Crown Crafts Inc (CRWS) 2012 Q1 法說會逐字稿

Hello, and welcome to the Crown Crafts, Incorporated first quarter investor conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Instructions will follow at that time. (Operator Instructions). Please note that today's conference is being recorded.

Your host for today's call is Ms. Olivia Elliott, Vice President and Chief Financial Officer. Ms. Elliott, please begin.

Thank you, Jamie.

Welcome to the Crown Crafts investor conference call for the first quarter of fiscal year 2012. 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 8.00 AM Central Daylight Time on August 25, 2011. A web replay of this call will be available for 90 days. You can access it by visiting our website at www.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 very much, and welcome to everyone.

Earlier today, before the market opened, we reported earnings for the first quarter of our fiscal year 2012, which ended July 3 of this year. First quarter sales were $17.5 million, as opposed to $17.2 million same quarter last year, or up about 2%.

Net income for the quarter was $530,000 as opposed to $726,000, or down $196,000 from the previous year. We experienced a gross margin gross profit decline from 25 percentage points last year to 21.6 this year.

The gross margin decline is attributable to 2 items that I'll touch on. We experienced much higher product costs from Asia as raw material costs increased. In addition, we experienced higher labor costs and transportation costs to get the product from Asia into the US market.

We passed these cost increases along to our customers, but in some cases, the first costs were rising at such a rapid rate that by the time we increased it to our customers, it was not sufficient to cover the first cost increase.

The second point, which Olivia will touch on a little later, is our method of accounting for overhead expense played a large part in the declining gross profit percentage. We account for overhead based on budgeted purchases, and the gross profit in the first quarter of the prior year was favorably impacted by an overabsorption of $333,000 in overhead expense.

Most of this overabsorption reversed as merchandise was sold later in last year, resulting in an unfavorable impact in gross profit in the latter quarters. The impact of gross profit in the first quarter of the current year from the absorption of overhead is minimal.

Moving on, historically, the first quarter of our year, the quarter that we just ended, is our weakest quarter. We're pleased that we're able to show in this market a slight sales increase in one of our more difficult quarters.

Sales at retail continue to be sluggish. As we pass price increases on to our retailers and in turn they have passed it on to their customers, we have seen that affect sell-through at retail. 1 point that's very good for us is we continue to pursue international sales. In the past 12 months, we have established new distributors for our products in the following countries -- Central and South America, Taiwan, Japan, South Africa, UK, China, and just beginning in Australia.

1 of the things that we're extremely pleased with, we have our NoJo bedding products in 12 Good Baby stores in mainland China. We've also -- last year, we introduced our pet products, our pet beds at the show in Las Vegas in September. We're pleased to report that we're now in 2 chains that represent 56 stores. As we had told investors in the past, we're starting this project off very slow.

We're starting with the pet specialty stores, and we're pleased that we're in 56 of those stores now. 1 is in middle America, the other is on the West Coast. Early reports at retail show that the product is selling, and we've actually had reorders on some of the items.

1 item that we're extremely pleased with, debt at the quarter end was $2.4 million, and we had $21.5 million of availability under our revolving line of credit. We have a very strong balance sheet to go forward with. We're pleased once more to provide immediate value to our shareholders as we announce the 7 consecutive quarter of dividend payments. We will pay $0.03 per share to shareholders of record as of September 16, and the payment will be made on October 7 of this year.

I'll now turn the call back to Olivia to make some additional comments on the financials, and then we'll come back and open it up for any questions. Thank you.

I'm only going to give financial highlights. For a 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 $413,000 in the first quarter of fiscal 2012 as compared to the first quarter of fiscal 2011, due to the successes of new designs and promotions. Sales of bib, bath, and disposable products decreased by $81,000 for the same period.

Gross profit decreased in amount and as a percentage of net sales for the first quarter of fiscal year 2012 as compared to the same period of fiscal year 2011, in large part due to higher raw material labor, transportation, and currency costs in the current year period, associated with the Company sourcing operations in China.

Also, the gross profit in the first quarter of the prior year was favorably impacted by the overabsorption of overhead expenses amounting to $333,000. During the current year quarter, the timing of inventory purchases and related expenses were in line with our budget used to develop our planned fiscal 2012 overhead burden rate to be applied to inventory, resulting in minimal impact to gross profit in the current year.

In the same quarter in the prior year, the rate of our inventory purchases exceeded planned amounts, and as a result, the application of our estimated 2011 burden rate resulted in overapplied overhead in the first quarter, which was reflected in cost of goods sold as the merchandise was sold in subsequent quarters during fiscal 2011, resulting in an unfavorable impact to gross profit in those later quarters.

Marketing and administrative expenses decreased for the first quarter of the current year as compared to the same quarter of the prior year, due to lower overall compensation costs and factoring fees. The decrease in interest expense for the current year quarter compared to the prior year is due to lower balances on the Company's credit facility. Net income for the first quarter of fiscal year 2012 was $530,000 or $0.05 per diluted share, compared to net income of $726,000 or $0.08 per diluted share in the first quarter of fiscal year 2011.

