Neat Solutions is one we completed in July of last year. It's disposable products to assist the mother during feeding and potty time. The second was Bibsters, which we acquired from Proctor & Gamble, which is a disposable bib. And now if you consider those two items, 8% of our business is disposable, as we speak. So we're really pleased with those acquisitions, and those were acquisitions that we were able to roll up, with adding very little overhead to the Company, so they became accretive almost immediately. During FY 2010, our NoJo business, which we talked about for the past two quarters, increased 22%, as we continued to get great designs and great placement, with some of the best selling designs in the industry. And we're pleased with the progress we made in the NoJo brand for the past year.

In addition, during the year, we began paying a dividend, first time the Company has afforded to pay a dividend since 1999. And we've now announced two consecutive quarters of paying dividends. The fourth quarter and full-year FY 2010 were successful. We're very pleased with our results. I would also like to take this opportunity to express our gratitude and continued support and contribution from all of our employees, customers, suppliers, lenders, and shareholders. I'll now turn it over to Olivia to make additional comments.

I'm going to give the financial highlights for the quarter and year. For more detailed analysis, please refer to the Company's Form 10-K filed with the Securities and Exchange Commission this morning. Sales of bedding, blankets and accessories decreased $5.5 million to $66.4 million in fiscal year 2010, as compared to $71.9 million in fiscal year 2009, due to an increase of $20.6 million related to shipments of new bedding and blanket programs, which was offset by $20.5 million in discontinued programs, and $5.6 million in lower replenishment orders.

Sales of bed, bath, and disposable products increased $4.2 million to $19.7 million in fiscal year 2010, as compared to $15.5 million in fiscal year 2009. Sales increased by $4.9 million, due to sales of new designs and promotions, and higher replenishment orders, and $3.5 million due to the Neat Solutions acquisition in July 2009, offset by a decrease of $4.2 million due to programs that were discontinued, and lower initial program shipments.

Gross profit increased in amount, and as a percentage of net sales for fiscal year 2010, as compared to fiscal year 2009. The increase in the percentage is due primarily to decreased amortization costs of $344,000, and the absence in the current year of $243,000 in charges incurred in the prior year related to transitioning away from the Company's warehousing and shared services agreement, all of which were associated with the Company's acquisition of the baby products line of Springs Global in November 2007. Also, the Company in the current year has incurred decreased product development costs of $199,000, and decreased costs of $73,000 to operate the Company's foreign representative office in China, offset by $187,000 increase in testing costs and increased amortization of $42,000, associated with the Neat Solutions acquisition.

Marketing and administrative expenses for fiscal year 2010 increased in amount, and as a percentage of net sales, as compared to fiscal year 2009. In the current year, the Company incurred $667,000 of costs related to the Neat Solutions acquisition and related integration. The Company has also incurred increased advertising costs of $166,000, and increased factoring fees of $268,000. These increases were offset by the absence in the current year of $195,000 of costs incurred in the prior year, that were associated with the governance and stand-still agreement entered into in July 2008 with Wynnefield Capital.

Interest expense for fiscal year 2010 decreased to $690,000 from $1.1 million in fiscal year 2009, due to lower variable rates and lower average balances on the Company's term loan and revolving line of credit. Total debt outstanding decreased from $25.2 million in 2009 to $5.2 million in 2010. During the fourth quarter, the Company announced it had amended it's financing agreement with CIT Commercial Services, to extend the termination date of the revolving credit facility three years to July 2013. The amendment also permits the Company to declare cash dividends on it's common stock, of up to $500,000 in any calendar quarter.

Net income for the fourth quarter of fiscal year 2010, was $2.3 million or $0.25 per diluted share, compared to net income of $2 million, or $0.21 per diluted share in the fourth quarter of fiscal year 2009, after excluding a $12.6 million after-tax charge related to goodwill impairments. Including the goodwill impairment charge, the Company reported a net loss in the fourth quarter of fiscal year 2009 of $10.6 million, or $1.15 per share. Net income for fiscal year 2010 was $4.8 million, or $0.52 per diluted share, compared to net income for fiscal year 2009 of $4.5 million, or $0.47 per diluted share, after excluding the $21.6 million after-tax goodwill impairment charge. Including the goodwill impairment charge, the Company reported a net loss for fiscal 2009 of $17.1 million, or $1.83 per diluted share. I will now return the call back over to Randall.

