Crown Crafts Inc (CRWS) 2012 Q3 法說會逐字稿

Good afternoon, and welcome to the Crown Crafts, Incorporated third quarter investor conference call. All participants will be in a listen-only mode. (Operator Instructions) Please also note that today's event is being recorded. I would now like to turn the conference over to Ms. Olivia Elliott, Vice President and Chief Financial Officer. Please go ahead.

Thank you, Jamie. Welcome to the Crown Crafts investor conference call for the third 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 Standard Time on February 23, 2012. Also, a 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 welcome to our third quarter investor conference call. Before the market opened this morning, we released our third quarter earnings for FY 2012, which ended January 1, 2012. Net sales for the third quarter in 2012 were $21.6 million as opposed to $21.9 million in the previous year, or a slight decline of 1.3%. Net income for the third quarter is $1.548 million as opposed to $775,000 in the previous quarter, or an increase of almost 100%. Earnings per share increased from $0.08 to $0.16, a 100% increase.

Year-to-date, our net sales are $60.5 million as opposed to $62.8 million in the previous year, or a decline of 3.7%. Net income, year-to-date, is $3.145 million as opposed to $2.715 million, or a 15.8% increase nine months, year over year. Earnings per share year-to-date for the nine months have increased from $0.28 to $0.32 per share. EBITDA as a percent of net sales for the quarter was 13.1%, and the year-to-date is 10.4%. We're very pleased with the strong results of the quarter.

A few comments about the quarter, and then Olivia will embellish it some with the financials. As we reported last quarter, we continued to move through merchandise which was purchased earlier in this year and late last fiscal year at higher cost. For some of the products, a portion of the higher cost was offset by price increases. But, the other products we reengineered and redesigned the product instead of increasing prices. We felt that on those particular products, increasing prices to consumers would have or could have negatively affected sales. Part of the improvement year over year is also related to one-time cost that was in the previous year associated with corporate governance and shareholder issues. Those costs were approximately $209,000 lower in the current year quarter. As we reported in the past, we will walk away from programs where we cannot make a profit.

During Q3, the quarter that just ended, we began to transition away from just such a program. As raw material prices increased, it pushed the program deeper into unprofitability. Such actions do negatively affect the top line but improve the overall cash flow and profitability of the Company. We're still seeing sell-through at certain retailers remain sluggish, as many of our customers continue to struggle with unemployment rates and the soft economy. In addition, the decline in the US birth rate of approximately 7% from 2007 to 2010 has also impacted our customer base. During Q3, we further increased our sales of Company-branded products, most notably NoJo and Neat Solutions. Combined sales of these lines during Q3 increased 39% year over year, and 13% year-to-date fiscal 2012 versus the same nine months of FY '11.

We're proud of the fact that we finished Q3 100% debt-free considering the fact that in 2001, we had $47.7 million of high interest rate debt after we downsized the Company. Being debt-free feels pretty darn good. Today, we also announced that the Board of Directors have declared a quarterly cash dividend of $0.04 per share on the Company's Series A common stock which represents the ninth consecutive quarter that dividends have been paid since early 2010. This dividend will be paid on April 6 to shareholders of record on March 16, 2012. We're pleased that the Board can share some of the positive cash flow with its shareholders. Using yesterday's stock price closing of $3.90 per share, our dividend represents an annualized yield rate of 4.1%. Again, I say we're pleased with the results of the quarter, and we trust that our shareholders are also pleased. I'll turn it back over to Olivia to add additional comments to the financials.

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. Third quarter sales decreased 1.3%, or $289,000 to $21.6 million as compared to the third quarter of fiscal year 2011 due to a decrease in sales of bedding, blankets, and accessories of $351,000, or 2.1%, which was offset by an increase in sales of bibs, bath, and disposable products of $62,000, or 1.2%. Year-to-date, sales decreased 3.7%, or $2.3 million, to $60.5 million as compared to the prior year due to a decrease in sales of bedding, blankets, and accessories of $1.9 million, or 4%, and a decrease in sales of bibs, bath, and disposable products of $486,000, or 3%.

Gross profit increased in amount by $837,000, and as the percentage of net sales went from 20.1% in the third quarter of fiscal year 2011 to 24.2% for the current year third quarter due to lower production costs resulting from lower raw material costs and the reengineering of certain of the Company's products and the transitioning away from an unprofitable private label bedding program. As we mentioned, during the second quarter, we refined our estimate of overhead allocation, which resulted in a nominal burden variance in the current year third quarter as compared to the prior-year third quarter. Consistent with prior years, we do not expect a material burden variance by the end of fiscal year 2012. Year-to-date, the gross margin percentage remained flat at 22.8%.

