Summer Infant, Inc. (SUMR) 2020 Q4 法說會逐字稿

Good day, and welcome to the SUMR Brands Fiscal Year 2020 Fourth Quarter Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Chris Witty, Investor Relations Adviser.

Please go ahead.

Hello, and welcome to the SUMR Brands 2020 Fourth Quarter Conference Call.

With me on the call today is the company's CEO, Stuart Noyes; and CFO, Ed Schwartz.

I would now like to provide a brief safe harbor statement.

This call may include forward-looking statements that relate to SUMR Brands outlook for 2021 and beyond.

These forward-looking statements are subject to various risks and uncertainties that could cause actual results and events to differ materially from these statements.

Please refer to the risk factors contained in the company's annual report on Form 10-K, its quarterly reports on Form 10-Q and in our other filings with the Securities and Exchange Commission.

During the call, management may make references to adjusted EBITDA, adjusted net income and adjusted earnings per share.

These metrics are non-GAAP financial measures, which the company believes help investors gain a meaningful understanding of changes in SUMR Brands' operations.

For more information on non-GAAP financial measures, please see the table for a reconciliation of GAAP results to non-GAAP measures included in the company's financial release issued yesterday evening.

And with that, I'd now like to turn the call over to Stuart Noyes.

Stuart?

Thanks, Chris, and good morning, everyone.

We appreciate you joining our fourth quarter conference call today.

I'll start by providing an overview of the recent developments, after which, Ed will go through our financial results in detail.

As we disclosed last quarter, we saw several challenges impacting our ability to grow top line results as we approach the end of fiscal 2020.

Foremost among these were logistics constraints and associated supply chain issues that hampered us in getting product to market.

This situation was exacerbated by the resurgence of COVID-19, leading to a slower-than-anticipated recovery of our mid-tier brick-and-mortar customers and the delayed reopening of international businesses.

In addition, our year-over-year revenue variance reflects the fact that 2019's fourth quarter included significant closeout sales, which was not the case this past year.

Such top line headwinds, coupled with some extraordinary charges recorded in the quarter, resulted in adjusted EBITDA coming in lower.

Ed will review this further in a moment, but suffice it to say that the quarter was more challenging than expected.

That said, the company had a good year in 2020.

We are pleased to have weathered the storm as well as we did all things considered in this quarter.

And this was due to the hard work and dedication from our associates throughout the organization.

We ended this year with just under $31 million of debt and saw a substantial reduction in year-over-year SG&A expenses.

Fourth quarter gross margins notably were higher than last year when adjusted for the 2019 retroactive tariff exclusions, testimony to an improving overall product mix.

The strategies we put in place these past 18 months to become a leaner, streamlined organization have resulted in higher margins and improved customer responsiveness, even in the midst of the pandemic.

We've also cut our debt levels dramatically and reduced interest expense in tandem, significantly strengthening the balance sheet and our overall financial flexibility.

While I'm pleased with these many accomplishments, we obviously were disappointed at how the fourth quarter turned out due to the various headwinds facing the company.

I'd like to say that things have improved considerably, but really, it's a mixed bag.

Logistical and supply chain constraints continue to hamper our ability to get product to customers in a reliable and consistent manner.

And overall, consumer demand is lower than anticipated due to the lagging impact of COVID-19.

While bottlenecks seem to have lessened, there is a lot of product working its way through the system, slowing delivery timing, and the storms in Texas and elsewhere negatively impacted certain markets this quarter.

However, I'd say that we are slowly becoming more optimistic for several reasons, which are likely to positively impact quarter 2 and beyond.

First is the overall improving economic outlook, including the reduced challenges related to COVID-19 as vaccines are rolled out and rates of infection drop.

In addition, Congress just approved a fiscal incentive package, which includes substantial stimulus for consumers.

We believe that, like last year, this could have a positive impact on product sales.

Lastly, we are hopeful that current supply chain issues will moderate in the coming months, leading to greater control over shipments in the second half of 2021.

While maintaining our focus on cost discipline and delevering the balance sheet, we will continue to invest in new product development and brand extensions where appropriate.

As I've mentioned in the past, we remain focused on those categories that provide the highest returns to the company, even as we're looking at other areas that may prove fruitful in product extensions or ancillary market penetration.

