Crown Crafts Inc (CRWS) 2011 Q3 法說會逐字稿

Hello, and welcome to the Crown Crafts, Inc. third quarter investor call. (Operator Instructions) Any reproduction of this call in whole or in part is not permitted without prior written authorization of Crown Crafts, Inc. As a reminder, today's conference is being recorded today, February 9, 2011. At this time, I would like to turn the conference call over to Olivia Elliott, Vice President, and CFO, who will begin the call. Please go ahead.

Thanks, Jamie. Welcome to the Crown Crafts investor conference call for the third 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 standard time, February 17, 2011. 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, and again, good afternoon to everyone, and thanks for joining us. And I would like to touch on some of the results for the third quarter, which ended December 26 of 2010, and the earnings were released before the market opened this morning. Net sales for the third quarter were $21.9 million, as opposed to $20.6 million in the previous year, same quarter, or an increase of 6.3%. Net income for the quarter was actually down by $300,000, from $1.1 million in the previous year, to $800,000 in the current quarter, or just over 30%. Diluted earnings per share also decreased from $0.12 to $0.08. For the six months, I'll touch on those numbers, net sales are up $2.7 million from $60.1 million last year to $62.8 million this year, an increase of 4.5%. Net income is also up 10.6% from $2.5 million to $2.7 million. And diluted earnings per share are up $7.7 million from $0.26 to $0.28 per share. Adjusted EBITDA for the third quarter was $1.8 million as opposed to $2.3 million in the previous year, which was a decline of 23%. Year to date EBITDA is up from 5 -- adjusted EBITDA is up from $5.9 million to $6.5 million, or an increase of 10.4%. Please note that the adjustments for EBITDA does not include $401,000 in the current year related to the proxy contest and also $52,000 in the third quarter, and $261,000 year to date associated with certain stock grants to executives.

Several factors contributed to the earnings decline in the quarter. I'll touch on those briefly, and Olivia will give it a little more detail. During the quarter, we had promotional sales to one major retailer that occurred in October that were lower than normal gross margin. This was some promotional blankets and pillows. Also, which we announced later in the year, we had a delay of more profitable shipments by one of our major customers, as they adjusted their year ending inventory, which cut our sales for the quarter. In addition, record high raw material costs primarily cotton, as well as increases in labor, transportation costs, and currency costs associated with the Company's Asian sourcing operations, contributed to increase in cost of sales. In addition, during the quarter, the Company expensed $225,000 of royalty shortfall. We did experience royalty shortfall in the previous year of $135,000 and the majority of this shortfall was due to the delay in shipments which I mentioned above, that occurred. Going forward, we do not expect to have this problem. We have negotiated new contracts with lesser guarantees going forward, so we think that's a one-time event.

We're pleased to report that the sales of our NoJo brand during the quarter increased 22.9% over the same quarter of 2010, and has increased 24.1% the nine months of Full Year 2011 versus the previous nine months. We're very pleased with the strong response we've received from the fashion forward designs that we're having. Most of this increase is from our NoJo brand and we have been driving this for the last several years with new designs, new creations, and new brands, and we're very pleased with the retailer acceptance and the consumer acceptance of this particular product. We're also pleased to announce today that the Board of Directors has authorized a cash dividend of $0.03 per share payable on April 8, 2011 to shareholders of record on March 11, 2011. This is a 50% increase over what the Company has paid over the four previous quarters of $0.02 per share. The Board's decision to increase the quarterly dividend is a reflection of continued optimism regarding the Company's long-range growth potential, as well as the strength of our future cash flows. With that, I'll turn it over to Olivia and then we'll come back afterwards and we'll open it up for questions. Thank you.

I'm only going to give the financial highlights for the quarter and year end 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 increased by $916,000 for the third quarter of fiscal 2011 as compared to the third quarter of fiscal 2010. Sales of bibs, baths, and disposable products increased $376,000 for the third quarter of fiscal year 2011 as compared to the third quarter of fiscal year 2010, primarily as a result of the Bibsters acquisition. And sales of bibs, baths, and disposable products increased $2.8 million for the nine-month period of fiscal year 2011 as compared to the same period in fiscal year 2010, primarily due to the Neat Solutions and Bibsters acquisition.

Gross profit decreased in amount and as a percentage of net sales for the third quarter, but has increased in amount and as a percentage of net sales year to date. During the current year quarter, the Company made promotional sales to a major retail customer, resulting in a contribution margin from sales to that customer that was lower than in the prior year period. The Company incurred higher raw material labor, transportation, and currency costs in the current year associated with the Company's sourcing operations in China, as well as a royalty shortfall from a major license sore that was $95,000 higher than in the prior year quarter. Offsetting these increases was a decrease in amortization costs of $69,000 in the current year, associated with the acquisition of the baby products line of Springs Global in November 2007. Year to date, 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 costs associated with the acquisition of the baby products line of Springs Global decreased by $483,000 to the nine-month period of the current year.