Olivia, thank you very much. And Jamie, I'll call you back up, and you can now introduce the procedure for questions.

(Operator Instructions).

And our first question comes from David Kanen from First Midwest. Sir, please go ahead with your question.

Good afternoon. Congratulations on a very good quarter.

Thank you. And good afternoon to you.

My question is, I saw gross margin year-over-year increase to almost 27.5%. Is that increase sustainable going forward? Can I use that kind of a number to model you guys out?

Olivia, hold on one second, and I'll start the question. Basically, the increase in the gross margin, David, is attributable to three or four items, and I'll let Olivia elaborate on those if we need to. One is volume, okay. The volume with the amount of overhead has a contributing factor to increase the gross margin percent. The second was Neat Solutions, we did not have in the previous year. We had it in this year. If you've been following us, keep in mind the way we did the Neat Solutions acquisition, for the first three months of the acquisition, which would have been through September, we still maintained an office in North Carolina. And at the end of September last year, we shut that office down except for two people.

Those two people stayed through December, but at the end of December, they departed. So during that time, we -- we shut the office down, so when we got into this quarter, we had none of the office expense, and none of the payroll expense, except for one person that stayed with us, that's still with us, on a consulting basis. So we got the effect of the Neat Solutions. The second -- the third item was the transition of Neat Solutions product from -- from domestic manufactured -- quite of bit of it when we acquired was still domestically produced, and we transitioned. And we saw some of the effect of that in the fourth quarter, as it hit Asia. And the last one, that Olivia addressed in her remarks was the amortization of the Springs Global baby division acquisition, which sort of rolled off. So does that answer your question?

It does, thank you.

You're welcome.

So, contribution from Neat Solutions overall is accretive to margins, is that right?

It is, it is accretive to margin, yes.

Okay, and then one more question related to Neat Solutions. Have you guys been successful in closing any large national restaurant chains, in terms of the disposable place mat product that they have?

Well, I think you probably know if you've been following us, we have one major, that we have in the camp already. And we have not been successful. We closed some minors, but no majors as of this point. But we have some that hopefully, that we can close in the not too distant future, but we haven't yet.

Okay. Is this business, like modeling it forward, is it something I should assume is flat, or do you expect organic growth from it?

We expect some organic growth in this business. I mean there's some major retailers that don't carry the product now, that we think we will sign on within the next 12 months.

Okay. Thanks, guys. Good luck.

Thank you.

Our next question comes from Nelson Obus from Wynnefield Capital.

Hi, Randall.

Hey, Nelson.

When you look at your beddings and blanket and accessory, the core business in the Company, and you look out, say, five years, do you see that getting into a growth mode again, or will -- do you kind of envision it as a cash cow?

In the bedding, blankets and accessories, Nelson, we have a significant market share as we speak. I mean, with many of the major retailers, we have the overwhelming market share. And with some others, we gained market share. I will see some organic growth, but when you reach the plateau of 25% to 30% market share, it gets more difficult. So growth is going to come from organically, from product line expansion to complement what we do. And we've been doing that. Our bedding -- our room decor items have grown exponentially over the last few years. So you will see some growth, okay, just as we, as we've been reporting quarter after quarter. But the NoJo growth with the placement of the new design, you'll see some. But when you have a 25 to 30% market share, it becomes more difficult.

Okay. One other question. For reporting purposes, I noticed Target dropped off the radar this year in the K. Are we still -- was that a significant drop in business, or just enough to get it below the reporting threshold?

It was enough to get it below the 10% threshold, Nelson, but it wasn't a significant number. If you recall last year, there was a classic pooh that cycled out, and we lost it to a competitor. And then that competitor lost it entirely and Target eventually dropped that license entirely. It all happened during last year. So that rolled off. That was a drop, but again, the number, it was just slightly above 10, now slightly below 10.

Okay, thank you.

You're welcome.

Our next question comes from Bobby Melnick from Terrier Partners.

Hi, Randall.

Hi, Bobby, how are you?

I'm well, thanks. Two unrelated questions. Could you explain the increase in the factoring fees which you cited in the financial review that went from $352,00 to $619,000?

I can, Bobby. The biggest factor of all, is there's a surcharge on one major customer, that all factors are charging at this day and time. That's the biggest increase of all.

Is that a permanent status?

I hope not, okay? We, we hope it's not permanent. But it's, it's with a major customer, and we hope that can be resolved and be reduced sometime over the next year.

