Crown Crafts Inc (CRWS) 2018 Q3 法說會逐字稿

Hello, ladies and gentlemen, and welcome to the Crown Crafts, Inc.

Investors Call.

Your host for today's call is Mr. Randall Chestnut, Chairman, President and Chief Executive Officer.

(Operator Instructions) Any reproduction of this call, in whole or in part, is not permitted without prior written authorization from Crown Crafts, Inc.

And as a reminder, this conference call is being recorded today, February 8, 2018.

At this time, I would now like to turn the conference call over to Ms. Olivia Elliott, Vice President and CFO, who will begin the call.

Please go ahead.

Thank you.

Welcome to the Crown Craft investor conference call for the third quarter of fiscal 2018.

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 1 hour after the end of the call through 4:00 p.m.

Central Time on February 15, 2018.

Also, a web replay of the 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 listeners 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.

Also, in regard to comments made in today's conference call that are related to the company's recently announced dividends, its history of paying dividends and the annualized yield on the company's common stock, we remind listeners that the declaration of each dividend is at the discretion of the company's Board of Directors, and the company expressly disclaims any assurances as to the frequency and amount of any future dividend.

I will now turn the call over to Randall.

Again, good afternoon.

Olivia, thank you.

And we are today discussing our third quarter which ended December 31, 2017, and a press release and Form 10-Q went out this morning before the market opened with all the information in it for the quarter.

This quarter, I'm only going to cover the highlights of the quarter's performance.

Olivia will review more details on the call later, before we open it up for Q&A.

We're pleased, with the help of Carousel Designs, that sales for the quarter were up compared to prior year.

However, during the quarter, we experienced some challenges that caused a decrease in profitability, and I'm going to touch on a few of those.

We had acquisition expense related in the quarter to both Carousel Designs and Sassy.

Carousel, we had acquired in August and Sassy, we acquired in mid-December.

We had credit costs associated with a major customer who filed for bankruptcy just prior to the beginning of the third quarter.

We also, in the third quarter, discontinued shipping to another major customer due to credit concerns.

Due to the timing of the Sassy acquisition, we recorded several weeks of expense, but only recording an insignificant amount of additional shipments during the quarter.

In one of our subsidiaries, we also experienced a shift in both customer and product mix from more profitable business to business which was less profitable.

In addition, during the quarter, the third quarter, we had higher-than-normal closeout sales, which are typically sold at lower margins.

In addition, looking backwards to the prior year before, the third quarter had lower-than-normal closeout sales.

We had several noncash charges to income tax expense which was recorded as a result of the recent tax legislation.

These charges amounted to $541,000, and had the effect of lowering net income for the quarter by more than a half.

The company expects the reduction in the tax rate to positively affect the future earnings of the company.

Turning to the acquisitions that we did in the past few months.

We're excited about the opportunity of both Carousel Designs and Sassy.

Carousel Designs opens up new channels of distribution for the company, with customized and personalized product sold directly to the end consumer.

Sassy, on the other hand, expands the company's product offering with exciting merchandise, such as early childhood developmental toys.

Again, trying to diversify the company's product mix.

Turning to the balance sheet.

We finished the quarter with a revolver balance of $2.3 million, but we'd like to remind everybody on the call that this was after we paid in December $6.5 million to acquire Sassy.

We announced today our 33rd consecutive quarterly dividend.

The dividend of $0.08 per share that we announced this morning represents a 4.4% annualized yields based on yesterday's closing price of $7.20 per share.

The dividend will be paid on April 6, 2018 to shareholders of record at the close of business -- as of the close of business March 16, 2018.

The dividend demonstrates the commitment of management and the board to return value to our shareholders.

I'll now turn it over to Olivia to give some more details on the numbers.

I'm only going to give financial highlights.

For more details, please refer to the company's Form 10-Q filed with the Securities and Exchange Commission this morning.

Net sales were $17.5 million for the third quarter of fiscal 2018, compared with $17.3 million for the third quarter of the prior year, an increase of $214,000 or 1.2%.

For the 9-month period, net sales were $47.6 million, which was down $1.1 million or 2.2% from $48.7 million in the prior year.

The increase for the quarter is due to sales by Carousel, which added $1.8 million of sales in the current year.

This amount was offset by a decrease of $1.6 million in sales by Crown Crafts Infant Products, which resulted from reduced product shipments in the current year to a customer that experienced credit problem, a shift to a less profitable customer and product mix and higher sales of closeout inventory, which are typically sold at lower margin.

Also affecting sales is the continuing change in the infant bedding marketplace, in which parents are purchasing fewer bedding sets in favor of separates, leading to a lower average price point for the company's infant bedding product.

