Crown Crafts Inc (CRWS) 2011 Q4 法說會逐字稿

Hello and welcome to the Crown Crafts, Inc. fourth quarter investor call. Your host for today's call is Randall Chestnut, Chairman, President and CEO, and also with us, we have Olivia Elliott, Vice President and CFO. 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, Inc. And as a reminder, this conference is being recorded today, June 13, 2011. At this time, I would like to turn the call over to Olivia Elliott, Vice President and CFO, who will begin the call. Please go ahead.

Thanks, Rocco. Welcome to the Crown Crafts investor conference call for the fourth quarter and full fiscal year 2011. With me today is Randall Chestnut, President and CEO of Crown Crafts.

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 on June 21, 2011. A web replay of this call will be available for 90 days. You can access it by visiting our website, at Crowncraft.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 good afternoon, again. Earlier today, before the market opened, we released earnings for our fourth quarter of fiscal year 2011 and also our full-year results for fiscal year 2011, both ending on April the third of this year. Net sales for the fourth quarter were $27.2 million, as opposed to $26 million in the previous year, same quarter, up $1.2 million, or 4.6%. Net income for the fourth quarter was $1.6 million, as opposed to $2.3 million, or down $700,000, or 31.6%. Diluted earnings per share were also down from $0.25 in the previous year to $0.16, a reduction of $0.09, or 36%.

Our year-to-date results, net sales for the full year were $90 million, as opposed to $86.1million, or we had an increase of $3.9 million, or 4.5%. Net income year-to-date was $4.3 million, as opposed to $4.8 million in the previous year, or down a $0.5 million, or just under 10%. Earnings per share went from $0.52 last year to $0.45, or down $0.07 or 13.5%.

Adjusted EBITDA, and I'll identify the adjustments in just a moment, for the fourth quarter was $3.3 million, as opposed to $4.6 million in the previous year, or a decrease of $1.3 million, or 28%. The adjusted EBITDA year-to-date was $10.1 million, as opposed to $10.5, or down $400,000, or 3.9%. In the full year EBITDA results, we also reflected some one-time costs, and I'll touch on those.

The one-time costs included $1.1 million of pretax hits, which included $401,000 of proxy-related costs from last year, $254,000 in outside fees for corporate governance matters, $121,000 impairment charge related to assets held for sale, and $313,000 of share-based compensation for executives.

The decline in the fourth quarter, and to a degree, the year-to-date, are attributable to several factors as follows. Higher than expected raw material costs on product out of Asia. Higher labor cost out of Asia and also higher transportation cost. And to a lesser degree, but still an impact, was the higher currency cost out of Asia as the exchange rate did fluctuate some during the quarter. They all had a negative impact on the fourth quarter, and again, on the year-to-date.

Despite the fourth quarter headwinds we faced, we're pleased with our fiscal 2011 performance and progress. We made significant progress on critical strategic initiatives, including diversification of the product lines and diversification of channels of distribution. We had strong growth in the bib, bath and disposable products area. And notably, when we talk about the diversification, 7% of fiscal 2011 sales are from channels that barely existed 2 years ago. And the most notable of those are international sales of Company branded products, sales of products into the casual restaurant chains, food and drug sales, and also, the rapidly growing dollar store channel of distribution.

Total sales of Company branded products increased 22% year-over-year, reflecting the increasing strength of our innovation, fashion-forward designs, and our creativity in this area. We're extremely pleased with this progress.

We ended the year with $6.3 million of total debt, of which $2 million is the legacy debt, which will be paid off in July of this year. Our strong balance sheet and operating cash flow provides us the financial flexibility we need to accelerate our organic growth and look for additional attractive value-priced acquisitions that would further extend our product line and geographic reach.

We announced previously that the Board of Directors had declared a quarterly cash dividend of the Company's Series A common stock of $0.03 per share. This dividend will be paid July 8, 2011, to shareholders of record at the close of business on June 17. This action by the Board is further evidence of our strength of our balance sheet, our operating cash flow, as well as the Board's continued confidence in our underlying business and its potential to create value and operational momentum to build for the future. I'll turn it back to Olivia to give some additional comments on the financials, and then we'll come back for questions.

I'm only going to give financial highlights for the quarter-end 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 were virtually the same for fiscal years 2011 and 2010. Sales of bib, bath and disposable products increased in the current fiscal year, mostly due to $3 million in acquisition-related sales, as well as an increase in core business sales.

Gross profit decreased in amount and as a percentage of net sales in fiscal year 2011 from fiscal year 2010. The decreases were due to higher raw material costs, including cotton, labor, transportation, and currency costs. The Company also had higher royalty shortfalls in fiscal 2011 from several of its licensers and had higher levels of promotional sales which were at lower contribution margins. Offsetting these cost increases was decreased amortization costs of $483,000 associated with the acquisition of the baby products line from Springs Global.