Because -- and again, I know I said two questions unrelated, so this is sort of 1(b) or 1 (c). You and I have spoken about this. I mean the permanent issue is what, what are the costs of factoring our receivables, versus what would it cost us to sort of greenfield a collections department, which we at the moment don't have? And as the previous caller cited, while Target is slightly below the threshold, we're still getting nearly three quarters of our business from three credits, which are pretty good credits.

And so it then raises the question, if we're collecting, whatever, a quarter of our business, let's call it $20 million to $25 million at what point does it make sense to hire some people in the receivables department, and sort of work the collections the way other companies do? And as the factoring fees goes to $600,000 plus and we're not really capping CIT per se. I mean at the end of the year we didn't have any credit on the CIT line, one starts to scratch one's head, and say, good grief, for this kind of money, could we do this by ourself? And I would like to hear your thoughts on that.

Okay, now Bobby, let me address the first one first. Our business is concentrated with three major retailers. Without calling the name, one of those major retailers is the one that has the surcharge on it. And that's causes the big increase. It's something, Bobby -- and let me answer the question directly. It's something we look at on a constant basis. It's not that we factor -- because we factor as credit insurance. We don't take advances on the factor, except for -- I think you know this. The way we factor is, we factor on terms plus two days. So if it's sold on 30 days, we get paid on 32 days. If it's sold on 60 days, we get paid on 62.

So the only advance is from that day until the day they actually collect it. So that keeps the rate lower, one. Two, we don't operate a credit department. All receivables are posted by CIT. And so therefore, it's not something that we have to run a credit department, not from a credit checking standpoint, or from a posting and billing standpoint. I mean we bill it, but we don't have to do all the postings, and work all the chargebacks, et cetera. And last, but not least, it's really credit insurance. But with that said, it's something we do look at an ongoing basis.

Okay. Second question, unrelated -- thank you for that. Second question, unrelated, Neat Solutions, is there seasonality to the sales of that business? In other words, you acquired the business, we had it for 9 of the 12 months, the last nine months, not the first quarter, and we did $3.5 million in volume. For that $3.5 million in volume, we paid $4.4 million, and as you said in your financial discussion, we had some $500,000 or $600,000 in integration costs. Is that $3.5 million -- I mean should one annualize that,and say it's a $4 million, or is it a $3.5 million business, or more?

No, hold on, Bobby. You can annualize the numbers.

Okay. So if we did -- I'm just trying to get a sense of valuation in the industry. We did, let's say $4.5 million plus or minus.

Call it 5, Bobby.

Call it $5 million is an annual run rate. That's slightly -- at higher margins, because you said to a previous questioner, that it's an incremental margin. So let's say that it's contributing double-digit EBIT margins, because that's what the business did in the fourth quarter. So we paid $4.5 million, and had $600,000 integration. So are all-in costs of Neat Solutions was around $5 million to contribute $600,000ish in EBIT?

No. Bobby, the EBITDA contribution on Neat Solutions on incremental basis, because we didn't add any overhead, okay. We only added one person to the payroll. And as I said earlier, we kept one person in Charlotte to assist us in the sales area on a part-time basis. So the contribution to EBITDA on Neat Solutions is -- it's -- hold on. I'll give you -- it's better than 20%, Bobby. It's a good bit better than 20%.

Okay, all right. So year one before growth, we paid year one, sort of a 5 multiple on EBITDA--

Bobby, I was just corrected. It's actually 30%, okay.

30% contribution--

It is a 30% contribution. Again, look at it this way, Bobby. You bring in the sales, and you bring no overhead.

Right.

And keep in mind, let me walk you through the deal again, okay? We bought, we bought the product, and we bought it in June. The office was in Huntersville, North Carolina. At the time we acquired it, they had six or seven employees. We kept all employees for three months, during the first three months of transition. We kept two of those employees, the two highest paid through the end of the year, okay, at full salary, and we kept the office. And the office, we had another year on the lease, and we had to write it all off in the December quarter, which we did. And we -- one of the employees departed. And the other one stayed at a much reduced rate on a consulting basis.

Then they had the warehousing in a public warehouse in Chicago. We closed that down. We moved it. We integrated it within our square footage in Compton, and didn't increase the square footage. So therefore you get the contributing margin, without the cost of any additional warehousing. We did hire one additional person here in Gonzalez, who is the product manager for the brand category. And she'll also serve as the product manager for the Bibsters category. So no one was hired on that one. So that's the way it contributes in excess of 30% EBITDA, Bobby.

