Crown Crafts Inc (CRWS) 2011 Q2 法說會逐字稿

Good afternoon. And welcome to the Crown Crafts Incorporated investor conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Olivia Elliott, the Company's Vice President and Chief Financial Officer. Please go ahead.

Thanks, Amy.

Welcome to the Crown Crafts investor conference call for the second 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 the call, through 8 AM Central standard time November 16, 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.

Thank you, Olivia. Again, good afternoon. And earlier today before the market opened, we released our earnings for our second quarter FY 2011, which ended on September the 26 of 2010. And I will touch on a few of the highlights of the numbers that were in the press release and the 10-Q that was filed earlier. Net sales for the second quarter were $23.7 million, as opposed to $21.7 million in the same quarter one year prior, or an increase of $2 million or 9.2%. Net income for the second quarter increased from $800,000 last year to $1.2 million this year, or a 50% increase. Likewise, the diluted earnings per share increased from $0.08 to $0.12, or a 50% increase.

Touching on the year-to-date numbers, the sales increased from $39.5 million last year, to $40.9 million this year, 3.6% year-over-year. Net income for the six months was -- increased from $1.3 million to $1.9 million, or a 45% increase. And diluted earnings per share increased from $0.14 to $0.20, or a 43%. EBITDA -- adjusted EBITDA, and I'll mention the adjustments in just a moment, for the quarter increased from $2.038 million in the prior year, to $3.036 million this year, or a 49% increase. The year-to-date EBITDA went up 32%, from $3.6 million last year, to $4.7 million this year.

Please note, that it is adjusted EBITDA suggested for two items, stock-based compensation, and proxy costs incurred this year. And those proxy-related costs in the Q2 was $320,000, and year-to-date were $401,000. We've been reporting now for the last couple of years, our NoJo business increasing. And we're very pleased that in the quarter that just ended, compared to the same quarter in a prior year, our NoJo business increased 33%. Which is -- shows proof of the fact that our designs are being accepted at retail and are selling very well. We're very pleased with those results.

In the press release earlier today, we reconfirmed our guidance for the year. And I would like to touch on that very briefly. We reaffirmed the guidance FY 2011 which ends next March, which we announced in August. All of which, please note, are before proxy and stock-based compensation costs. We anticipate that net sales for the year to be $95 million, an increase of 10% over FY 2010. And adjusted EBITDA, again adjusted pre-proxy and pre-stock-based compensation, to be $11.8 million, which is 12.4% of net sales and happens to be an increase of 12.5% over the full physical year FY 2010. We also expect fully diluted earnings per share to increase from $0.52 in FY 2010, to $0.64 in the current year, an increase of 23.1%.

Earlier today, we also announced for our fourth consecutive quarter, that we'll pay another dividend of $0.02 per share, for all shares of record as of December 10, and the dividend will be payable December 31, 2010. In general, we're very pleased with the quarter, and we're pleased with the year-to-date. We're pleased with the progress that the Company has made over the last couple of years. With that, I'll turn it over to Olivia to touch on more specifics of the financials. Thank you.

I am only going to give the 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 this morning. Sales of bedding, blankets and accessories increased $1.1 million for the current year quarter, as compared to the prior year, due to shipments of new bedding and blanket programs being greater than discontinued programs, as well as higher replenishment orders. Year-to-date sales of bedding, blankets and accessories are lower than the prior year by $1 million. Sales of bibs, bath and disposable products increased by $924,000 in the current year quarter, as compared to the prior year with the Bibsters acquisition contributing $646,000 of the increase. Year-to-date sales of bibs, bath, and disposable products increased by $2.4 million, as compared to the prior year, with $2.2 million due to the in-aggregate to the Neat Solutions and Bibsters acquisition.

Growth profit increased in amount, and as a percentage of net sales, for both the current year quarter and year-to-date, as compared to the same periods of fiscal year 2010. The contributions from the Neat Solutions and Bibsters acquisitions, have provided incrementally higher margins, by increasing sales without proportionately increasing fixed overhead costs. Also, amortization of costs associated with the acquisition of the baby products line of Springs Global in November 2007, decreased by $207,000 for the quarter, and $414,000 year-to-date. Finally, higher inventory purchases in the current quarter, resulted in a greater absorption of costs to inventory, as compared to prior periods.

Marketing and administrative expenses for both the current year quarter, and year-to-date, increased, as compared to the same periods of fiscal year 2010. In the current year, the Company incurred costs of $320,000 in the quarter, and $401,000 for the year, that were associated with the Company's proxy contest that were not incurred in the prior year. The decrease in interest expense in fiscal year 2011, as compared to fiscal year 2010, is due to lower balances on the Company's revolving line of credit and term loan. Net debt increased from -- decreased from $11.1 million in September 2009, to $7.7 million in September 2010.

In July 2010, the Company paid the first $2 million installment on the non-interest bearing debt. Net income for the second quarter of fiscal year 2011, was $1.2 million, or $0.12 per diluted share, compared to net income of $803,000, or $0.08 per diluted share, in the second quarter of fiscal year 2010. Year-to-date fiscal year 2011 net income was $1.9 million, or $0.20 per diluted share, compared to $1.3 million or $0.14 per diluted share in fiscal year 2010. I will now turn the call back over to Randall.

Olivia, thank you very much. And Amy, I'll ask you to come back on and make the introduction. And we'll open it up to any questions that anyone on the line may have.