I will now return the call to Randall.

Olivia, thank you very much. And Jamie, if you'll come back and make the introductions, we'll open it up to any questions that anyone may have online.

(Operator Instructions).

Our first question comes from Steven Zelkowitz from Wynnefield Capital. Please go ahead with your question.

Good afternoon, Randall. It's Steve from Winfield.

Hi, Steven. How are you?

Okay.

Randall, after the recent Board elections last week, can you share with us any new assignments of the directors on the various committees?

Steven, hold on 1 second.

Sure.

I made a gross error. I cut you off just temporarily. Start over again. I'm back on, okay?

Just wanted to ask after last week's Board elections, can you share with us any new assignments of directors on the various committees?

Steven, those have not been announced. I mean, there's been some appointments to the particular committees, but those have not been announced at this particular point to the public.

Okay. Well, we just want to reiterate the fact that we do support Ms. Stensrud, our new director for the nominating committee, as we expressed at the annual meeting and we reflected in the 13-D yesterday. Because we feel it just would be helpful, given the Company's current deficient corporate governance practices.

No, I appreciate that, Steven. And believe me, it is taken under advisement, and it will be handled at the Board level.

Okay, thank you.

Thank you. Have a good day.

(Operator Instructions).

We do have an additional question. This comes from Michael Bernstein. Please go ahead with your question.

Randall, how are you?

Hi, Michael. How are you?

Good.

A few questions. Last July -- I don't have the financials near me -- were your inventories, did your inventories increase pretty greatly from the end of the fiscal year to the end of the first quarter, because I see that there was an increase to some $18 million.

There is, Michael, and there is every year. As we enter the year-end, we usually draw inventories down as at the lowest point of the year. And then as we go through the first quarter, it is a weaker quarter, we're building inventory for the second and third quarters, and --

Is your inventory -- I'm sorry.

Excuse me. Olivia's looking right now at last year's and compared to this year.

In March of 2010, the number was $10.5 million, and in June of 2010, it was $16.7 million.

How does that compare to June this year?

You're up about $1.6.

Well, in the rate -- it's based on budget, so in this particular year, we would have been closer to our budget, as far as the purchasing levels.

And you said that costs were passed on the first time, but then prices went up beyond that. Was there a second price increase to reflect current raw material costs?

There is in some cases, and in some cases there's not. And each 1 stands on its own, if we -- because by the time some of the second came, we started to see the downside, the back side of the bell curve, and prices were starting to drop some. So, in some cases, we elected not to make a second price increase, and in some cases we have.

Okay. The sales increase, would you say that that was largely because of price increases?

No. Part of it is. Part of it would be price increases, and part of it would be real unit increases.

Well, because if you did $17 million in sales, your increase in sales was maybe $300,000. And I'm assuming that your price increases had to be well in excess of 2%.

I mean, I don't know the overall average, Michael, of what the overall average price increases were. Some of them -- some items we did not increase at all, okay? Some of the disposable products, the meat solutions and the bibsters, we didn't really experience price increases on them, So, those did not have price increases.

So, I can't tell you on the call. You can call back later, and we can give you the information of what the average price increase was.

Okay.

And my last question is, was there not an acquisition in the last 12 months in the bib and disposable product area?

There was 1 of Bibsters that occurred in May of last year, yes. It did.

So, with the acquisition, you still had a decline in that category?

With that acquisition. In the quarter, we still had a decline in that category. There's no question about it, because we saw some weakness.

With the economy the way it is, we've seen people trading down, buying less product, where in the first year of birth, they usually buy a dozen bibs, they're buying less now. And so as the economy has affected the consumer, we've seen that as an item that has been somewhat soft, and yes, we did. We had a couple of million dollars from the Bibsters, just short of $2 million, and there was some of that offset by lower decline in sales in some of the core Hamco business.

Okay. Thank you.

Thank you.

And our next question comes from Bobby Melnick from Terrier Partners. Please go ahead with your question.

Thank you. Hi, Randall. Hi, Olivia.

Hi.

I wanted to talk a little bit about your balance sheet. You had a couple million dollars of debt at the end of this most recent period, but the bulk of that was due to be paid July -- in the interim, which I presume you've paid. Is that right, Olivia?

We did pay that, Bobby. We paid it on July 11 when it was due.

So you're essentially -- I mean, not entirely to the penny -- but you're essentially debt free at this point, which is -- again, the Company has been in a debt-free position several years ago. And then you've borrowed for the CIT issue, remember for the economic recession concerns, which I thought was prudent, and you've made some acquisitions.

But I wanted to sort of, Randall, get your ideas here. Barring acquisitions, barring strategic acquisitions, what would you recommend to the Board, or what does the Board envision as a sort of strategy with respect to -- you're still planning on accumulating, and you'll convert receivables into cash and you'll build and then convert again toward the end of the year. A year from now, absent acquisitions, we're going to start building $4 million or $5 million of cash.