Marketing and administrative expenses decreased for both the quarter and year-to-date periods, due primarily to lower overall compensation costs and lower professional fees associated with corporate governance and shareholder issues, which were $209,000 lower in the third quarter, and $462,000 lower for the year. Net income for the third quarter of fiscal year 2012 was $1.5 million, or $0.16 per diluted share compared to net income of $775,000, or $0.08 per diluted share in the third quarter of fiscal year 2011. For the first nine months of fiscal year 2012, net income was $3.1 million, or $0.32 per diluted share, compared to net income of $2.7 million, or $0.28 per diluted share for the same period in fiscal year 2011. I will now turn the call back to Randall.

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

(Operator Instructions) Our first question comes from Liz Pierce from ROTH Capital Partners. Please go ahead with your question.

Thanks. Good afternoon. Hi, Randall and Olivia. How are you?

Fine, Liz. How are you?

I'm well, thanks. Nice job on the quarter. Obviously, the gross margin -- even if you exclude what was happening year-to-date on the unfavorable/favorable variance, still seems like a nice increase. I'm just curious how you feel about those trends, particularly as you indicated you're working through these lower -- or the higher cost inventory. Is this as sustainable -- and I think we have to go back a couple years before we even -- it's been almost two years since it was maybe above 24%, back in early '10?

That's true. Liz, barring any unforeseen circumstances like we saw last year -- early last year and late the year before of cotton going from where it is now to $2 a pound, and other raw materials or labor rates going up, we do think it's relatively sustainable, yes, on an overall annualized basis. It can have swings quarter-to-quarter, as we've seen that. There's no question about it. But we feel pretty good about the future.

Okay, all right. And then, how should we be thinking about the top line in light of the fact that there still seems to be some macro issues? I've noticed in our channel checks that certain retailers look like they are a little bit more -- better in stock, and then some of the usual suspects still seem to have a lot of empty shelf space.

It's a mixed bag. We have one retailer that we go into, and they say they are stocked well. And we go into the stores, and the shelves don't have the merchandise on it. So, it's a mixed bag. There's still softness in the economy. There's still some overstocking inventory issues, and understocking in other retailers. So, it's a mixed bag.

When you look at the top line, one thing that you need to be aware of is what we alluded to in the press release is we are exiting -- it's a sizable program that was a private label bedding program that, after the cotton prices did the rise as high as they did, it became very unprofitable. So we're exiting that. We started the exit of that in the third quarter, and it will continue into the fourth quarter, but we're striving to replace that business at profitable levels.

Okay. That was my next question, is how much -- how many quarters do you think it takes? And is there any seasonality? I wouldn't think with bedding there would be any seasonality. So, how we think about the sales cadence over the next couple of quarters?

That program, Liz, should be flushed out by the end of the fourth quarter.

Okay.

We started the exit midway through the third, or actually in the first-third of the third. And it continued through December, and we should be out of that by the end of our fiscal year, which is March.

I presume you don't want to tell us what retailer this was for, but it sounds like it was a sizable program?

It was in the multi-million dollar program, and I really prefer not to publicly announce who it is, for competitive reasons.

Even with that, beginning in the third quarter, your sales were down 1.3%. So, either you're getting traction with something else, or you're already replacing it. So, I would think that in terms of the fourth quarter, maybe the pressure wouldn't be so terribly -- too much pressure. I would also think that retailers are starting to do some stocking, restocking.

Well, they are. Every retailer, most of them, their year ends in January. When their year ends, they wake up and realize -- geez, I need goods on the shelf. So, we're seeing some positive responses to that. But it's still not the solid flow-through that we would like to see. It's still a little bit jerky.

Okay. Can you just give us an update on the toddler bedding license that was supposed to expire -- or did expire, I presume, at the end of December?

It did expire, and it has been renewed.

It has been renewed.

We don't disclose that in the Q. It will be disclosed in the K. But it's been renewed for two years.

Yes, I didn't see it in the Q. That's why I was wondering. All right.

It's normally a one-year event whenever we disclose that, just in the K.

Okay, all right.

But it has been renewed, Liz.

Okay, all right. That's good. I'll get back in the queue. Thanks.

Okay, thank you.

Our next question comes from James Fronda from Sidoti & Company. Please go ahead with your question.

Hi.

How are you, James?

Pretty good. I'll be filling in for Tino from now going forward.

Great.

I'm new to the story, but the one question I had was in terms of the private label products. I know the bedding might not have worked out the way you wanted it to, but is this the direction you think you're going to go to, going forward? Do they have higher price points and better margins?

No. That particular program was 100% cotton program, and when cotton went from $0.80 to $2 a pound, it just became so unprofitable that you couldn't produce the product anymore.

Okay.

So, don't read into it that it's a whole change in strategy. It's not. It's just that one program, which happened to be 100% cotton, became so unprofitable that it was not good to continue with.

Okay. In terms of the tax rate going forward, could I use 37%, 38%?