Marketing and administrative expenses for fiscal year 2011 increased in amount and as a percentage of net sales as compared to fiscal year 2010. The Company incurred increased advertising cost of $324,000 in the current year, as well as certain costs in the current year, which were not incurred in the prior year, primarily $254,000 in professional fees associated with corporate governance matters and $401,000 of costs in connection with the proxy contest related to the 2010 annual meeting of stockholders. Interest expense for fiscal year 2011 decreased to $460,000, from $692,000 in fiscal year 2010, due to lower average balances on the Company's term loan and revolving line of credit.

Net income for the fourth quarter of fiscal year 2011 was $1.6 million, or $0.16 per diluted share, compared to net income of $2.3 million, or $0.25 per diluted share in the fourth quarter of fiscal year 2010. Net income for fiscal year 2011 was $4.3 million, or $0.45 per diluted share, compared to net income for fiscal year 2010 of $4.8 million, or $0.52 per diluted share. I will now return the call back to Randall.

Olivia, thank you very much. Rocco, if you'll come back in, we'll open it up to any questions that anyone on the call may have.

Absolutely. (Operator Instructions). Arnie Brief of Goldsmith and Harris.

Didn't expect to be number one.

Hello, Arnie.

How you doing? You have a Disney license, and I think part of that Disney license is Winnie the Pooh.

It is.

Could you elaborate a little bit on what you think the impact -- Disney has a movie coming out this summer. And usually the licensed products get some benefit in their sales from a related movie. Could you comment on that at all? And could you give me some idea of where the Disney license goes? Is it just Wal-Mart, or is it in broader distribution?

Okay, Arnie. Let me answer in reverse. The Disney license is Walmart and it's broader distribution. It's a number of other value-priced retailers that we sell the product to, including Kmart, et cetera. And a lot of smaller accounts. There is a couple of movies coming out. And I think you're alluding to the DVD with the Pooh, and that can have a driving impact, but there's also in the toddler side of the business, we're pretty excited about, there's a new Cars movie coming out this year. And Cars is the number 1 now, the number 1 licensed property in toddler beds. Does that answer your question?

What line that you -- Cars is one of your lines? I'm not sure what --?

Cars is a property owned by Disney. It's a movie, and it appeals to children in the 2 to 4 year age range, and we sell toddler bedding into that age range. It's already our number 1 brand, and the number 1 brand at retail, of toddler bedding. And with a movie coming out this summer, we think that's going to have an impact on it.

I got you. Thank you very much.

Thank you.

(Operator Instructions). Michael Bernstein, a private investor.

Randall, good morning.

Hello, Michael.

Good afternoon. I reviewed the 13-D filing for Ms. [Stannard] and her CV, and she appears to be quite qualified. I was wondering what the Company has done to consider her? Have you had any meetings with her, interviews with her?

Michael, at this point I can't answer for the entire Board and the nominating corporate governance committee because nothing has been made public as it relates to that particular filing by the Company. So we have made no public announcement on that at all.

I would hope, and you know my long-term position has been to do whatever you can to avoid proxy fights, but if nothing is worked out with her, which in the past has been the history, and the Company then seems to have a willingness to spend $300,000; $400,000 a year to keep a nominee off the Board, I don't understand. If that's how you go forward, I don't understand how you take proxy fights into adjusted EBITDA, because they seem to be recurring.

I hate to agree with you, but in the last few years, they do seem to be recurring, even though they're varying amounts in different years. But again, Michael, no decision has been made public from the Company's standpoint on the 13-D filing that you're talking about.

I hope, and you know how strongly I hold the position that other large shareholders discourage the Company from having another proxy fight, because I think there's plenty to do in running the Company, rather than the distraction of a proxy fight and the expense.

Your desires are noted. Thank you.

Thank you.

Thank you. Have a good day.

(Operator Instructions). Bobby Melnick with Terrier Partners.

Thank you. It's Terrier Partners. Can you hear me, Randall?

Hello, Bobby. I sure can.

I'm okay. Thank you for asking. I'm trying to reconcile what seems to be 2 disparate statements. In your press release this morning, the Company talked about, I'm quoting, significant organic growth in our bib, bath and disposable products, end quote. And in your 10-K that was filed this morning, which is obviously a legal document that's vetted by counsel, the Company says, and I'm quoting, direct quote, sales of bib, bath and disposable products increased in fiscal year 2011 as compared to the prior year primarily as a result of an increase of $3 million in the aggregate due to the Company's acquisition of substantially all the assets of Neat Solutions and the Company's acquisition of the Bibsters product line of disposable infant bibs from P&G on May 27, 2010.