We pay a little over $1 million a year in dividends, so we're still going to be in a net cash build position. And I'm curious as to what you think is an appropriate prudent use of that, ranging from more aggressive share repurchase down here in the force, increasing the perpetual dividend, special dividend $0.15, $0.20, $0.25 or $1 if you wanted to lever up. What are your thoughts on that?

First of all, Bobby, let me say that the dividend is not a perpetual dividend. It's declared every quarter, and I just want to get that on the record. We have now kept it for 7 quarters, I agree.

Bobby, you've calculated the numbers very closely, and you're very clear that if we don't do -- barring acquisition over the next 9 to 12 months, we will be debt free. We have now paid off all the legacy debt from the old company that existed back in 90s and the early 2000s, which were sizeable.

That last payment was made on the 11th of July, and so now the only thing we have is a revolving debt with CIT, which we only use as working capital needs. And as I said, we had a tremendous amount of availability at year-end of $21.5 million available on that for borrowings.

Bobby, all of the above will be discussed at the Board level, I can assure you, meaning the items that you brought up, which would be as you related the perpetual dividend or the $0.03 per share declared for the last 7 quarters. It could be stock buybacks, it could be special dividends, or the biggest 1 is, it can be used and will some possibly be used by acquisitions if we find the right deal. So, it's not smart to just sit with a lot of cash, we know that.

Okay, do you have a preference? Or a recommendation you'll make to the Board?

Bobby, my recommendation to the Board, if we can find the right acquisitions that work and that make sense and complement the business, will be to do some acquisitions if they're the right ones. We aren't going to overpay. We never have and never will, and we've got to find the right ones to make it work.

And are you experiencing the same view and the same climate that your peer/competitor said yesterday on its publicly traded conference call when Kip Rance talked about there was a lot of acquisition -- were a lot of acquisition candidates for sale?

There's a lot, yes. There's a lot, and a lot of people are very proud of their companies, meaning they want a lot of money. And there are a lot available, and we are looking.

Bobby, are you still there?

Yes, I am.

Okay, it beeped. I didn't know what happened. But no, there are opportunities, and there's a lot out there, and so, we're continuously looking.

Thank you.

Thank you very much.

And our next question comes from Nelson Obus from Wynnefield Capital. Please go ahead with your question.

Look, I missed a couple of your prepared remarks, so I hope that you didn't cover this, but increasingly, I'm hearing that going forward, China's really not going to be the place you want to outsource to because of increased labor costs and etcetera. So, I know you've got a very good record in China and a lot of good relationships, so how is the Company reacting to this? Maybe you disagree with it, but what are you thinking long term in terms of what kind of outsource profile you'd like to have?

Okay, Nelson, let me answer that a couple different ways. First of all, right now China is still the best. In our category, it all starts with woven fabric. You can outsource knit fabrics and wood items to other countries, those are readily available.

But woven fabrics are not as readily available in the grades and counts that we're using in some of the lower-priced countries. So, if you look at moving the fabric from China to another developing country and then bring it into the US, the price is higher.

We've looked at that and we've done the math on it. I've been to Vietnam, we've looked at Vietnam. We're looking at it again as we speak. We're still doing business in Thailand. We've been in Indonesia, we're looking at Indonesia again, We're in India to a lesser degree.

So, yes, to answer your question, if we can find the woven fabrics in the right country where the labor rates are cheaper, we aren't opposed to moving. We are definitely in favor of moving if we need to, and that's a constant, ongoing situation. You are right.

Labor rates are increasing in China, and I don't see that changing. They were up 20% last year. It looks like it's going to be up at least 10% this year, and I don't see that easing up in the years to come.

Do you think that there's any expertise growing in regard to some of those other countries in terms of handling woven products or not?

I haven't seen it yet. It's not inexpensive. It's quite expensive, as you know, to get into the woven business to do the yarn and then do the weaving.

It is quite expensive. Some countries have it, but it's limited. It's not as widespread availability as it is in China. But there are some that we're seeing come about in some other countries.

2 years from now, I think we could see a different landscape. Because these other countries are looking at China and saying that it's an opportunity as well.

Okay, thanks.

Thank you.

(Operator Instructions).

Sir, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to you for any closing remarks.

Okay, Jamie. Thank you very much.

And to all of the investors on the line, we appreciate your interest in the Company. And we remain, that if you have any follow-up questions, feel free to call Olivia or myself, and we'll be happy to address those. But thanks to all the suppliers of the Company, the employees of the Company, and the shareholders of the Company. We appreciate your interest in Crown Crafts.

Thank you very much and have a good day. Thank you.

And with that, today's conference has concluded. To access the digital replay of this conference, you may dial 877-344-7529 or 412-317-0088 beginning at 3.30 Eastern Time today. You will be prompted to enter a conference number, which will be 1000-26-69. Again, 1000-26-69. You'll be prompted to record your name and company when joining.

We do thank you for attending today's presentation. You may now disconnect your telephone lines.