Before turning the call over to Ed, I'd like to take a moment to thank him for his service to the company this past year.

Ed has chosen to retire, and we wish him all the best going forward.

He came aboard just as we were moving forward on a number of fronts to restructure the company, and his impeccable skills and judgment have been instrumental in helping SUMR successfully navigate a period of significant disruption and change.

I personally want to thank Ed for being a trusted adviser to me and a true business partner to the whole team.

We wish him a long, happy and well-deserved retirement, although I don't know if he can really improve that scratch golf score by having more time off.

Ed will be succeeded by Bruce Meier, a colleague of mine from Winter Harbor.

Bruce brings over 20 years of diverse business and financial experience and has been consulting with the company since its engagement with Winter Harbor in December 2019.

Over the past year, Bruce has worked with us to transform SUMR into what it is today, and he was particularly helpful with regard to last year's refinancing of our credit facilities.

It gives me great confidence to know that Bruce is stepping into the CFO role as he's already contributed significantly to the strategic operational and financial functions of SUMR.

I am confident that he will prove a great addition as we drive profitable growth in a prudent, disciplined manner.

Welcome aboard, Bruce.

With that, I'll turn it over to Ed to review our financial results in detail.

Ed?

Thanks, Stuart, and good morning, everyone.

As a reminder, our 10-K and related press release were issued yesterday.

In addition to listening to this conference call, I encourage you to review our filings.

It's been a great pleasure to be part of the company and to have worked with you, Stuart, and this dedicated management group this past year through some extraordinary times.

Thank you for your well wishes, and I wish you, the team and the company all the best going forward.

Now to the results.

Fourth quarter net sales were $36.0 million compared with $42.7 million in the fourth quarter of fiscal 2019.

As Stuart mentioned, the decline in revenue year-over-year was largely due to the negative impact from supply chain constraints and lower demand related to COVID-19 restrictions, particularly with regard to our mid-tier specialty accounts and international sales.

We believe that for 2021, while currently dealing with many of the same headwinds, things are likely to improve as market conditions stabilize, helped by economic stimulus measures as well as a general easing of pandemic-related restrictions and supply chain bottlenecks.

At this point, we are cautiously optimistic about prospects for top line growth later this year, while the first half of 2021 will remain challenging.

Gross profit was $10.8 million for the fourth quarter of fiscal 2020 versus $14.0 million in 2019, and our gross margin as a percentage of sales was 30.0% versus 32.8% last year.

The 2019 results included a $1.5 million benefit to cost of goods sold related to retroactive tariff exclusions, without which, adjusted gross profit was $12.5 million with a gross margin of 29.3%.

As Stuart mentioned, the 2020 fourth quarter benefited from improved product mix and a higher percentage of direct import sales along with fewer closeouts.

We will continue to focus on maintaining gross margins that are in line with achieving our financial objectives and as much as possible to effectively manage supply chain costs.

Selling expense was $2.6 million in the fourth quarter versus $3.6 million in the prior year period and as a percentage of net sales was 7.2% this year versus 8.3% in 2019.

The decrease year-over-year and as a percentage of sales was primarily due to lower program costs with our major customers.

General and administrative expenses were $7.6 million in the fourth quarter versus $8.6 million in the prior year period, and G&A as a percentage of sales was 21.1% this year versus 20.1% in 2019.

The year-over-year change reflects lower labor and other costs due to our various streamlining initiatives, partially offset by higher logistics and warehousing expenses.

Interest expense was $0.5 million in the fourth quarter of 2020 versus $1.1 million last year, reflecting lower outstanding debt levels and more attractive interest rates following the company's refinancing of its credit facilities.

We'll continue to focus on further delevering of the balance sheet this year.

The company reported a net loss of $3.4 million or $1.59 per share in the fourth quarter of 2020 compared with a net loss of $0.9 million or $0.42 per share in the prior year period.

The 2020 fourth quarter included $2.5 million of pretax charges related to the company's previously announced refinancing and an asset impairment charge, while the prior year fourth quarter included a $1.5 million benefit to cost of goods sold related to retroactive tariff exclusions as previously mentioned.

The company recorded a tax provision of $0.2 million in the fiscal 2020 fourth quarter versus $0.7 million in the comparable period of fiscal 2019.