Gross profit decreased by $370,000, and decreased from 32.7% of net sales for the prior year quarter to 30.1% of net sales for the current year quarter.

Year-to-date, gross profit decreased by $342,000 and was steady at 29.2% of net sales for both the current and prior year.

The decrease in amount for both the 3- and 9-month period is due to higher sales of closeout inventory at lower margins in the current year as well as the shift in the current year to a less profitable customer and product mix.

Marketing and administrative expenses increased by $1.1 million for the current year quarter compared with the prior year quarter as a result of credit coverage fees amounting to $81,000 that did not occur in the prior year and that were associated with the bankruptcy of a major customer.

The company also incurred $160,000 in cost during the current year quarter that were associated with the Carousel and Sassy acquisitions and $63,000 in amortization expense associated with the Carousel acquisition.

For the 9-month period, marketing and administrative expenses increased by $2.2 million compared with the prior year, due to $572,000 in credit coverage fees, $424,000 in acquisition costs and $90,000 in audit fees associated with the company's transition from a smaller reporting company to an accelerated filer for SEC purposes, none of which were incurred in the prior year.

Additionally, the Carousel acquisition resulted in $115,000 in amortization expense for the current year period.

The company's provision for income taxes is based upon an annual effective tax rate for continuing operations for the current year of 33%.

Recent tax legislation includes a provision to lower the federal corporate income tax rate to 21%, effective as of January 1, 2018.

As the company's fiscal year will end on April 1, 2018, the lower corporate income tax rate will be phased in, resulting in a blended federal statutory rate of 30.75% for the fiscal year 2018.

The company provides for deferred income taxes based on the difference between the financial statement and tax [basics] of the company's assets and liabilities.

The company's net deferred income tax asset had previously been recorded based upon the enacted composite federal state and foreign income tax rate of approximately 37.5% that would have been applied as the financial statement tax differences began to reverse.

Because the differences are now expected to reverse at a composite rate of approximately 23.5%, the company was required to revalue its net deferred income tax asset.

This revaluation resulted in a provisional discrete charge to income tax expense of $409,000 during the 3- and 9-month periods of the current year.

Additionally, because the company's measurement regarding the tax impact of certain state apportionment percentages are measured net of federal income taxes, the company also revalued its reserve for unrecognized tax benefits, which resulted in a net discrete charge to income tax expense of $132,000 during the 3- and 9-month periods of the current year.

Income tax expense for the current year and 9-month period also included a discrete income tax charge of $37,000 and a discrete income tax benefit of $60,000 to reflect the effect of the tax shortfall and excess tax benefits arising from the vesting of nonvested stock.

The revaluations of the company's net deferred income tax assets and its reserve for unrecognized tax benefit, was the primary factor in the increase in the overall provision for income taxes to 66.3% for the 3-month period of the current year and 49.7% for the 9-month period of the current year.

Although the company does not anticipate a material change to the effective tax rate from continuing operations for the balance of fiscal year 2018, several factors could impact the effective tax rate, including variations from the company's estimates of the amount and source of its pretax income and the amount of certain tax credits.

Net income for the third quarter of fiscal 2018 was $531,000 or $0.05 per diluted share compared to net income of $1.9 million or $0.19 per diluted share in the third quarter of fiscal 2017.

Net income for the first 9 months of fiscal 2018 was $1.8 million or $0.18 per diluted share compared to net income of $4 million or $0.39 per diluted share for the same period in fiscal 2017.

I'll now return the call to Randall.

Okay.

Before we open it up for questions, just to sort of wrap it up, we've said this many times before and we'll say it again: our position in the market remains very strong and we're pleased with where we are in the market.

We have strong licenses and very good designs.

To repeat what I said earlier, we are excited about the acquisitions that we've made over the past few months.

Carousel Designs in August and Sassy 14 LLC, which we now call Sassy, was completed in December of 2017.

And those 2 helped to diversify our customer and product mix, and will make a major impact going forward.

We're pleased with that.

Last but not least, we're pleased that we are able to return to the shareholders another quarterly dividend of $0.08 per share.

So Jamie, if you will come back, we'll open it up for questions.

(Operator Instructions) And our first question today comes from Dave King from Roth Capital.

So given the several moving parts this quarter, I got a bunch of questions, if you'll bear with me.

I guess, first off, on the onetime charges, if you will, and the $541,000 or so or $0.05, does that then include all the merger costs, all the bankruptcy-related credit costs and the tax charges and/or any other onetime items?

No.

The tax itself -- by itself was over $500,000.

And -- how much was it?

The taxes was $541,000 and that, by itself, was the $0.05.

Okay.

So then it sounds like another...

Just the taxes were $541,000.

Okay.

And there's another $170,000, it sounds like, on top of that at least on an after tax basis?

On a post-tax basis, yes.