38% is reasonable.

All right, good. Okay, thanks. I appreciate it.

Thank you.

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

Hi, Randall. Just to follow up on the private label cotton. When you talk about walking away, it implies a couple of things. Number one, that there was no reset to the raw material costs, and two, that I assume the thing -- the contract came up for sale again. You weren't able to initiate any kind of pass-through or reset the contract to reflect higher cotton prices? Could you just give us a little more color on that?

Nelson, I'll be happy to. We did increase the price on that particular product category early last year. That would have been early in calendar 2011 at a double-digit rate, over 10%. And that passed through. As cotton continued to increase, we went back in the late Summer to pass through another price increase. And we told them at the time that because the price increase the second time was pretty -- was more substantial than the first, okay? And quite candidly, I said you can do us a favor and take it away.

It's not like it came up for renewal. It's not a renewal contract. It's not a renewal program. We've had this product, except for about an 18-month period -- we've had this product for many, many years. And it's just gradually, as cotton got higher, became more and more unprofitable. So, we asked them -- we said price increase or take it away, and candidly, I would rather you take it away. That was almost the direct quotes, okay? It's better for us to be without it than with it, I promise you.

Even when cotton starts heading down. It's not something that averages out?

Even with cotton going down. Even in the best of days, Nelson, it had brackets around it.

Is there anything we can read into this about the future of private label? Or was it just sort of a one-off?

This one, I think, is more of a one-off. And I don't think you should read it into the future of private label at all. It's more of a one-off, because it's -- I don't want to go -- it's a solids program. It has no design in it. And it can be done by a multitude of people. It doesn't have to be done by us. It can be done by almost anybody. But it's a solids color program, and it's 100% cotton.

So, when you do solids, 100% cotton, there's no margin in it. And then, when cotton goes up the way it did, it becomes even less attractive. It's a huge program with a lot of SKUs -- not huge as far as dollars, but a lot of SKUs. So, it's terrible to manage. Just nothing about it is right.

Got it.

Okay?

This reference in the press release to the decline in birth rate. Is this reflecting itself more in inventory management by your customers, or actual sell-through?

We think it's actual sell-through. There's two things. The birth rate's down a real 7% over the three-year period. There's no question about that. We sell to the first birth -- we sell to the birth rate. With the birth rate being down 7%, it translates straight through to the consumer because we have 7% less consumers that are buying the product.

And also, the unemployment rate -- we think a lot of our customers fall into the unemployment category. It's hard to start families when you don't have a job. So, we think both of those play into the customer base.

Strikes me that, other than making condoms illegal, there's not much you can do, right? (laughter)

We think it's going to change if the economy rebounds. We think that birth rate will change.

One other question. I noticed in the Q, there was a little legal flare-up. I realize there are limits as to what you can say, but can you give us any color?

Not really, Nelson. I don't want to give a lot of color, but what Nelson is alluding to is the comment we had in the Q that there was -- that there's been a lawsuit served or filed by a competitor claiming that we infringed -- or we're infringing on a new product that we introduced that is patent pending for us. And all I will say to that is that we think we're on the right side of that argument. We feel strongly that way, and we plan to --. (multiple speakers)

So, you'll have a [markman] or something at some point and straighten it out. Is it a big product?

Yes, it's a sizable product because it's a new creation of a -- and again, going into elaborate a little bit. There's been a lot of controversy over the safety of traditional crib bumpers -- the padded bumpers that we have known and loved for so many years. They have been banned in one particular city. There's another state considering it, et cetera. We went to work and from ground zero, and engineered base-up a product that we don't think infringes upon the other product. It is used to protect the child in the crib, not as a bumper, it's called a safety crib liner that goes around all four sides of the crib, and keeps the baby's arms, the legs, and the limbs from getting -- extending through the slats at the side of the crib.

So, it can play into a separate sales issue as a crib liner. It can be incorporated into the set. And so, yes, we think it is a good product and sizable product, and we've invested a lot of time, energy, effort, and money to design this product. We've applied for the patent, and we will defend it.

I lied. Last question -- can you just give us an update on the table-top product for kids? And your efforts to try and get it into other restaurants and so on and so forth?

The table topper product -- the Neat Solutions table topper product for kids is doing well. We're expecting an increase in that product category for next year. It is selling well at retail. We've designed some new products that incorporate games into the table topper, and those products are actually on sale now at Babies R Us and at Wal-Mart. We have gained some traction with that.

We have still been struggling and trying to achieve expanded placements into the casual dining chains. We have one major customer there now that we're doing in excess of $1 million a year with, but we have not -- with the economy being the way it is, it's been very difficult to secure many more casual dining chains. We do have one West Coast chain that's small. We have another one that's in tests right now. So, we have some going, but we don't have anything major to report. We don't have another homerun.

Okay, understood. Thanks.

Thank you.

