Crown Crafts Inc (CRWS) 2013 Q2 法說會逐字稿

Welcome to Crown Crafts, Inc., second-quarter investor conference call. Your host for today's call is Randall Chestnut, Chairman, President, and CEO. 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. As a reminder, this conference is being recorded today, November 14. At this time, I would like to turn the call over to Olivia Elliott, Vice President and CFO, who will begin with the call. Please go ahead, ma'am.

Thank you. Welcome to the Crown Crafts investor conference call for the second quarter of fiscal year 2013. 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 November 26, 2012. Also, a web replay of this call will be available for 90 days and can be accessed 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 good afternoon again. And we'd like to go through the numbers and talk a little about the quarter which we reported yesterday afternoon which is our second quarter which ended September 30, 2012. Net sales for the quarter were $17.3 million as opposed to $21.3 million in the same quarter the previous year, or a decline of 18.9%. Net income for the quarter was $755,000 as opposed to $1.067 million in the same quarter the previous year or a decline of 29.2%. Likewise, diluted earnings per share were $0.08 versus $0.11 or down $0.03 or 27.3%. For year-to-date numbers, we were $34.7 million as opposed to $38.8 million or down 4.1% which all occurred in the quarter, or 10.5%. Net income for the year-to-date was $1.652 million as opposed to $1.597 million, or an increase of $55,000, or 3.4%. And likewise, diluted earnings per share went from $0.16 last year for the six months to $0.17 this year, or an increase of 6.3%.

The second quarter of FY '13 was impacted by several factors, including the following. The discontinuation of an unprofitable private label bedding program which we've talked about on these calls now for almost a year. The impact in Q2, which is the largest shipping quarter for the program and FY '12, was just over $1 million in revenue. In addition, as we reported on the first quarter call, we did shift some goods from FY13 Q2 into Q1 which had a negative impact on the current quarter. The remainder of the shortfall is attributable to the soft economy and the sell-through at retailers which is contributed to the soft economy and the lower birth rate. Also this year, we saw the retailers being very vigilant in controlling their inventories and they were tenacious in pursuing that.

Our gross profit percentage improved in the quarter from 22.2% to 22.6% in the current year, and it improved from 22% to 24% in the six months year-to-date. The improvement can be attributes to four factors. Again, I go back, the discontinuation of the unprofitable private label bedding program as we circle around year over year, we see the benefits of discontinuing that program. Second, the improvement of prices from our suppliers as raw materials continued to -- did decrease in the current year versus the previous year. We also continued to see success of product which we re-engineered when the raw materials prices were at an all-time high and we saw the benefit of that continue into the quarter. Also, as we had reported before, we increased prices where we felt that we could without having a big detrimental effect on the sales volume. Branded sales for the quarter improved 6.8% year over year with NoJo leading the way and our secondary brand Neat Solutions also making new head roads. So that increased 6.8% year over year and also it's increased 13.5% year-to-date for the six months.

Turning to the balance sheet, we finished the quarter with no debt and $6.3 million in cash on hand, which we're very pleased with. Moving on to another area, dividends. Yesterday, we announced our 12th consecutive quarterly dividend and our third at $0.08 per year. I'll get to the record date and the payable date in a moment. This represents a 5.3% annualized yield based on yesterday's closing price. One item we announced yesterday, which was a new addition that we had never done before, was a one-time special cash dividend of $0.50 per share. Both the quarterly dividend and the special dividend will be paid on December 27 of this year to shareholders of record as of December 14 of this year and will be funded from available cash balances. This action by the Board to pay a special dividend is further evidence of its continued confidence in both the health of the business and the strength of our cash flow. It is intended to reward our shareholders while retaining the financial flexibility to take advantage of opportunities as they arise.

In closing, let me sum up a few things and I will give it back to Olivia to make some more comments. Management remains optimistic about our future as well as the Board. We have discontinued the private label program which represents more than $3 million in sales and even though we're taking the hit for the loss of the revenue, we are seeing the benefits from the profit because the program was so unprofitable. As most of you know who have followed us for a long time, we maintain tight cost controls at all time and that is to our benefit at this particular point, is to maintain very tight cost controls. Next, and very importantly, we're debt free. We have no debt, and even with the special dividend of $0.50 plus the $0.08 that we're going pay, the $0.58, we should still be debt free at the end of the quarter. Yes, the declining birth rate and the unstable economy are concerns, but frankly we think we're well positioned for the future.

