Crown Crafts Inc (CRWS) 2011 Q1 法說會逐字稿

Hello and welcome to the first quarter Crown Crafts, Incorporated investor conference call. Your host for today's call is Randall Chestnut, Chairman, President and CEO. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior written authorization of Crown Crafts, Incorporated. As a reminder, this conference is being recorded today, August 11, 2010. At this time, we would like to turn the call over to Olivia Elliott, Vice President and Chief Financial Officer, who will begin the call. Please go ahead.

Thanks, Amy. Welcome to the Crown Crafts' investor conference call for the first quarter of fiscal year 2011. With me today is Randall Chestnut, the Company's President and Chief Executive Officer.

Good afternoon.

A telephone replay of this call will be available one hour after the end of this call through 8 AM Central Daylight Time August 19, 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 again, and thanks to everyone on the call.

Earlier today, before the market opened, the Company issued its press release and earnings for its first quarter, which ended June 27 of 2010, and I'll give you a few highlights of what was contained in the press release and a few comments. Net sales for the first quarter this year were $17.2 million, as opposed to $17.7 million in the same quarter of the prior year, or down approximately 3%. Net income for the quarter was up from $538,000 in the quarter last year to $726,000 in the same quarter this year, or an increase of 34.9%. It should be noted, and we put it in the press release, that the last week of the month, the last week of June, a major customer shifted an order that was due to be shipped the last week of the month to the very next week, which happened to be the very first week of our second quarter, and that shift was $1.4 million. Had that not occurred, our sales would have actually been up slightly or 5% over the prior year.

As we reported many times before, we continue to experience tremendous success at retail with our brand NoJo and that increased again this year over the same quarter last year, another 23%, as we continued to gain placement at major retailers with our designs in the NoJo brand, which we're very pleased with. We also had announced earlier that we have employed a Director of International Sales that has a very good resume that is coming into the Company and reported for duty last week to work with us to increase international sales, as we had reported earlier, we've been pleased with the results that we've had over the past couple of years with increasing our international sales and this is a special emphasis to continue that in the future. Also, next month we'll introduce at the SuperZoo expo in Las Vegas, our first debut into the pet market and we're excited about that and we hope to start seeing results of that occurring later in this fiscal year.

Next point of highlight that we'll call out today, when we acquired Neat Solutions last year, one major retailer that we were missing from the assortment with Neat Solutions, and we had been selling every major retailer but one, we've now cracked that retailer and that product will be placed and will be shipped in December of 2010. So we can now say that Neat Solutions covers the waterfront with all the major retailers that we've identified to ship the product to.

During the quarter, we're very pleased to have been able to improve our gross margin in the current year, especially in a volatile global environment. Q1 of FY 2011 was 25% as opposed to Q1 of FY 2010 of 22.4%. Olivia will comment on this later, but the improvement in gross margin is due to decreased amortization, but mostly, is increased absorption of fixed cost due to the two most recent acquisitions, Neat Solutions and Bibsters. And we've elaborated on that in previous calls, with the way we did the integration of the Neat Solutions and Bibsters it took fixed cost and spread it over more dollars. It should also be noted that in the first quarter we only had, in the quarter just ended, we only had one month of shipments from the Bibsters product. It was actually acquired on May 27 of 2010.

Debt at the end of the quarter was $3.4 million, all of which was non-interest bearing legacy debt. We had no borrowings on our revolver and we had an actual cash balance of $900,000. This is really remarkable, considering in the past 12 months we paid cash of approximately $6 million to acquire Neat Solutions and Bibsters. Since the quarter ended on Friday, July 9, we actually paid $2 million of that $4 million legacy debt which was due in early July, and the second portion of the legacy non-interest bearing debt is due in July of 2011.

Today we would like to reaffirm the 2011 guidance that we announced earlier, all of which I'd like to state is before proxy cost that we incurred this year. We anticipate sales for the year to be $95 million net, which will be an increase of 10%(Sic-see press release) over FY 2010, and adjusted EBITDA to be $11.8 million which is 12.4% of net sales. That happens to be a 12.4% increase over the previous year. It's ironic that the numbers are the same. We also expect to have fully diluted earnings per share increase from $0.52 to $0.64. We're pleased once more to announce that we will provide shareholders with an immediate return on their investment and today the Company is pleased to announce that we reaffirmed and reconfirmed that we will pay an additional $0.02 per share in dividend payments for all shareholders of record as of September 10, and the dividend will be payable October 1 of 2010.