(Operator Instructions) Our next question comes from Bobby Melnick from Terrier Partners. Please go ahead with your question.

Hi, good afternoon. I wanted to spend a second, if we could, a little bit away from product and a little bit about finance. Olivia, the revolver is now completely undrawn, and you have no debt on the Company at the end of the quarter. Is that correct?

That's correct.

What are the terms of the revolver? In other words, if you were to borrow today, what rates would you be paying?

We're at LIBOR plus 3, which is about 3.25 right now, I believe.

Okay. Thank you. That gets into my question for Randall, which is -- could you talk a little bit about the dividend payout ratio, and what the Company's strategy is therein? And the reason I say this is because you and I have spoken both online and offline about things that this Company can do to surface shareholder value and to produce shareholder value. It strikes me that a Company that in a pretty difficult climate that produced almost $8 million in free cash flow in the first three quarters -- I'm going to go out on a limb and assume you're not going to have negative cash flow, $4 million or $5 million in the fourth quarter. In fact, you'll probably be positive cash flow. Could probably sustain a dividend of higher than $1.5 million a year, which is what it currently is. While we don't know the outcome in the future, there are proposals that would raise the tax rate on dividends.

I guess my question is -- would it make sense for this Company either to be paying a higher percentage of its net income or free cash flow as dividends? Or, in addition, perhaps lever up and pay a special dividend if your covenants would permit that? In other words, borrow $5 million or $7 million or $8 million or $10 million, and pay a $0.75 one-time dividend, or $9 million one-time dividend.

I would like to hear your thoughts on that, because it strikes me that given this Company's growth prospects, which are largely acquisition-oriented, buttressed by some organic growth in new products. It sounds like this is not a Company that's going to be consuming a tremendous amount of its capital going forward. That, to me, is the prescription for a Company that could pay a higher dividend than a 30% or 25% payout ratio. I know you guys don't make forward-looking comments about earnings, but we've earned $0.30-odd in three quarters. Forecasts are $0.45, $0.50. We've earned higher in the past, and we're paying one-third of that in earnings -- of our earnings in dividends. Randall, thoughts?

Yes, Bobby, it's a good point. First of all, let me go back and address -- we are totally debt-free as of now. That's not to say that we won't bounce back into it if we have big royalty payments or something, but we're pretty much debt-free and should stay close to that level going forward unless something does happen like we do an acquisition or something. The Board -- Bobby, we started paying dividends at $0.02 per share in early 2010. We paid that, I think, for three quarters. Then we raised it to -- maybe four quarters -- and then we raised that to $0.03, and now we've been -- this is the second time around at $0.04. The Board did look at it. They did entertain it.

There are -- I'm trying to remember everything you said. There are some covenants within the loan agreement that restrict how much we can pay on dividends, but we're not close to it at this particular point, okay. So, we do have some wiggle room. The Board has considered it. They will consider it in the future, and it is a topic that will be on the Board agenda to discuss at future meetings because it is a way to reward the shareholders and give money back. And you're right, we should be cash-positive going forward, barring any major unforeseen circumstances. So, your comments are well-noted, I promise you.

Okay.

That's all I can say at this point.

Well, you're one Board member, and you're one representative. You're not -- it's not your Company. What would you advocate? Do you have a position that this Company should be paying one-third of its earnings in dividends, or should it be more? Or what would you personally -- or professionally -- would you, Randall, prefer to harvest that money and find acquisitions? I'm asking you.

Right now, Bobby, at the $0.04 per share, I'm an advocate -- I was an advocate this quarter of holding it where it was, because until we see where the economy's going to shake out, where we see where raw materials are going to shake out -- and to see if there was some acquisition opportunities. But that was only for the quarter. It can change next quarter.

Okay, thanks.

Thank you.

Our next question comes from Ralph Marash from First Manhattan Company.

Hi, Olivia and Randall.

Hello, Ralph, how are you?

Okay, how are you?

Good.

I think I just have one question, which is about inventories. Year-over-year, they appear to be down substantially, about $4 million. Just was curious about your comments?

Ralph, the easy answer to that is they were higher last year than they should have been, and we alluded to that on one of our phone calls about a year ago -- that we weren't happy with the inventory. We manage inventory pretty darn well. And so, they are more in line now with where they should be. If you've got a look, they were more out of line last year.

Okay, thank you.

Thank you.

At this time, I'm showing no additional questions. I would like to turn the conference back over to management for any closing remarks.

Okay, Jamie. Thank you very much. I would like to say to all the shareholders on the call, thank you for your time, your attention, and your participation. If you have questions in the meantime, please don't hesitate to call us. And we'll be back again in a few months to report our year-end, which will be the year that ends the end of March, which will be our FY 2012.

With that, we'll sign off. Thank you very much. Have a good day. Good-bye.

That concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.