All of our products and designs were received very well at an ABC trade show, All Babies & Children show, held in October in Louisville, Kentucky. One of the new lines that we previewed or showed at the show was a brand called Wendy Bellissimo and was received very, very well. And we are beginning to ship that in Q3, the quarter we're currently in. As I wrap up before I give it to Olivia, I would like to say thanks to all our customers, employees, suppliers, and our shareholders for their continued interest and support of the Company. Olivia?

Thank you, Randall. I'm only going to give financial highlights. For more detailed analysis please refer to the Company's Form 10-Q filed with the Securities and Exchange Commission yesterday afternoon.

Net sales for the current year second quarter were $17.3 million, this is $4 million or 18.9% lower than in the second quarter of fiscal 2012. Fiscal 2013 year-to-date sales of $34.7 million were $4.1 million or 10.5% lower than fiscal 2012 year-to-date sales. The decrease is primarily due to the discontinuance late last year of an unprofitable private label bedding program and a shift of sales from the current quarter into the first quarter. Also, we continued to experience challenges associated with the difficult macroeconomic conditions.

Gross profit decreased in amount by $827,000 but increased as a percentage of net sales from 22.2% in the second quarter of fiscal 2012 to 22.6% in the second quarter of fiscal 2013. For the year, gross margin has improved from 22% in the prior year to 24% in the current year. The margin improvement can be attributed to lower production costs resulting from the redesign of several product lines to reduce the Company's dependence on cotton, the cost of which reached record setting levels in the prior year and the discontinuance of the unprofitable private label bedding program previously discussed. Also, amortization costs related to the acquisition of the baby products line of Springs Global in November 2007 were $122,000 lower in the current year second quarter and $244,000 lower year-to-date. Marketing and administrative expenses were $180,000 lower in the current year second quarter and $50,000 lower for the first six months of the current year as compared to the prior year.

The provision for income taxes is based upon an estimated annual effective tax rate of 35.8% for fiscal 2013 compared with 38% for fiscal 2012. The decrease in the estimated annual effective tax rate in the current year is related to an increase in the current year in the amount of certain expenses which are deductible for tax purposes but not for book purposes, as well as an increase in projected state enterprise zone wage credits. Net income for the second quarter of fiscal 2013 was $755,000 or $0.08 per diluted share compared to net income of $1.1 million or $0.11 per diluted share in the second quarter of fiscal 2012. Net income for the first six months of fiscal 2013 was $1.7 million or $0.17 per diluted share compared to net income of $1.6 million or $0.16 per diluted share for the first six months of fiscal 2012. I will now return the call to Randall.

Olivia, thank you very much. And Denise, I'll call you back, and we can open up for any questions that anyone on the line may have.

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

James Fronda, Sidoti & Company.

Could you just give us any insight into how sales are holding up regardless of the new product introduction in third quarter?

Again, James, we really don't, as you know, from following us, we don't make any forecasts in anticipation. The closest I will come to it is what I said that we're -- we remain optimistic about the future.

Okay. Are you guys seeing any inflationary cost pressure going forward?

Are you talking about from the supply side?

Right.

We're seeing some. Yes.

Okay.

We're seeing a little, and we're ruling that back and fighting that back as much as we can. In some cases we're having to grant a few price increases but so far, they have not been severe.

Okay. That's good. All right, thanks, guys. I appreciate it.

Nelson Obus, Winfield.

Look, I think this is a very important question, although it's a bit convoluted. First of all, I think this extraordinary disarray in the infant and juvenile arena, and I think the short-term macros are nothing short of ugly. I also feel that in light of that, I would just like you to counter this. In light of that, I think the special dividend is a very large error on the part of Management and the Board, and I would just like to you refute this.

I think one of issues here has been that the Company has not really ever achieved a critical mass. I do believe you've never had a quarter in recent memory where revenues have been so low. I know there are all sorts of extenuating circumstances, but the trajectory of revenues has been down, down, down, down. With the dividend and now this extraordinary dividend, I think you kind of reinforce the idea that this is a dividend stock and not a dynamic stock, and as you know, I'm your largest shareholder and I've been an activist all along.

One of my issues has been that the Company should either sell itself or it should be a little more aggressive making acquisitions to create that. What really bothers me here is that having gone to the infant and juvenile show, there's an element of desperation I picked up on the floor that would allow you to do some serious bottom fishing with some of these entrepreneurial efforts like Bellissimo, and create a whole growth leg for the Company instead of the very slow incremental drop in acquisitions that have characterized the Company and frankly kept the earnings flat or growing during the period.

So it's sort of a philosophic question, but frankly the last thing I wanted to see was a special dividend. I think it constrains your ability to execute the strategy and it really kind of creates a status quo for everybody to see this as a cash cow rather than a dynamic company. And I know you don't like leverage so that's the bear case. I'd like you to go ahead and refute it.