Adjusted EBITDA for the fourth quarter of 2020 was $1.4 million versus $2.4 million in the fourth quarter of 2019.

Adjusted EBITDA in 2020 included $0.7 million in bank-permitted add-back charges compared with $0.4 million in the prior year period, and adjusted EBITDA as a percentage of net sales was 3.9% in fiscal 2020 versus 5.6% last year.

Turning to the balance sheet.

As of January 2, 2021, Summer Infant had approximately $0.5 million of cash and $30.9 million of bank debt compared with $0.4 million of cash and $48.6 million of bank debt at the beginning of fiscal 2020.

We view the company as being in a much stronger position after lowering debt levels by 36% and also refinancing our credit facilities, allowing for significantly lower interest costs in the future.

Inventory at the end of the fourth quarter was $25.1 million compared with $28.1 million as of December 28, 2019, and our inventory turns were 4.0 versus 4.1 turns at the beginning of the year.

Trade receivables at the end of fiscal 2020 were $26.0 million compared with $32.8 million at the beginning of fiscal 2020.

Days sales outstanding, or DSOs, were 66 as compared to 70 at the start of last year.

Accounts payable and accrued expenses were $34.1 million as of January 2, 2021, compared with $32.7 million at the beginning of the fiscal year.

With that, I'll turn the call over to the operator and open it up for questions.

(Operator Instructions) And the first question comes from Eric Beder with SCC Research.

Congratulations on navigating through a very difficult and crazy year.

Thank you, Eric.

Great.

Could you talk a little bit about, when you look at the product mix for 2021, what are you seeing as some of the opportunities here?

I know that logistics is an issue, but when you look at the products, what are you excited about for this year?

Yes.

So look, we're excited about a couple of things.

One is, what I'll call, new distribution or penetration.

We're mainly [consuming] headway, I think, in Canada with some of the retail and dot-com up there as well as the discount channel and trying to manage through what a product mix might look a little bit different in that channel that would enhance the company as well as just basic opening up of Europe, although we've had a little setback, as I think we've all heard on the vaccine over there in the last week, but the opening up of that, because that was a start and stop 2 or 3 times this year.

So just distribution-wise as well as we've got new items in potty, et cetera, that are getting set in store.

And then I would say the last thing is we are looking at, what I'll call, consistent with what we manufacture today, or contract manufacturer is, new categories that actually align very well with our product mix and are easily transferable, and one of those is the pet category that we're looking at and making a push there.

So more to come on that in the future.

Right.

When you look -- I know the business has become much more online-driven in terms of both reviews and in terms of both sales.

So how are you guys managing that spend, given the focus on kind of being as lean as you can be here?

Kind of how should we think about that spend going forward?

Yes, that's actually a great question, Eric.

So we've created a team within the organization that's focused specifically on that, whether it be Amazon spend or the other dot-coms, Walmart, Target and actually even more dot-com players that we are in the midst of penetrating and/or having meetings with.

So analytically, we look at that, we look at that spend, we measure that spend.

And I think it's taken us probably 6 or 8 months to put that all together, but I feel that team's is functioning very well right now, and we actually even split that out in our budgeting process going into 2021.

So the team has their own budget, and we can monitor that monthly on how that's being done and what we're actually getting from it.

Because the future is that, and we've got to be on the forefront of that.

And I think we reacted in a timely manner to put that team together.

Okay.

And finally, you've done a great job of paying down the debt.

Do you have a specific debt or coverage ratio that you are focusing on going forward?

And where do you want it to be?

Well, I'd like the debt to be $0, Eric.

Look, it's a balance, right, because we've got to -- if you're -- if we get into some of those growth categories or even those channels, that will increase the debt, but I would say in a good way.

But at the end of the day, we want to generate cash to pay that down even in growth mode.

So I don't probably have a great target number at it.

But we're going to continue to pay that down as we generate cash in the business and manage our working capital effectively.

(Operator Instructions) The next question comes from [Ed Reese], who is a private investor.

My first question is, when you look at the issues that started in the supply chain, I guess, started to -- if this is right, I would say like maybe October of last year, and you alluded to on the call, the last call that you were looking at ways to get around that, maybe move some stuff to Mexico.