Marketing and administrative expenses for the third quarter and year to date fiscal year 2011 increased as compared to the same periods of fiscal year 2010, due in part to higher advertising costs. The Company has also incurred approximately $650,000 in nonrecurring expenses related to proxy and corporate governance issues in the current year that were not included in the prior year.

Net income for the third quarter of fiscal year 2011 was $775,000, or $0.08 per diluted share compared to net income of $1.1 million, or $0.12 per diluted share in the third quarter of fiscal year 2010. Year to date fiscal year 2011 net income was $2.7 million, or $0.28 per diluted share, compared to $2.5 million, or $0.26 per diluted share in fiscal year 2010. I will now return the call back over to Randall.

Olivia, thank you very much. And, Jamie, if you'll come back in and make the appropriate announcement, we'll open it up to any questions that anyone might have.

(Operator Instructions) And our first question comes from Sean McGowan from Needham & Company.

Hi. How are you?

Hi, Sean, how are you?

Hi, Sean.

Hi. I have a couple of questions. First, can you talk a little bit about whether there was meaningful shift in the percentage of business done with various customers, both in the period and year to date?

There would have been some shift, Sean, that would have occurred in the year to date and in the quarter to one major baby specialty retailer, but otherwise, it would have been fairly consistent year-over-year. I would not even consider that a major shift, but it was an increase.

And are you expecting that to remain the case?

Yes.

Okay. Secondly, can you talk -- everybody knows what cotton has done, but can you talk a little bit about the most recent past and what your expectations are for the upcoming couple of quarters?

I mean, Sean, if you look, I mean for those on the call that don't have a follow, cotton has risen to an all-time high in the $1.60, $1.70 a pound range and has not declined. We were under the belief that we would see some decline hopefully right after Chinese New Year and we have not seen that yet. So the Company is taking a very aggressive approach that we are passing it on and we are increasing prices, and we've been tenacious in doing that. Not only has cotton increased, labor is up in Asia and China and, Sean, probably to the neighborhood of 20%. Freight's up, other items are up, but the most notable one is cotton, going from the $0.80, $0.90 a range to the $1.60, $1.70 range. But we're in hopes that as we see planning for the future, we'll see the cotton price decline. But we're not taking a chance with that. We are increasing prices and passing it on.

And what is the timing of those increases, you know, vis-a-vis discussions that you have had already with retailers over the past several months?

If I had to put a stake in the ground and say what would have been my average date, it would have been February 1 to February 15. So it's just happening.

Okay, very helpful.

And if you look at the calendar, that's right after the retailers started their new year. But that's the majority of them, okay? Are we getting everything? The answer is no. Are we wrestling to try to get everything? Yes, we are. And we're getting the overwhelming majority, I can assure you.

Well, that's good. Last question, then, these cost issues must hurt a lot more for smaller companies. Are you seeing potential acquisition targets out there emerging as a result of some of these factors?

Haven't seen it yet, Sean. I mean, people are still very proud of what they have got and the prices seem to be very high. So we aren't -- we are looking at a few things. We always do. We constantly do. But right now, they don't seem to have taken that much effect. Chinese New Year is right now, I think if you'll see any spikes, you'll see it right after China opens back up.

Right. Okay, thank you very much.

Thank you.

(Operator Instructions) our next question comes from Nelson Obus from Wynnefield Capital.

Hi, there. I just wanted to go over this one more time. When you say in the press release, quote, we do not expect that to be the case in future quarters, I.E, your ability to pass along higher costs, I assume year talking mostly about cotton, and you feel comfortable in terms of what you've seen already that, your customers are willing to let that happen?

We're passing the price increases on, Nelson, and we passed them on fairly aggressively. Now, if cotton stays at the level it is now or goes higher, then the answer's going to be different. It's going to be different for everybody in the world. Because, when we started passing price increases on late last year, late in the third quarter, effect in January and February and March of this year, cotton was not quite at these levels. So if cotton stays at the $1.70, $1.80 a pound range, three times what it's ever been, then we'll have to have additional increases that we'll pass on.

Do you have specific contracts that allow you to do that? Or is it all by negotiation?

Contracts with the retailers?

Yes.

It's all by negotiations.