Okay, perfect.

So then along those lines, in terms of the merger cost portion of that, on a pretax basis, I think was 160k, Olivia, do you have how that breaks up between cost of goods sold and SG&A or expenses?

It's all in SG&A.

It's all in SG&A, okay.

And then on the Sassy acquisition, Randall, in the press release and then in your prepared remarks, I think you talked about the uptick in expenses that came but not much of a revenue benefit.

Are you able to kind of quantify or kind of talk about the magnitude of those?

I think Sassy is an $11 million revenue business.

How did we think about that seasonally?

Just some context around some of those numbers I think would be helpful to kind of get a sense of what the underlying trend is.

Dave, what we shipped in December was almost nothing, okay?

It was less than $25,000.

Any more, when you buy a company, the integration, one of the big hurdles that you got to get through with the major retailers is to get them to change their vendor agreements and EDI arrangements, or electronic data interchange.

And believe me, with that coming right before the holidays, a lot of people being gone, we didn't get a big number of those companies to switch over until after the holidays, so we couldn't receive our ship orders.

And we only were able to get out some very small orders.

So it had a very, very slight impact in December.

We've gotten shipping and we are shipping now in the fourth quarter, in the January, February, March quarter.

And we've gotten everybody now.

I think as of last week, all the major retailers have switched over, and we're onboard and we've got them lined up to start shipping now.

So it should flatten out.

And there's not a huge amount of seasonality, there is some slight ebbs and flows, but it's fairly constant throughout the year.

Okay.

Okay, that helps a lot.

Any maybe lastly on Sassy.

How should we think about the -- I don't -- you probably don't want to talk about gross margins and stuff like that, but how should we then think about that EBITDA contribution from that?

Or expense contribution from that on the annualized basis?

Is it similar to legacy Crown Crafts?

Dave, we don't break that out.

But once we get -- we've moved them now to a new office in Grand Rapids.

The 8 or so people that remained with us are now in a small, I think, it's 3,400, 3,500 square-foot office space in Grand Rapids.

We are currently shipping out of a third party warehouse in Grand Rapids.

And we -- at the end of our fiscal year, which is March, we are going to move all of that inventory over a couple of weeks from Grand Rapids to our facility in Southern California.

We have space, we can put it into our existing building.

So the overhead contribution, once we get that done, is going to be good.

So the best answer I can give you is the one that you create yourself.

You can look at, going forward, it should have -- because it's going to merge into Hamco -- it should have gross margins and contributions and EBITDA, very similar, maybe a wee bit lower because of the product category, but very similar to the legacy companies.

Okay, that helps immensely.

And then, on Carousel, I guess these are my last questions.

In terms of Carousel, do you have what the revenue contribution was in the quarter?

And then, more importantly, can you update us on where things stand with getting some potential revenue synergies there, whether that's putting some of their bedding products online, rolling out some of your own e-com capabilities, et cetera?

Well, there's not -- Dave, as we said last call, there's not -- this one's not going to [pay for] itself with synergies, okay?

It's going to pay for itself because it's a new channel of distribution that we're not in currently.

We can add things to it, and will, and I'll give you an example: we began shipping a few weeks ago.

If you go to the homepage of their website, Sassy -- excuse me, Carousel, babybedding.com -- I'll get it right, okay?

If you go to the opening page, you can click on and you can create your own Disney customized sheet and put your child's name in the center of the sheet.

And we'll custom print it for you and send it to you.

So we have, with the help of the licenses that we've had at CCIP, we were able to get that added on to our contract.

So we're excited about that and we're doing some other things.

So what's going to -- the contribution from Carousel is bringing about entirely different customer base, entirely different product, no 2 customers are alike.

And hopefully, since it's thousands of customers, we hope not to be dealing with bankruptcy issues with them since they're all (inaudible).

And it's all prepaid, I might add.

At to address the first part of your question, Carousel contributed $1.8 million in the quarter and $3 million for the 5-month period.

(Operator Instructions) And ladies and gentlemen, at this time, in showing no additional questions, I'd like to turn the conference call back over for any closing remarks.

Okay, Jamie, thank you very much, and thanks to everyone on the call.

And as wrapping up, we'd like to say thank you to all of our customers, employees, suppliers and shareholders for their continued interest and support of Crown Crafts.

A reminder, our next conference call will be a little bit more -- a little bit further down the road because this is our fourth quarter, our year ends in March, so the call will actually take place in, what, Olivia?

Middle of June.

Middle of June.

So we'll speak again in a few months.

Thank you.

Have a great day.

Have a good day.

Bye.

Bye.

Ladies and gentlemen, with that, we'll conclude today's conference call.

We do thank you for attending today's presentation.

You may now disconnect your lines.