It seems like what you're seeing today that maybe 6 months later, it really hasn't -- the picture hasn't changed.

Is that fair to say?

Yes.

I mean it's fair to say, Ed, and that may even have become a little worse, I'll call it, the perfect storm.

I mean I don't have to tell you.

I mean you're on top of this, but you watch the financial news early in the morning.

And I mean 8 out of 10 lead stories, I think, over the last 10 days has been all about logistics and supply chain.

And I mean everybody from retail to manufacturing, et cetera, and the horror stories about the ports and all that.

So I think something that we thought would have worked its way through, I wish I had a crystal ball, is still working itself through and got worse before it actually became better.

And I wish that wasn't the case, but that's -- those are the facts at this point.

Okay.

I mean, given that situation that you're kind of in the middle of this right now, Stuart, you also talked on the last call about the fact that the company was in the middle of their budgeting process for 2021 and that you really couldn't -- you're in the middle of it, you really could not kind of give us an idea about where you thought things would play out in '21.

I mean can you share with us today where you think your EBITDA will come -- will be at for full year 2021?

Well, I can't share that, but I can tell you, look, we had, what I'll call, a very good year for the company in 2020 based on prior years and all the different items, whether it be the streamlining and the costs for managing the working capital.

I can tell you that, look, we are about trying to grow and trying to make more money in the future.

And as these things come at us, I don't look at this any different than I would any business.

Look, we all have these challenges, and there's always going to be challenges.

This has been quite a year and a different year with the whole pandemic and then hopefully starting to get that behind us, but it's caused some different, what I'll call, disruptions.

I haven't seen this in the supply chain, Ed, and I don't know if I've ever seen it quite honestly in my career in this state.

But look, what you do is you say, what does that mean to us?

What is that hurdle now?

I've got to figure out different things to do to make that up, if that adds some cost to it or can I -- is that cost going to come flush back out of the system when things get back to normal on the back half?

So every day we wake up and do that, right, week-to-week, month-to-month on.

If I've got something hit me here, well, where are my levers I can pull to gain in another area of the business.

So we continually look at that, look -- and we see even -- I look at the gas pump right now and commodity prices changing, et cetera.

So -- but I think those are just normal business challenges.

This one being a little bit more.

But look, our goal is to try to grow that top line.

I think the stimulus is going to have a positive effect on us.

We've seen it in the past.

And now that's starting to get into people's hands.

And so it's to grow the business and to grow our bottom line.

When you're going back, the last thing I'll -- kind of question I have, when you look at this supply chain situation, and I know that maybe there's a lot of factors that are going into it, but from your perspective, is -- I'm just looking at how does it improve?

Is it a matter of the fact that we need more ships?

Is it the fact that we need more -- the COVID kind of cut back on the amount of handlers at Long Beach to take product off the ships?

Is it a factor of that the whole supply chain got surprised by the level of demand that came back in the U.S.?

What do you see as the major issue that needs to get solved so the supply chain loosens up?

Yes.

Well, look, I actually think it's all of the above.

You're hitting on 4 or 5 different elements that -- why I called it kind of the perfect storm, right, whether it was shortage of help, shortage of containers, shipping lanes that were upside down or backwards.

We had assets in places where -- you need the assets in a different place.

So this is a tough one to answer, but I think time is going to help kind of straighten this out as the freight forwarders and the docks get their arms around everything.

Unfortunately, we're not in total control of all that, much like any either retail or a wholesaler is.

But look, we talk daily, weekly with our freight folks and to get updates on that, and they do publish some things internally for their customers.

So we've got a beat on it.

But -- and there's some different views out there on when they think it's going to be straightened out.

So I wouldn't dare estimate.

But I think it's -- right now, we're at a point where it's just time is going to have to work its way through the system here to really straighten this out.

And look, there are people saying that could be June or whatever.

Look, the sooner the better for everybody, not just Summer Infant.

(Operator Instructions) It appears we have nobody else joining the question queue.

So this concludes our question-and-answer session.

I would now like to turn the conference back over to Stuart Noyes for any closing remarks.

Great.

Thank you.

Thank you all for joining us for today's call.

We do look forward to speaking with you next quarter.

Have a nice day.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.