Okay. I almost don't even want to ask this question, but I, I guess if you made it public, I might as well. What -- let me ask it in a broad context. What would, what would motivate you to accept promotional -- provide promotional sales in one circumstance and not do it in others? Since that was one of the things, it just strikes me that the trade -- that you provided these promotional sales and everybody would want it. So is there any sort of formula you can give us, or whether that's a one-time shot that would clarify that a little bit?

Well, this one was a one-time shot, Nelson. As I said, it was a blanket and a pillow promotion and it was plus business. It was in the quarter, you know, was intended to be -- it was in October, so the order was actually placed and negotiated and sourced sometime midsummer last year, before the rise in the cotton prices, I can assure you, okay? And it was at old prices. But nevertheless, we expected in the quarter -- we didn't expect to have the shift late in the quarter from the third quarter, when they adjusted inventory. So, but yes, we do promotions, and I do promotions, you know, with other retailers, too. This one just happened to be a very large promotion.

Okay, and my last question, are you able to get higher gross margins for your branded products as opposed to your licensed and private label products at this point?

Nelson, historically, the licensed and branded product have been close to the same, and private label would have been a slight bit less than the branded and the licensed, but in the current, in the current environment, we are able to get a slight bit more for the branded than even the licensed.

All right, thank you.

Thank you.

(Operator Instructions) And we have a question from Gary Steiner from Huber Capital Management.

Hi, good morning. On the -- you had itemized out in the, in the cue some professional fees in connection with certain corporate governance matters. Could you just indicate what those were? And just confirm, looks like you did not back those out in terms of calculating the adjusted EBITDA. Could you just confirm that?

We did not back them out and calculating the adjusted EBITDA, Gary, and it was some research that the Board undertook to do some research, some extensive research into the areas of corporate governance, and we have not, and don't intend to publicize anymore details on what those were. But it was a Board action. But they were not in the add-back.

Okay, and just a general question -- I'm sorry. I thought you were further responding. In terms of the, just the raw material cost issue, I thought that when you agree in advance to promote a product that your costs are essentially locked in at that point in time. In other words, you go to our suppliers, and you essentially have a predetermined contract price -- if costs move in one way or another, cotton costs or labor costs, that you are locked in. So can you just educate me on how that works in reality?

Well, I mean, typically, Gary, when we issue a purchase order to Asia, it is, but it's one purchase order at the time. It's not a long-term contract. So, the prices are basically locked in for that one contract. Yes, they are. But then as we place additional purchase orders, it can be a different prices, either up or down, and unfortunately in the current environment, those are up.

Okay, but I mean, I guess specifically as it relates to this one promotional item that you talked about, I think you had indicated that you had essentially provided that product at a price that you thought you would generate certain margins on, and when costs--

No, Gary, that was a misunderstanding. It was, it was sold as a promotion at a lower margin, okay. We knew that going in. What I said is we purchased the goods and locked those prices in and received those goods, sometime mid to late summer last year, you know, which would have been in the July -- it was shipped in October, so it would have been in the July-August-September timeframe that those goods would have been received and those goods were negotiated and purchased when the raw materials were at lesser prices.

Okay. So to be clear, the margins you received on those at the end of the day were as expected or lower than expected?

They were as expected.

Okay, and then just separately, I guess your inventory levels are a little bit higher now. Is that -- how would you exactly that to play out in your fiscal fourth quarter? Would you expect your inventories to come back down a little, or are they pretty normal levels here?

No, we expect in the fourth quarter to come back down some. I mean, we go through a two to three-week period of no receipts during Chinese New Year, and we're still shipping. And that brings it back down and we're in that period right now. So we expect the inventory it to come down. It is higher than we like to see when the shipments moved to the end of the third quarter to the fourth quarter, that had a tendency to keep the inventories higher than we expected. So we did have that effect. But we do expect it to come back down.

And then just the last one, Olivia, do you have the contribution from Bibsters in the quarter in terms of sales?

In just the quarter?

Yes.

The Bibster sales were $370,000-ish. It was the entire increase in the bib and bath product line.

Okay, great. Thank you very much.

Thank you.

Our next question comes from [Michael Bernstein]. Please go ahead with your question.

Randall, good morning.

Hi, Mike, good afternoon.

Good afternoon. On the inventory, you're about 90% higher now than you were a year ago same quarter, and if that was caused by just a change in timing on what the major customer is doing, would it be fair to expect that your fourth quarter sales then should be substantially up with that customer?

We expect fourth quarter sales to be up. Fourth quarter typically is one of our strongest quarters, always has been, and we expect that to continue. Inventory is high, okay, and it's high for a couple of reasons, because we had that shift, okay, one. Two, we did some pre-buying. When we saw cotton going up and the expenses going up on some safe commodity items -- or not safe commodity, but on Safe Harbor items that we knew we were going to flush through, we did some building of inventory. Looking back, we're glad we did. That inventory looks pretty good right now.