For the past few weeks, the Company's been involved in a proxy contest with its largest shareholder, the Winfield Group, related to the election of its board of directors. The annual meeting was held yesterday and the official vote has not been tabulated. As most everyone is aware, in a contested election, you have to have an inspector. An inspector was present yesterday, and therefore it has not been certified by the inspector, so we will not be in a position to discuss the matter on today's call.

With that, I'll turn it back to Olivia and she'll make comments and then we'll open it up for any questions you may have. Thank you.

I'm only going to give the financial highlights for the quarter. 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 for the three month period of fiscal year 2011, as compared to the same period in fiscal year 2010. Sales decreased by $4.9 million due to discontinued programs and lower replenishment orders, with these decreases being offset by $2.9 million in shipments of new bedding and blanket programs. Also, as Randall mentioned we had a major customer shift a $1.4 million shipment from June into July.

Sales of bibs, bath and disposable products increased for the three month period of fiscal year 2011 as compared to the same period in fiscal year 2010. Sales increased by $1.4 million due to the Neat Solutions and Bibsters acquisitions, and also increased by $1 million due to sales of new designs and promotions, which was offset by decrease of $959,000 related to programs that were discontinued and lower replenishment orders. Gross profit increased in amount and as a percentage of net sales for the first quarter of fiscal year 2011, as compared to the same period of fiscal year 2010. The increase in gross profit is due to decreased amortization cost of $207,000, associated with the Springs Global acquisition and a shift in the product mix toward more sales of disposable products, which have generally higher margins.

Marketing and administrative expenses for the three month period of fiscal year 2011 increased as compared to the same period of fiscal year 2010. In the current year, the Company incurred costs of $81,000 associated with the Company's proxy contest that were not incurred in the prior year. The Company also incurred increased advertising cost of $48,000, and increased amortization cost of $48,000 in the current year associated with the Neat Solutions and Bibsters acquisitions. These increases were offset by decreased accounting costs of $56,000 in the current year as compared to the prior year. The decrease in interest expense for the current year quarter compared to the prior year is due to lower balances on the Company's revolving line of credit and term loans. Net income for the first quarter of fiscal year 2011 was $726,000, or $0.08 per diluted share, compared to net income of $538,000 or $0.06 per diluted share in the first quarter of fiscal year 2010.

I'll now turn the call back over to Randall.

Olivia, thank you again. Amy, if you will, I'll call you back up, and then we can open it up to any questions that we have from the line.

Thank you.

(Operator Instructions)

Our first question comes from Arnold Brief of Goldsmith & Harris.

First in line.

Hey, Arnold.

Good morning. Good afternoon, I should say. I'm trying to remember off the top of my head, I can't, but last December you lost some business at a major account and this December you're getting business back.

Arnold --

Are these related transactions, so-to-speak? Is it NoJo that's going back in or is it your core line?

Arnold --

Underlying the question, what I'm trying to get at is NoJo is up and your acquisitions added sales and it looks like the rest of your businesses were down and I'm just wondering how much related to what happened last December, how much of that is going to come back this December, whether this is NoJo coming back or whether it's the other lines coming back, et cetera -- you got the drift, I think.

Arnold, let me apologize first. I didn't catch the first part of your comments. As I tried to adjust the volume, actually cut myself off, okay, and then I was able to rejoin the line. Can you hear me okay?

I can hear you fine. The question started, I'm trying to get some better picture of analyzing your sales.

Okay.

If I remember right, last December you lost some business, I think it was at Wal-Mart and this December you're getting business back, I don't know if it's at Wal-Mart or not. I'm wondering how much of this is related. Is it NoJo? Is it your core line? Because if you adjust your sales for the acquisitions of NoJo, the rest of your business is down, and I'm trying to get some feel whether or not you're reversing that with this December business, et cetera.

The December business you're referring to is not Wal-Mart. That was actually at Target. And that business is not back and has not come back and that went away. And was actually lost to a competitor and then eventually was just dropped entirely from the assortment at Target. The $1.4 million that we alluded to that happened to shift in the last week of the month, basically all related to the bedding category and every bit of that was related to the bedding category that got shifted from one quarter to the other. So that explains the biggest part.

Is that NoJo or other product?

