Summer Infant, Inc. (SUMR) 2020 Q3 法說會逐字稿

Good morning, and welcome to the SUMR Brands Fiscal 2020 Third Quarter Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations moderator. Please go ahead.

Hello, and welcome to the SUMR Brands 2020 Third Quarter Conference Call. With you on the call today is the company's interim CEO, Stuart Noise; 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 2020 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 for the year ended December 28, 2019, and its quarterly reports on Form 10-Q and in our other filings with the SEC.

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 tables for a reconciliation of GAAP results to non-GAAP measures included in the company's financial release issued recently.

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

Thanks, Chris, and good morning, everyone. We appreciate you joining our third quarter conference call today. I'll start by providing an overview of recent developments, after which Ed will go through our financial results in detail.

As was the case in the prior periods this year, the third quarter was one with many accomplishments of which we're quite proud, particularly given the ongoing pandemic, which has impacted our business as well as the economy in general. We reported net sales of $40.7 million, a sequential increase from the second quarter, although down slightly from last year's $41.5 million.

While we saw solid double-digit year-over-year growth across many of our key product categories, including gates, potties, and bathers, as well as increasing traction with our new travel system, we still face point-of-purchase headwinds due to the COVID '19, particularly with certain specialty and mid-tier brick-and-mortar retailers. In addition, our previously announced strategy to restructure and streamline international operations and our move to more direct import sales have negatively impacted top line results. We also continued to see some supply chain disruptions in quarter 3, which I'll come back to this issue in a moment when I discuss our thoughts on the outlook for the fourth quarter.

We posted much improved EPS of $0.86 adjusted for onetime items, but more importantly, reported adjusted EBITDA $4.7 million. I know that many of our investors already focus on EBITDA as well as free cash flow, and we do as well. We've successfully transformed the company into a streamlined, nimble enterprise, well positioned to produce positive results under normal circumstances, and our EBITDA illustrates this.

Once again, this quarter, SG&A was much lower year-over-year, with selling expense as a percent of revenue, declining to 6.9% in 2020 from 8.7% last year, and G&A falling 16.9% of sales from 20.1% in 2019. These ratios are also down from where they were in quarter 2, and such performance has helped drive this large increase in EBITDA and cash flow. Year-to-date, we've generated nearly $15 million in cash from operations and $10.8 million of adjusted EBITDA. We remain on track to eliminate over $7.5 million in annualized overhead expense and are well on our way to completing the restructuring of our international operations and continue to focus on streamlining initiatives to strengthen margins and improve return on equity.

After the end of the quarter, we completed a debt refinancing, which really places us on solid footing and greatly reduced our interest expense burden. Our new agreement allows for up to $50 million of borrowings at interest rates that, in aggregate, are expected to save the company roughly $2 million annually, while providing the necessary liquidity moving forward. Ed will speak to this more in a moment, but after the refinancing, we had $9 million of availability, and we'll continue actively reducing our indebtedness whenever possible. I want to sincerely thank Bank of America for their many years of loyalty and support of the SUMR Brands and their ongoing commitment through these new credit facilities.

Before turning the call over to Ed, I wanted to talk about the fourth quarter and some increased challenges we and the industry have recently been experiencing. As you may or may not be aware, there are significant logistical problems facing the supply chain for numerous goods, particularly within the consumer sector, impacting product availability, time to market, and shipping expense. Specifically, there's container, there's vessel, there's trucks and shortages throughout the supply chain, and a material amount of inventory at this time actually sitting in the Pacific waiting to be unloaded at the Port of Long Beach due to congestion there. Things are just backed up across the board, and this is impacting large numbers of companies in the consumer goods and retail space, including those selling online.

Such challenges caused by these issues, including the impact of COVID-19 on ships and truckers, means that products are not getting to market on time, tying up working capital both offshore or in warehouses. This includes SUMR Brands, where we are having to wait on delivery of numerous items and store many others, stretching the capacity limitations of our warehouse and increasing costs for freight, logistics, and leasing. And this is on top of the fact that some products faced a reinstatement of tariffs on August 7, already requiring us to manage costs aggressively while pursuing price integrity.