In the legal document that your lawyers write, the Company attributes the growth primarily to acquisitions, and in your press release, which is written by not your lawyers, but maybe vetted by your lawyers, who no doubt are familiar with your 10-K, I should hope, or we need new lawyers. You talk about significant organic growth, and I don't see how those 2 statements are consistent.

Bobby, there was some -- in the bib and bath area, not including the Bibsters and the Neat Solutions, there was growth, but there was some also some changing of products. But the material growth came at the dollar store level, which was significant. And that is not related to Neat Solutions and is not related to Bibsters. Some of that growth was offset to some slight -- a slighter degree by some changing programs at other retailers, but that goes back to what we noted in the conference call a few minutes ago, that we've had a growth in category or channels of distributions that didn't exist 2 years ago. And the dollar store was one of those. If we're misleading on that, I apologize.

Yes, it is very, very confusing. You've got a legal document that attributes the increase primarily to acquisitions. And then you've got a press release that says it's organic. It can't be both.

It says fueled by acquisitions and strong organic growth.

I'm sorry, I have to cut you off. That's not what it says. That's not what your statement says in your 10-K.

I'm talking about the press release.

Well, I understand, but in the press release you talk about acquisitions and organic growth. And then in your 10-K, you attribute it to organic -- excuse me, to acquisitions. The numbers are -- your organic growth, as I understand it in the bib, bath and disposables, was less than $1 million on a $19 million base from last year, which would imply around 4%, between 4% and 5%. And I just -- I don't want to split hairs here, but that's not significant growth. That's normative 2% units, 2% price, that's GDP-type growth.

There would have been very little price increase.

Maybe it was 4% units.

I understand your point. I really do. Okay?

Yes.

And if we -- if the heading on the press release is misleading, I apologize to you. That's not the intention. We did have significant organic growth was in the dollar store channel.

Okay.

Some of that was offset by some programs that were discontinued at other retailers. So it didn't all come through as total growth. It was a mix change, so to speak.

Right, right. I guess -- look, we've had snippets of this conversation, and we can have it offline if you want to pursue this. My objective as an owner is not to disparage the Company or its assets or its trade marks. For years we've looked at this Company and said there really isn't a lot of organic growth here. The facts are that you're right. We've had programs that have been discontinued, and you've walked away from business that was unprofitable. And you've rightly said as an owner-oriented manager, why should we do business where we're losing money? The owners appreciate that. I do, anyway.

We seem to continue to be spending capital, buying -- making acquisitions to stay in place. And we're all familiar with some of the publicly traded peers of yours who compete in this area through some subsidiaries or divisions. Some of your publicly traded peers more so than others. And they too seem to be struggling to produce the organic growth in revenues and certainly profitability, sustaining margins that we face. So this is not everybody's piling on Randall, he's a bad manager. This is, we face some serious headwinds.

We have faced serious headwinds, Bobby. There's no question about that.

What's that?

Excuse me. Go ahead.

So I guess the perpetual question becomes in an environment in which we've got a handful of significantly recognized suppliers and wholesalers, some of which have decent brands and good reputations and providing -- making, providing and delivering these products and we're competing where 73% of our sales go to multi-billion dollar, very strong, very entrenched, very concentrated retailers, it continues to raise the question as to why there hasn't been more consolidation among the suppliers. Because we just kept getting beaten up and beaten up every year. We have no pricing flexibility.

If the price of cotton goes up, or any other raw materials or shipping or distribution or fuels, it's very difficult, even with understanding retailers, for us to implement price increases. And there's not a lot of organic growth here. And if you look at the history of economics, that would foretell consolidation. And we're not seeing it, but instead, every year or 2, we're spending $4 million for an acquisition or $2 million for an acquisition or $6 million for an acquisition, to stay in place.

And Bobby, one of the themes that we've had from our shareholders over the last few years is we were too dependent on the 3 major retailers. Let me quote a number to you. In 2009, 2 years ago, 77% of our business was made up by the 3 major retailers that we all know and talk about. In fiscal year 2011, that's down to 71%.

Well, it was actually down a lot more. Why don't you be totally forthright and tell us what number was in 2010, since we both know what it is. And some of the other people listening might get the sense that it's been a straight line decline. Why don't you say the 2010 number now?

I don't know the 2010 number.

It only included 2, because 1 was slightly below 10%.

Target was below 10% that year, so I don't have the number.

We can tell you. Based on what you said in here, it didn't go down. It went up.

It only included 2. If you added Target into that, you can add a slightly below 10% to it.

So it was 73% in 2010.

But it was on the right track. From 77%, 73%, to 71%.

Okay.