Okay.

That's the way it works. Do you follow me?

I -- it sounds like a very lucrative acquisition.

It was a very lucrative -- it's a lucrative acquisition once you get it integrated, Bobby.

No, I understand. If Terrier partners went and bought it, it wouldn't be that profitable. For you to fold it in, it might be.

That's right. You would have to keep a warehouse. You would have to keep a staff,.

Got you, all right, thanks.

And the Bibsters, which followed on, we did a month or so ago, it followed the same model.

Got you. Thank you very much.

Thank you.

Our next question comes from David Kanen from First Midwest.

To follow up on Neat Solutions, are you currently developing extensions to your product line in that division? And if so, when do you expect them to be released? Can we -- should we see something this current year? Thank you.

David, the answer to those questions, is yes and yes. I actually met with the product development people this morning and authorized the purchase of a new product that we just designed that we're going to roll out, that I would rather not say on the line, what it is. But it compliments it, and we think the product is right, and the timing is right. We authorized the purchase of the product this morning. So, yes, you will see more product this year.

Okay, thank you.

You're welcome.

Our next question comes from [Ralph Marash] from First Manhattan Company.

Hi, how are you doing?

Fine, Ralph, how are you?

Okay, thanks.

Good.

I just wanted to check in on your thoughts on labor in China. Obviously you cannot predict if or when the factories that you contract with may have labor issues, but I'm sure that you've thought some about it. I'm just curious if you can share with us some of what your thinking is?

Ralph, we are concerned that there could be labor issues. We have not as of this moment run into severe problems where labor's not available. But we have moved goods around, with both companies in the last six months to spread our risk, and we are doing that. So we aren't concentrated in as few a suppliers. And we have spread that out quite a bit more. We're also concerned about the recent announcement by the Chinese government that they are going to let the RMB float again, and we're watching that.

And last, but not least, we're watching cotton costs in China, as it has been rising and we're keeping a close watch on that to be sure we, we can react appropriately for that. But to go back and answer your question, the biggest thing is on the labor, we're trying to spread our base around to be sure, if there is a labor shortage, that, that we are not affected by it, in a big way. The other one, in one of our businesses, we've always kept a little bit coming out of Thailand, and we're actually sort of boosting that back up a little bit, and getting some more goods out of Thailand.

Can you estimate if you had to change factories within China, or if you had to move away from China the length of time of a potential disruption?

I don't -- I think it would be minor. I really do. I don't think we would have a major effect, because in almost every major category we're in, we, we've got double suppliers.

Okay.

And it would be very minor. I mean, we had a situation a few years ago, where we had to move from Thailand -- excuse me, Indonesia back to China because the supplier didn't deliver. And that had to be abrupt. And we only missed just a very few weeks of shipments, and we regained that very shortly.

Among your competitors, do they have very similar sourcing? Is there anybody -- I don't care about the name, of course, but is there any competitor that has much different sourcing from you?

I don't know that much about them, honestly, Ralph, because I think they are a lot like we are. They keep moving. So I really am not -- I don't think I can answer that question. I don't think there's anything majorly difference between us and the other ones, though.

Okay, thanks, Randall.

You're quite welcome. Thank you.

Our next question comes from Arnold Brief from Goldsmith & Harris.

Good afternoon. I'm just wondering, you don't have to get into specific names of what a company's doing, but I'm just wondering whether you could review a little bit in general terms, the inventory positions of your major customers. Are they starting to add after periods of inventory reductions? Do you see any positive impact from that?

We saw some of that in the quarter, Arnold. It's very true. Because our retailers, as you know, their year ends in January, most all of them, not all. But most of them end in January. So not unlike a lot of people, after Christmas they try to draw inventories down to a low level. And once they do that, they wake up in March, or excuse me, February and March, and realize, geez, in order to sell goods, I've got to have goods on the shelf. So you get a resurgence there. So I think you saw inventories maintained latter part of last year and early part of this year, and through January at a very low level. And then you started seeing some opening up and rebuilding of inventory. And that started in February and we have not seen it turn back down. So I would say we saw the low dip in January, and then the rebuild February, March, April, May, et cetera.

Thank you. Do you see any change in the -- I don't know if you track it at all, any change in the number of births, children being born?