It would have been other product. As we reported, NoJo was actually up, what, 21 -- 23%.

Is the new business in December, is that NoJo or other product?

Not sure what new business you're referring to.

You said something about a new account that was going to --

That was Neat Solutions. Okay?

I'm sorry.

No, that's Neat Solutions and let me repeat what I said. What I said is that when we acquired Neat Solutions, there was one major retailer that they were not selling. That major retailer has now been sold and we'll ship that product in December.

Okay. Okay. Just to finish this off and then I'll -- somebody else can ask. If I look at your two-year sales trends I see some very positive results with some nice acquisitions. I see NoJo growing over 20% for the last -- each of the last two years, if I remember correctly. And if I saw those numbers into the $86 million sales base of a couple years ago and look at your $95 million estimate, it still leaves me with a feeling that your other sales are down and I'm just -- given the economic recovery, I guess that's a source of concern to me and I'm just wondering do you see the non-NoJo business and the non-acquisition business starting to turn up at any point?

It is, Arnold, and you go back and I think part of what you're seeing is that one particular program that we're circling around the year on that was a license program at Target that we did lose year-over-year to another competitor and then eventually it was lost, okay? That program was sizable. And when you take that out of the equation, it puts the other business at flat or a slight increase but we're projecting a 10% increase going forward and I think you're going to see that across NoJo. You'll see it across the current acquisitions and also all the old legacy business.

Thank you. I'll get back in line.

(Operator Instructions). Our next question comes from Michael Bernstein at DWI Holdings.

Hello, Randall, how are you?

I'm fine, Michael, you?

As a follow-up to that discussion, I'm a little puzzled. Because if I look at your bedding, blanket and accessory business, even adding the $1.4 million in sales that was moved, that business would -- if it occurred in June, that business would still be off by $600,000.

Yes.

June this quarter, is that correct?

Yes.

Also, in that business isn't your Springs acquisition in that business?

It is in that business, yes.

How much -- how big is the Springs -- I've seen such different numbers on that. How big is the Springs acquisition business?

We don't divulge the segment business on that, Michael.

Okay, because I thought in some announcement you said it was $25 million. I might have misread that and recent I've seen numbers as low as $12.8 million.

I've seen $12.8 million number. You may have seen a $25 million number when we did the acquisition in 2007. You've not seen a $12.8 million.

Okay. But I've seen both numbers. I don't know which is right. But if I go back to 2003, the Company did $93 million. And that's just the infant business. By 2003, all of the adult business was gone. So this year it's going to be back up to $95 million, which is basically where you were in 2003, yet all of these acquisitions have occurred. It indicates to me that the business that is that bedding, blanket and accessory business is unbelievably down.

That is not the case, Michael. You've first got to go and you've got to factor that quota was eliminated and we've announced that a number of years ago which you are aware of, and quota was eliminated which had a deflationary effect when quota was passed through, it was eliminated on bibs, bath and all bedding and blanket items. And quota, in some cases, amounted to 5%, as much as 15% of the price of the product and that was taken out of the top line revenue. It happened to every supplier. So that happened in 2003 and 2004.

Okay. But has there not been -- if you pull the Springs acquisition out of that segment, hasn't that segment declined fairly dramatically over this time period?

The answer is no, Michael, with one notable exception which we've discussed before. We had a program, Classic Pooh at Target, which was about $6 million in top line revenue. That was lost, and that was the one that Arnold was talking about a moment ago, where he mistakenly said it was Wal-Mart. It was actually Target. We did lose it to a competitor, and then that competitor lost it and the brand was discontinued at Target completely. That went away. It dissolved, okay. If you take that piece out and you take the deflationary effects of the quota out, then I think you'll see the numbers. Offline, we'll be happy to model the numbers with you if you want to go in that great of detail.

Okay, because that's the part of the business that really concerns me. It seems that you have --

Michael, I think I just explained to you the decrease in revenue. We stand firm on that.

Okay. Thank you.

Thank you.

The next question comes from Ralph Marash at First Manhattan.

Hi, how you doing?

Fine, Ralph, how about you?

Okay, thanks. One quick question. What did you use to pay down the $2 million note in the current quarter?

I borrowed the money to pay it down, Ralph. Okay? One of the things we don't do is we don't keep cash, okay? So we did pull down the revolver and we pulled down the revolver, the $2 million in cash, or a portion of the amount to it, and then we used that to pay off the $2 million legacy debt. But as we continue to generate positive cash flow, that revolver will be paid down too.