All these issues are impacting Q4's bottom line, such that even as we work to mitigate their impact and work around the bottlenecks, we anticipate fourth quarter EBITDA may be down 40% to 60% compared to what we just reported in Q3. We wanted to be upfront about this to make sure that our investors are not blinded by these near-term headwinds that many companies are facing, SUMR included. SUMR Brands has come a long way this past year, and to a large extent, we've restored some credibility with our investors, I feel. So the last thing we wanted was to not share something that is definitely impacting near-term results. Without question, we're doing everything possible to navigate through these issues and continue driving solid performance. The team and I are committed to keeping the company on solid footing.

In closing, I believe that SUMR Brands has made tremendous headway this year, improving its bottom line and positioning the company for higher results going forward. This hasn't changed. The many initiatives to reduce costs, streamline the company, and improve customer responsiveness have created a healthy enterprise where that really wasn't the case before. And the recent refi or credit facilities underscores just how far we've come, while positioning us for higher returns in the future.

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-Q and related press release were previously issued. In addition to listening to this conference call, I encourage you to review our filings.

Third quarter net sales were $40.7 million, compared with $41.5 million in the third quarter of fiscal 2019. As Stuart mentioned, the lower revenue was largely due to the impact from restructuring our international operations, a move toward more direct import sales, and from COVID-19, primarily related to store closures and certain supply chain disruptions. While we are pleased with the quarterly results, we remain cautious going forward, due to the continuing economic uncertainty and supply chain issues that remain challenging.

Gross profit was $13.5 million for the third quarter of fiscal 2020 versus $12.6 million in 2019, and our gross margin as a percentage of sales was 33.3% versus 30.3% last year. The gross margin increase reflects a favorable mix of higher-profit product categories, fewer closeout sales, and lower tariffs on certain items as compared with 2019.

However, as we previously noted, some tariff exclusions we received since December 2019 expired in August of this year. The company has taken action to mitigate the impact of tariff reinstatement through strategic pricing, supply chain management, and cost reductions, although the extent to which we can mitigate the loss of tariff exclusions remains uncertain.

Selling expense was $2.8 million in the third quarter versus $3.6 million in the prior year period, and as a percent of net sales, was 6.9% this year versus 8.7% in 2019. The decrease year-over-year as a percentage of sales was primarily due to lower freight and advertising costs.

General and administrative expenses were $6.9 million in the third quarter versus $8.4 million in the prior year period. And G&A as a percentage of sales was 16.9% this year versus 20.1% in 2019. The year-over-year change reflects lower labor and other costs due to the various streamlining initiatives undertaken by the company in 2020.

Interest expense was $1 million in the third quarter of 2020 versus $1.2 million last year. Cash interest expense will decline in Q4, as we begin to operate under our new credit facility, which was completed on October 15.

The company recorded net income of $2.2 million or $1.03 per share in the third quarter of 2020, compared with a net loss of $1.7 million, or $0.79 per share in the prior year period. As Stuart mentioned, our current year results included a onetime $0.17 favorable tax provision adjustment related to changes in the interest deduction threshold under the U.S. CARES Act. On an adjusted basis, our 2020 third quarter earnings were $0.86 per share.

Adjusted EBITDA for the third quarter of 2020 was $4.7 million versus $0.8 million in the third quarter of 2019. Adjusted EBITDA in 2020 included $0.7 million in bank permitted add-back charges, compared with $0.1 million in the prior year period. And adjusted EBITDA as a percentage of net sales was 11.4% in fiscal 2020 versus 2% last year. As Stuart mentioned, a variety of issues related to logistics and supply chain management could possibly reduce adjusted EBITDA by as much as 40% to 60% in Q4 versus Q3.

Turning to the balance sheet, as of September 26, 2020, Summer Infant had approximately $0.9 million of cash and $35 million of bank debt, compared with $0.4 million of cash and $48.6 million of bank debt at the beginning of fiscal 2020. On October 15, the company entered into a third amended and restated loan and security agreement with Bank of America that replaced our prior $17.5 million term loan with Pathlight Capital and a $48 million ABL with Bank of America. The new credit facility consists of a $40 million APL, a $7.5 million term loan, and a $2.5 million FILO loan, for an aggregate amount of $50 million. After paying off existing debt, the company had approximately $9 million in availability under the new credit facility. We'll continue to manage working capital appropriately and use excess cash to pay down debt whenever possible.