Okay. Nelson, it is a broad ranging question or comment that you made, and I will try my best to answer all of them. First of all, as we said, the special dividend, the $0.50 per share that we're paying, is done from cash. It's not from debt. And so when we pay the dividend, the $0.50 plus the $0.08 at the end of December, we should still have some cash left on the balance sheet at the end of the quarter. And we'll turn around and start building cash again, and you've done the mathematics with me before.

We generate, on a free cash flow basis, somewhere north of $6 million to, you know, somewhere in the $6 million range per year. So, we don't think, and the Board doesn't think that this hampers our ability. Plus, on the side, we have $19 million as of today, barring availability, at 3.25% interest. We think that is very attractive rates to do acquisitions at 3.25%. And we've got $19 million.

I will remind you when we did the Springs acquisition in '07, we actually didn't use all of our revolver to do it. We did a $5 million fixed loan piece for two years spread over 24 months amortization. So, if we did an acquisition, there's way to do it with the availability under the revolver and also some fixed coverage outside of the revolver. So $19 million is not just the limit.

And the last point, I think I'll cover all this, is there is a lot of small businesses that are available to look at. And we are looking on a constant basis. We've had a few recently that were very, very close to reeling in, and for various reasons, one of them being safety issues, we backed out.

And one of them we've seen recently that I'm very happy we did back out because they had a real problem with the CPSC, and they've now closed their doors. So, we're very careful from two standpoints. The safety that CPSC has put on our products and the industry. We don't want to buy into a troubled situation. And also, we don't want to over pay. But we are looking and will continue to look. And we appreciate your remarks.

Let me make just one response to that because I think this is important. What you say makes a lot of sense from 5,000 feet. The problem, Randall, is that we've known each other a long time, and you've been a very capable steward of this Company and probably the best operator that I know of in the I and J space. But you don't like debt, and that's you.

You don't like leverage. I don't know whether the leopard, i.e., you, can change its spots but I will tell you based on your prior record, leverage is toxic. It's an anathema. So, I really -- you can talk all about what you have there in terms of availability, but I think that's something, based on your prior record, that would you feel very uncomfortable with. So, I really look at it like you've took $6 million of buying power and turned it into it one.

You tell me you can change it, yourself, that this era in your history, knowing that you admit this is a great opportunity to go bottom fishing, I'd feel a lot better. So I'd like to ask you that. Secondly -- let me just make one more comment. I really think this is an appropriate quarter, in light of what I said, to show some guidance for the rest of the year just so we get some sense of how that cash might build. But that's just an aside. I'm more concerned about your willingness to take on debt for opportunistic reasons in this environment.

Okay. Nelson, let me address that. And I can address it by example. When we took this thing over in 2001, we had $48 million of debt, which was way too much debt, and the first day of operations, we had $900,000 of availability left on our revolver. We could sneeze and go out of business and not make payroll. So you learn from those tough times.

But in 2007, I went into debt for $11 million to buy Springs Global, and I borrowed the $11 million straight out of our revolving line of credit. In addition, when we bought Neat Solutions, we borrowed $4.4 million and we had debt at the time and we added more debt to the balance sheet to do that. Then a year later when we bought Bibsters, we did the same thing. We added $2 million of debt. So there's some truth in what you say, but not totally. We will take on risk, I promise you.

Last comment I would make, in 2007, the animal spirits were pretty high up the scale. So I just hope that you can be a bottom fisher and leverage the Company a little bit in this incredibly opportune time. I've been following this industry for 20 years and I've never seen an uglier environment, and what I would call a buyer's market, so I urge you to go a little a little bit against your conservative instincts and consider really taking down that line if something attractive in the $5 million to $10 million range comes about, because I believe they are out there. Thanks.

Thank you, Nelson. I appreciate your comments.

That will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Chestnut for his closing remarks.

Okay. We'll give it one second, Denise, and see if anybody else comes on. But if they don't, then we'll close it.

Very good.

You want to give the instructions one last time?

(Operator Instructions)

Okay. I don't see anyone else coming on, so apparently we -- that answers the questions from our shareholders today. Nelson, I know you're off, but I appreciate your comments, and I genuinely do, and we do listen to you, even though sometimes you don't think we do. And we have been friends for a long time.

But with that, we'll close and say thank you to all of our shareholders and thank you for your interest in the Company and thank you for your time and participation today, and in the meantime if you have questions, don't hesitate to call either Olivia or myself. Thank you and have a good day.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your line.