So you would expect that to be paid down by the end of the fiscal year?

I don't think we've actually given a forecast. We did. I'm sorry. Ralph, we did. In our forecast we said that barring any additional acquisitions between now and the end of our fiscal year, next March, we will be -- excuse me -- I won't say we'll be debt-free because Ralph, we'll still have the $2 million interest free because it will be due in July, but we'll be net debt free, meaning we'll have enough cash to pay that off. So net of the -- the net cash basis, we'll be debt-free.

Okay. So that --

Next March.

I would interpret that to mean that you wouldn't be into your line of credit.

We would not. Actually, what it would mean, Ralph and the mathematics of it would mean we would be zero in the line of credit. We would have at least $2 million in cash sitting in a bank and we would owe the $2 million of interest-free debt. And we're not going to pay that off early because it's obviously interest free.

Okay. Thank you.

Yes, sir.

(Operator Instructions). And our next question comes from Gary Steiner at Huber Capital Management.

Hi. Good morning. Good afternoon.

Hey, Gary. Good afternoon, how are you?

Good. A couple of things. You had commented on the timing issue that negatively affected you this quarter, the $1.4 million. Does my memory serve me correct that you also had received a benefit in last year's first quarter from -- I'm sorry, a decrement last year, sales that had shifted into the fourth quarter of the prior year and out of the fiscal first quarter?

Olivia, can you help me with that? I don't recall that. Gary, honestly, we would have to go back and do some research to dig that out. Okay? Your memory may be correct. There may have been a shift quarter to quarter, but let us go back and look at that and we'll answer you offline on that question, if that's okay.

Okay. Yes, that would be great. And maybe just clearly it seems like the pattern of growth that you expect in the second quarter through the rest of the year is going to be much better than the first quarter, even adjusted for this timing issue.

Gary, we said in the press release today, historically our first quarter, and it always has been, has always been our weakest quarter. It has been for 10 years now. And if you go back six, eight years ago, we lost money in the first quarter almost every year.

Okay. I had just -- I had recalled that above and beyond that, you had a timing issue in last year's first quarter. But we can --

We could have. We'll have to go back and check that, honestly.

Okay. I guess just it sounds like the outlook for the rest of the year as implied by your full year revenue guidance assumes a pretty meaningful pick-up in organic growth of the business and I just wonder if you might be able to speak a little bit more to that. You had highlighted a new piece of business a week or two ago when you preannounced the full year guidance but I just wonder if you could more broadly speak about what you're seeing in the business that gives you comfort that the organic growth of the business is going to accelerate pretty meaningfully through the rest of the year?

Well, Gary, we have a lot of good programs in place and I'll just -- without putting numbers on them, we alluded to the Neat Solutions being placed at the new major retailer. That happens to be Wal-Mart, by the way. And that's going to add revenue, one. Two, we had been very successful in placing one piece body suits at a major retailer and then also a major dollar store for the holiday seasons for Christmas, Valentine's, St. Patrick's Day, et cetera, that had just been very, very, very good and that's a new business for us. Okay? It's a complement to what we've been doing but it really borders in the apparel area and it does the one piece body suits. Some people commonly refer to them as onesies, so we've expanded and gotten into that business as well.

And we alluded to the fact that our NoJo, at one major retailer, Gary, if you go back three years, we had zero back wall placement at one major retailer and today we're either six -- we're seven now and we've got the eighth one going in I'm not sure, next month, I think. So we've gone from zero to eight in four years. So that's where we're seeing the growth, okay? We're seeing the growth in new product, new placements, new channels of distribution, i.e. the dollar stores. We've also expanded and gotten into the food and drug and with the bib and bath category and that has helped us as well, as well as the NoJo growth. We feel good about where we are in the pipeline.

Great. Just one other question on the -- maybe this is for Olivia -- in terms of the gross margin, I was a little confused because I think Randall you had said in your opening comments that part of the improvement or a big part of the improvement in the gross margin was because of the higher utilization because of the acquisitions that you've done. But, I think when Olivia went through the formal sort of line by line analysis there was -- the improvement in the gross margin was attributed to lower amortization and an improvement in mix and I was wondering which -- they seem like they're different factors. What was the main driver to the gross margin improvement?