Inventory at the end of the third quarter was $24.5 million, compared with $28.1 million as of December 28, 2019, and our inventory turns were 4.4 versus 4.1 turns at the beginning of the year. Trade receivables at the end of September were $30.8 million, compared with $32.8 million at the beginning of fiscal 2020. Days sales outstanding, or DSOs, were 68, as compared to 70 at the start of the year. Accounts payable and accrued expenses were $37.3 million as of September 26, 2020, 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. Thank you.

(Operator Instructions) Our first question comes from Mark Gomes with Pipeline Data.

Congratulations on the progress this year. Looking at the near-term outlook, appreciate the candor there. Kind of looking past that, though, wondering kind of normalized financials we could be looking at as we look past COVID and kind of deeper into 2021. You guys have cut a lot of expenses, and this was a EBITDA-profitable company beforehand, maybe $5.5 million the year before you got in. So with those -- it looks like you're going to end the year with maybe $15 million or $16 million of EBITDA total. How does that compare to what you think the company can do long term, as we start to build or attempt to rejigger our DCF-based valuation models?

Yes. Go ahead, Ed. You can take that one.

Yes. Look, we're in the process of completing our 2021 budget for the upcoming year. As you know, we don't give that type of guidance, Mark, but we are looking at it. And we're going to continue to do the same things we've been talking about doing, as much as we can, to make sure that we keep the EBITDA number headed in the right direction. So we're doing everything we can. We're watching what's happening on the expense side, and we're trying to build some revenue back on the growth so we do show a little bit of growth.

Right, so, well, from where we sit, without getting any guidance, is it unreasonable to assume that your cost efficiencies gained, in addition to your prior baseline level of EBITDA, that we can make some assumptions based on that? Is it safe to assume that your competitive positioning has at least remain the same, if not improved, thus allowing for that scenario to play out?

Yes, I think that's safe to say. With our customer base, obviously, kind of the big 3, big 4 that we service and how they've kind of managed through this -- the pandemic, which obviously, we're not to the other side yet. There's still a lot unknown there. But I do feel our product teams and our selling teams have positioned us well in the competitive marketplace going forward, Mark. I mean I just -- I mean, we talk about that every day. And as Ed says, we will continue to look at cost initiatives or actually even redeploying capital, whether we're moving from one area in the business to another, based on what that marketplace is forcing us to do to react to.

Great. And do you get the sense that there is -- once things kind of settle down, that there is pent-up demand at the retail brick-and-mortar level that can serve as a tailwind as these headwinds start to abate.

Yes. I mean, look, everybody's got an opinion on it, and that's all this is. It's just my opinion. I mean I think with what's going on at the federal level and potential stimulus and elections and pandemic, there's just a lot of uncertainty out there. I'm sure you're seeing it throughout your businesses. And so I do feel there's been a little bit of -- there's a suck of air in that -- the economic environment right now.

But look, I think we just keep plugging away. We do the right things to position ourselves to take advantage of that. You see that we built a little bit of inventory here going forward. And we did that consciously on our key items, to make sure we were in a position, whether it be through the Lunar New Year, et cetera, or based on what happen economically, in a position to take advantage of that.

Great. A final question. What are the long-term plans that you have for the company, considering your status as an interim CEO and what you're -- obviously, what you do for a living and the incentives that you have in place with Summer Infant, in the event that the company gets sold?

Yes. Look, right now, we've got a board meeting coming up this Friday. And I mean, I think I might have mentioned this before. I mean we were very focused on stabilization, getting through 2020, getting 2021 locked and loaded, budget forecast wise, which we're in the middle of, as Ed mentioned. So we'll continue to talk about time line on interim CEO and that type of thing, but at this point, we're just focused on the business and making that right near and long term. But we'll continue to update you on that as things develop with the Board.

(Operator Instructions) At this time, there appears to be no further questions in the queue. I'd like to turn it back over to Mr. Noyes for any closing remarks.

Great. I appreciate it. Thank you all for joining us for today's call. We look forward to speaking with everybody in the next quarter. Have a nice day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.