So then with price increases that you expect to come in February and a lower ownership in that inventory, then we should expect more normalized gross margins than in the third quarter, which had that big promotion in it?

We should see that, yes. The big promotion had a, had a big negative effect in the third quarter.

So you're -- I'm sorry. I might have not heard your answer. Then you're expecting more normalized gross margins?

We are expecting in the fourth quarter more normalized gross margins, yes.

Okay, and with regard to gross margins, with the acquisitions of Neat Solutions and Bibsters and your branded business increasing, all of which have higher gross margins than your non-branded business, or non-licensed business, would it be -- are you seeing a decline in gross margins in the other businesses, or was that promotion just skewed everything to a degree that you can't make any sense, that we couldn't make any sense out of the third quarter?

Well, I mean, the promotion had a big effect. Whenever you do a big promotion that is very big and then you take normalized business and move it to another quarter, it does have a double whammy effect, okay? So, we -- to your point, the gross margins on the branded goods are a slight bit higher and the gross margin -- but now, and on the Neat Solutions as a slight bit higher.

Okay. My last question, are your products still primarily poly cotton as opposed to 100% cotton?

We have, we have both. We have 100% cotton and we have poly cotton, or cotton-poly. It's cotton-rich. And it depends on the particular product you're talking about, but in some of the infant areas, it is 100% cotton and the toddler area it's pretty much all blended items.

In the -- it's not today as much poly cotton as it used to be?

No, no, there's more cotton in the higher end.

Okay, and have-- -- mass side. Have polyester prices gone up fairly dramatically as well?

They did. They took a very steep spike, and they were cotton a couple months ago and came back down. They are still up probably 20% over where they were, nine months ago, but they took a real crazy spike for a short period of time trying to follow the cotton increase, but it came back down pretty quick.

Okay, thank you.

Thank you.

Our next question comes from [Phil Lantis] from Lantis and Associates

Hi, Phil.

How are you doing?

I'm okay. How about you?

I'm doing pretty good.

Good.

What's your take on the currency exchange rates in China?

Phil, I mean we hear all the same rumors you're hearing, that there has been a decrease over the last three months of, I don't know, 4 to 5 percentage points, and it's down to the 650 range. There's speculation in Asia that could go on down. I've heard numbers, I'm sure you have, too, as low as 6. But I, I don't -- I really don't know. I don't think anybody does until they see it on a daily basis.

Okay. Pretty cool. I appreciate your taking my call.

Thank you.

(Operator Instructions) and our next question is a follow-up from Nelson Obus from Wynnefield Capital.

Hi, as the Company has traditionally relied on acquisitions to drive the top line, could you -- in regard to Bibster I guess and Neat Solutions, can you give us a little strategic overview about how your thinking of growing and positioning those acquisitions going forward.

Nelson, the Neat Solutions has drawn very nicely and we're projecting, that to increase next year by another almost 20%. We've gotten some additional placements. I think we reported on this call that the most notable customer that was missing whenever we acquired it was Wal-Mart and we started shipping that in December, and have gotten some additional placements since then. So we're very excited about that.

The Bibsters has not been the home run that we expected it to be. The sales will be there, but we haven't been able to capitalize on it. There's one retailer that discontinued it, which sort of gave us a setback. But it's still a good acquisition. It's creating, additional revenue for the Company, and we've been able to transition that -- we're finishing the transition in the fourth quarter from US to Asian sourcing, which will improve the gross margins on the Bibsters. And -- but the Neat Solutions has been an absolute home run. And it's continuing to increase.

In Neat Solutions, are you, are you beginning to get placements in different restaurant chains, or is it mostly retail?

At this point, Nelson, it's been mostly retail. The one restaurant chain we have has increased very nicely and their business is up appreciably. We're in talks with a couple more now as we speak. We've gotten a couple of small ones, but nothing of any major consequences. There's been no big one, okay. There's been a couple small ones, and we're in discussions and sampling now with a company that supplies product to, to another reseller for the airline industry that we think could be very, very good. So we are excited about that.

Okay, thanks.

Thank you.

(Operator Instructions) And Mr. Chestnut at this time, we're showing no additional questions and would like to turn the call back over for closing remarks.

Jamie, thank you very much. And I would like to close by saying, Olivia, thank you for all your help in the conference call, but thanks to all of our shareholders, thanks for your support, and we sincerely would like to thank all of our suppliers, all of our customers, our employees, and all of our shareholders for your continued support. Thank you very much. Have a good day. Good-bye.

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.