Well, when we talk about the change in the product mix and we talk about going to -- that the disposable products have a higher gross margin, that is the acquisition.

Gary, that's what I was waiting for Olivia to answer it. But I'm saying it one way and she's saying it another way, okay? When she says a shift in the product mix, it's a shift from the traditional product to the new products which happen to be the acquisitions, the disposables, the Neat Solutions and to a much lesser degree because it was only in for a month, the Bibsters.

Got it. It's not, per se that the products that you acquired are higher margin.

They are slightly higher. Slightly.

They're slightly higher, okay.

Slightly.

Okay.

Don't get too excited. Nothing in this business goes outrageous but it is slightly higher.

But part of the key is the leveraging in of the incremental sales.

It really is. We explained that on the last quarterly conference call is the way we bring it in and we don't add the increased cost, okay? And it's merged into the same distribution center and we have very little added cost to it, period.

Got it. Thank you very much.

Thank you, Gary.

(Operator Instructions). Our next question comes from Arnold Brief, Goldsmith and Harris.

Two questions. One, you mentioned something about going into the pet business. Did I get that right? Could you elaborate a little bit? And secondly, could you -- I understand why your gross margins are up. But some of your competitors have had conference calls and they all are talking about pressure on gross margins, not only from the mass retailers but from the cost side, and in my opinion, it's only an opinion, some of them I think are using gross margin to get shelf space. Could you discuss the outlook for gross margins as you go forward with the competitive pressures and the pressure from the retailers as well as, again, elaborate something on that pet business. I'm not quite sure what I got there.

Okay. Arnold. Let me address them one at a time. The pet business first. We announced about a month ago that we had expanded our product offering and we were entering into a new category called Neat Solutions for Pets and it's pet beds, and what we did is we used our designer expertise and we brought the design capabilities of infant bedding, and with our designers we put together -- and a consultant we've been working with for almost a year now, started October of last year -- put together an extensive line of soft pet beds, fabric pet beds that have some unique features to it, anti-skid properties, designer properties. We did use different batting in it to make it more uniform and form-fitting for the dog or the cat. And we're introducing this whole line of products, brand-new category, never done it before, at the major pet show in September in Las Vegas.

Do you have any idea how big that market is?

It's an $80 billion market.

No, no, just the bedding side of it.

I don't know the number for just the bedding side. No, I don't. But we think it's a sizable market. On the gross margins, what has helped us in this quarter and will continue to aid us through this year is the fact that we did the acquisition of Neat Solutions and we did the acquisition of Bibsters and we had reported, Arnold, in last quarter, that overall, that we would have about a 30% EBITDA on those two businesses when it's all said and done. And the reason being is because we did the purchase, we did not bring any of the people with the businesses with the exception of one person with Neat Solutions and we didn't keep the offices. We merged everything to our existing operations. We merged the distribution, et cetera. So when it's all in, then it goes -- it improves the gross margin. That is going to have an effect of improving our gross margin for the year.

With that said, there is pricing pressure in Asia. We factored that in and that is in our projections that we gave for the year. Cotton has started to stabilize some, thank goodness, but labor rates are increasing so that has been a constant battle. We have people on the ground in Asia right now, as we speak, rearranging supply sources as we have to maintain our profitability. So that definitely is an ongoing thing that we see. The last part that you mentioned, you said you thought you had seen some other suppliers having to fund to get shelf space. There is some of that going on. And that too is factored into our ongoing gross margin.

Could you -- then I'm finished -- give us some idea as the show, trade show's in October, do you envision entering any new categories? Is there a big new product flow coming into October? Or is it so-so year in terms of new product from here?

We'll have at the October ABC show, we will have an offering that will be many, many, many new products and designs. I don't see anything earth-shattering that we'll be showing that will be new products. Obviously, the pet products will be shown at the pet show but not at the ABC show but we'll have new designs in bedding, new design in bib, bath and also we'll be featuring these one piece body suits that I mentioned earlier.

Thank you.

Thank you. Have a good day. Amy?

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Chestnut for any closing remarks.

Amy, thank you very much and thank all the shareholders on the call today. We appreciate your support and understanding and we stay steadfast that we're on track this year to have a good year, and we believe that we're -- that this month or this quarter shows the results of that. So we thank you very much for your interest and in the meantime, if you have any questions that we can address, please don't hesitate to call. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.