We, we did some research on it two weeks ago, and the forecast is that it's going to be down slight bit from when the 2009 official numbers are released. But it was a very slight percentage, and it was predicted to go down for 2009.

Thank you very much.

Yes, sir.

Our next question comes from Gary Steiner from Huber Capital Management.

Hey, Randall, couple things.

Hi, Gary.

I guess just one on the P&L, there's a line item for discontinued operations. I don't know if you had spoken to that and I missed it, but what was in there?

We had not spoken to that, but it's Churchill Weavers, which we discontinued two years ago. And it's really just the -- we're still on the property in Kentucky. So it's the maintenance on that property, the taxes, et cetera, and insurance that is associated with maintaining that property.

Writedown in the quarter.

Oh, yes, there was a writedown in the quarter. I'm sorry. There was a writedown in the quarter. How much did we write it down?

It was a hundred --

As real estate, Gary, while they are looking for the numbers, real estate got less valuable in parts of the country including Berea, Kentucky. We actually wrote the value of the, the book value of that property down another $154,000 in the quarter.

Got it, okay. So you've -- I'm sure you took a provision at the time and just -- and the value deteriorated--

The value deteriorated, and we had another appraisal on it, so we marked it down and we took that we failed to mention that, that that also hit in the quarter as--

Okay, got it. Thank you. And then just in terms of acquisitions, you've obviously talked about Neat, and you talked about Bibsters. Wondering what the M&A environment looks like out there generally speaking, and whether you see other opportunities in the next 6 to 12 months

I mean, we do see opportunities, Gary. There's a lot of opportunities out there. You got to sort through them and see which ones are good and which ones are bad. But we try to keep a couple on the radar at all times, because for every few that you look at, you're not going to bring but one or two of them to fruition. So we're constantly looking.

Okay, and how far along are you at this point with Bibsters? I mean, there was a lot of conversation earlier on in the call about Neat Solutions and the financial impact of that. How far along are you at this stage in the process, in terms of the integration, and your comfort level that you could achieve the types of returns with Bibsters that you did with Neat Solutions?

That's a good question, Gary. We should have addressed that early on upfront. And I apologize that we didn't, and you had to bring it up. But Bibsters, unlike Neat Solutions, came as a clean operation. We did not have to inherit any employees at all. So we don't have a six-month work off. We don't have an office to work off, et cetera. We shut -- when we did the deal at the end of, end of May, we shut -- it was Memorial Day weekend actually. We shut the operation down. We took inventory at the current supplier, that P&G had licensed us to, and we never shipped another piece out of there. We moved that inventory over the weekend and the next week. We were literally shut down from shipping one week.

The next week we had it back in our Compton California facility, and we were up and shipping. And we were shipping to all major retailers. And so we feel very good. The integration is done. That's, that's a sweetheart deal. The integration was done. There's no work-off of the employees. There's no work-off of offices, et cetera. All the product had been produced in the USA. And we're still, we're still bringing some of that in out of the US. To get the full effect of that, it's going to take probably four to six months to get that transition to Asia. We, we actually now, I think have placed our first PO with Asia, just within the last few days. We don't have goods yet, but we place the PO.

Okay, and so I guess when you're -- and this will be my last question, but I think at the time you announced the transaction, I think you said it would contribute something like $3 million in, in revenues. So based on some of the incremental margin numbers that you commented on relative to Neat Solutions before, is it your thought that Bibsters could be a similar kind of incremental margin to Neat Solutions, or do you think it would be less attractive?

It will be close, Gary. It will be very, very, very close. It may not be quite as good, because the previous supplier had prepaid freight on some of this, to some of the major customers. So we have to factor the prepaid freight in. But it will still be in the high, high 20s, low 30s.

Great, thank you.

Thank you.

(Operator Instructions).

Our next question comes from Nelson Obus from Wynnefield Capital.

My question was answered.

Okay, thanks, Nelson.

(Operator Instructions).

Okay, Jamie, we'll wrap it up. I don't think we've got anyone else coming on. And Olivia, thank you for your help, and we appreciate everyone's time and attention. As again, I say we are very pleased with the year, of what started out as a difficult retail environment, ended up a banner year for us, for which we are very, very pleased with. And again, I would like to extend my appreciation to all of our stake holders, including the shareholders that are on the line, and all shareholders. Thank you very much, and we'll speak to you again when we have the results for our Q1. Have a good day.

That concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.