Thank you. (Operator Instructions) We show no questions at this time. Mr. Chestnut, would you like to make any closing remarks?

Okay.

Actually, sir, two people just decided to ask a question. Can I go ahead with one?

You sure can.

Thank you, sir. Our first question comes from Ralph Marash at First Manhattan.

Hi, Randall. How are you doing?

Fine, Ralph. How about you?

I didn't want you to escape without any questions.

You were saved by the bell, Ralph.

Okay. So just comment on why the inventory is that much higher versus a year ago and of course, versus the end of the year.

Well, I mean, obviously at the end of the year is one of our low points, Ralph, and our first quarter's typically a weaker quarter, so we bring inventories down at year-end and always have, and that's going to be the lowest point of the year. Two, if you notice from the forecast, we are forecasting to have a good shipping year, up 10%, so we have inventory in anticipation of the programs that are to be shipped later in the year. Those are the two major reasons. In some cases, some very few cases, we have overbought some inventory because raw material costs are increasing in China and we bank rolled some of that and brought some goods a little earlier.

Okay. Just a follow-up on that. Do you have any intentions of -- let me rephrase it. So you mentioned the cost increases in China and the potential for the Chinese currency to appreciate, so are you exploring any other alternatives right now?

We do, Ralph. We're exploring other alternatives on a constant basis. Unfortunately, because you've got to start with the fabric and the fabric is the first key, and China is the country that produces most of the fabric. Even though we try to look other places it comes back to China as the best source. And but we are constantly looking. We're moving -- we have moved a lot of product from within China to other places within China, and but we have looked at other countries as well, and we have not found a good solution for -- to move it to other countries.

Okay. And the recently increased cost of cotton, any influence on profitability?

It does, Ralph. It does. What we had done early in the year when we did our budget, we did our line item budget, we anticipated some cost increases, so through the year with the inventory we have and with the cost inflation factors that we have built in, we are okay through the current physical year in March. We are concerned if cotton stays at these high levels about the cost of raw material -- or the cost of product going into next year. With that in mind, we have increased some prices at the recent ABC Show, we did raise prices to the, basically the rank and file customers and we're now looking at some special programs with some of the major customers where we're going to increase prices. I mean, as you are aware, if you follow it, cotton is at an all time high. We don't think it can stay there but nevertheless it is right now.

Okay. And last question. The introduction of the Neat Solutions products into Wal-Mart in December. That's still on schedule?

It is still on schedule for two SKUs. Yes, it is. It is very much so.

Thanks.

Thank you, Ralph.

The next question comes from Gary Steiner at Huber Capital Management.

Hey, Randall and Olivia.

Hi, Gary.

Just a couple of questions. Maybe just to expand on one of the last questions that was asked. Can you maybe just give us an order of magnitude what cost increases were baked into this year's assumptions?

Gary, we don't give out that line item detail that goes into our budget, but we did build in inflation factors into the budget in anticipation of raw materials increasing, but I am not sure that we want to publicize to the world what percentages those were.

Okay. Fair enough. And, Olivia, you had made a comment about the impact of the higher inventory purchases on the absorption. Can you maybe just repeat that and expand upon what the impact of that was if there was an impact on the gross margin this quarter?

Well, Gary, let me take a stab at it first, okay? We used to be many years ago, a domestic manufacturing Company and we have an accounting system that accounted for if you had a factory tied to your front office and that's a legacy system that we still have and don't ask me why we don't change it. It is very complicated to change it from a manufacturing costing system to a procurement costing system, and it is almost impossible to do. So under the old manufacturing system you would have ups and downs in manufacturing and you would take your overhead variance and burden and spread it.

Now because we don't manufacture anything out back in the backroom, we tie it to purchases that we anticipate purchasing from Asia. And we sat down at the beginning of the year and we say we're going to purchase X amount each month during the course of the year and if we miss that up or down make it makes that variance go up or down a little bit, but it all washes out by the end of the year is the key factor to it.

So that was a benefit in the quarter?

It was a slight benefit in the quarter, yes.

Okay. And then just last question I had, the stock-based compensation, Olivia do you know what that number will be approximately for the full year?

What we're adding back for adjusted EBITDA was associated solely with the restricted share grant that was made this past summer to management, and that is going to be $313,000 for the year.

Okay. That's the only piece that gets added back in the adjusted EBITDA calculation?

Correct.

Yes, sir.

Great. Thank you very much.

Thanks, Gary.

(Operator Instructions) We show no questions at this time. Would you like to go ahead with your closing remarks?

I will go ahead this time if there is no one going to come in. We'll make closing remarks, and we did have a good quarter. We've had a good year-to-date. We are anticipating and we're forecasting and modeling a good year so we're very pleased with that. The initiatives that have been in place for a while now, the NoJo initiative, the design initiative that goes with that, the acquisitions of Neat Solutions, Bibsters and of a couple of years ago the Springs Global have all been accretive.

And we're very pleased with the results of that and it shows in the bottom line numbers. Last but not least, we appreciate everyone's interest. We appreciate all the shareholders and last but not least all of the employees, suppliers, and all of the other stakeholders of the Company. Thank you very much. Amy, you can come back on, and you can make the announcement for the replay. Thank you very much.

Thank you. The replay will be available in an hour. If you would like to join the replay, you may do so by dialing 1-877-344-7529 or 412-317-0088. The conference number will be 445454. You will be asked to record your name and company when you dial in to listen to the replay. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.