That's the point I'm trying to make is there has been diversification, okay? The Neat Solutions acquisition did a tremendous amount to diversify us and take us into new channels of distribution, including food and drug and the restaurant chains. And that has been a very good channel of distribution for us. And when I say into the restaurant business, it's not insignificant numbers. It's major numbers, and that's not one of the big 3 retailers.

So we have -- the acquisitions that we've done has taken us into an area of reducing our dependency on the 3 major retailers, which was a major theme that was pushed a couple of years ago. And we've made great strides in that area.

Thank you.

Thank you.

(Operator Instructions). Michael Bernstein.

Just a follow-up to Bobby Melnick's question that I don't understand. The last conference call, you indicated that you were going to be able to implement price increases in order to compensate for the price increases on the supply side. Assuming were you successful, if your business were flat in the Crown Crafts infant products, that means that it actually declined on a unit basis. If you had a price increase but no increase in sales. The other thing, in terms of diversification, if my recollection is correct, Springs infant products is highly concentrated. It was basically a Walmart business.

Okay. Let me address your questions one at a time. We did say and we did pass price increases along. No question about that. We started passing price increases along late last calendar year. A lot of those were not effective until mid-fourth quarter. So we didn't get the full effect of that, so there's not a lot of top line growth from the price increases in any of the businesses.

And, as I'm sure you're fully aware, when we start passing price increases on in October, November, December, for January conversions, cotton still continued to go up even after that. So by the time we got the price increases through, it was not quite enough, and we had to go back for more. But we have passed price increases along.

On the Springs, it was a heavy concentration. Whenever we did the Springs acquisition, it is very highly driven by the 3 major retailers. So that was what it did. It did increase the percentage of the dependence on the 3 major retailers, and that's been 1 of the drives of the Company over the last 2 years is to decrease that dependency. And that's what we're talking about we have done. Thank you. Rocco?

Operator. Yes, sir. (Operator Instructions). Nelson Obus from Wynnefield Capital.

Hi, Randall.

Hi, Nelson.

In the midst of the proxy contest a year ago, the Company -- I believe it broke with practice -- issued a fairly detailed or fairly long-lasting projections regarding the future and has continued to do that. Would you just let us know what the policy is going forward and if we can depend on that kind of guidance in the future?

Nelson, with the uncertainty in the marketplace and the uncertainty in the raw material cost and the uncertainty of China, it is not our practice and policy to give guidance in the future. Right now, there's a lot of uncertainty. Cotton, polyester, transportation, power is a huge problem in China now. So that practice is not going to be a practice of one of giving guidance for the future.

I guess my only comment is that -- and I know this industry pretty well. I think all of those characteristics applied a year ago, so it was curious to come out with those numbers that were so inaccurate. Just a statement.

Nelson, I agree with you, they did exist, but not to the extent. In October of last year, cotton was still -- I don't know the exact price in August, but the early part of last year, it was under $1, and then peaked at $2. So, it was unprecedented times as far as raw material costs are concerned.

Well, we can all agree to disagree. I just thought it was unprecedented timing, and I guess I'm sorry you're not continuing with it to the best of your efforts. But thank you.

Thank you.

Gary Steiner of Huber Capital.

Hello, good morning. Three questions I guess. I'll just list them out. One is relative to the performance in the quarter, relative to the earnings and the EBITDA guidance that you had previously provided. Could you maybe rank out the biggest factors that prevented you from hitting that guidance? Could you maybe provide some outlook or commentary on how the current quarter is going, since we're largely through the current quarter? And then lastly, if there's anything to report on relative to the M&A environment, what you do see out there and any opportunities that are in the pipeline. Thank you.

Okay. Gary, on the EBITDA, the last guidance we gave on the low side after adjustments for EBITDA was $10.4 million, and we actually came in slightly below that at $10.1 million. So we did miss it, but by $300,000 on $10.4 million of EBITDA.

As far as outlook for the quarter, as I just addressed with Nelson, we're not going to give guidance going forward. I will say that we are still passing price increases along, and we're working with that on a daily basis with all of our retailers, as we need to, to pass the raw material costs on.

And I think the last question was acquisitions. We're seeing a lot of opportunities. We're seeing a lot of people very proud of what they have, and want to have high dollar price for it. So we're not paying for the high dollar value for some of the acquisitions, but there is a lot, and we are looking. Thank you, Gary.

Thank you.

Have a good day. Rocco.

This concludes our question-and-answer session. I'd like to turn the conference back over to Randall Chestnut for any closing remarks you may have.

Rocco, thank you very much and all shareholders on the line, we appreciate your interest in the Company. And we appreciate your questions and participation today. And we'll be back to talk with you in just a few weeks for Q1 of fiscal year 2012. This concludes our conference. I'll turn it back over to Rocco to wrap it up. Thank you very much.

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